UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) |
EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading symbol | Name of Exchange on which registered |
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.
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).
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.
⌧ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 01, 2022, the registrant had
Certara, Inc.
Unless otherwise indicated, references to the “Company,” “Certara,” “we,” “us” and “our” refer to Certara, Inc. and its consolidated subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements (other than statements of historical facts) in this Quarterly Report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “might,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential,” “continue,” “suggest,” “project” or “target” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:
• | our ability to compete within our market; |
• | any deceleration in, or resistance to, the acceptance of model-informed biopharmaceutical discovery; |
• | the occurrence of natural disasters and epidemic diseases, including the ongoing COVID 19 pandemic, which may result in delays or cancellations of customer contracts or decreased utilization by our employees; |
• | changes or delays in government regulation relating to the biopharmaceutical industry; |
• | increasing competition, regulation and other cost pressures within the pharmaceutical and biotechnology industries; |
• | trends in research and development (“R&D”) spending, the use of third parties by biopharmaceutical companies and a shift toward more R&D occurring at smaller biotechnology companies; |
• | our ability to successfully enter new markets, increase our customer base and expand our relationships with existing customers; |
• | our ability to retain key personnel or recruit additional qualified personnel; |
• | consolidation within the biopharmaceutical industry; |
• | reduction in the use of our products by academic institutions; |
• | pricing pressures due to increased customer utilization of our products; |
• | any delays or defects in our release of new or enhanced software or other biosimulation tools; |
• | failure of our existing customers to renew their software licenses or any delays or terminations of contracts or reductions in scope of work by our existing customers; |
• | our ability to accurately estimate costs associated with our fixed-fee contracts; |
• | risks related to our contracts with government customers, including the ability of third parties to challenge our receipt of such contracts; |
• | our ability to sustain recent growth rates; |
• | any future acquisitions and our ability to successfully integrate such acquisitions; |
• | the accuracy of our addressable market estimates; |
• | the length and unpredictability of our software and service sales cycles; |
• | our ability to successfully operate a global business; |
• | our ability to comply with applicable anti-corruption, trade compliance and economic sanctions laws and regulations; |
• | risks related to litigation against us; |
• | the adequacy of our insurance coverage and our ability to obtain adequate insurance coverage in the future; |
• | our ability to perform our services in accordance with contractual requirements, regulatory standards and ethical considerations; |
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• | the loss of more than one of our major customers; |
• | our future capital needs; |
• | the ability or inability of our bookings to accurately predict our future revenue and our ability to realize the anticipated revenue reflected in our backlog; |
• | any disruption in the operations of the third-party providers who host our software solutions or any limitations on their capacity or interference with our use; |
• | our ability to reliably meet our data storage and management requirements, or the experience of any failures or interruptions in the delivery of our services over the internet; |
• | our ability to comply with the terms of any licenses governing our use of third-party open source software utilized in our software solutions; |
• | any breach of our security measures or unauthorized access to customer data; |
• | our ability to comply with applicable privacy and data security laws; |
• | our ability to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights; |
• | any allegations that we are infringing, misappropriating or otherwise violating a third party’s intellectual property rights; |
• | our ability to meet the obligations under our current or future indebtedness as they become due and have sufficient capital to operate our business and react to changes in the economy or industry; |
• | any limitations on our ability to pursue our business strategies due to restrictions under our current or future indebtedness or inability to comply with any restrictions under such indebtedness; |
• | any impairment of goodwill or other intangible assets; |
• | our ability to use our net operating loss (“NOLs”) and R&D tax credit carryforwards to offset future taxable income; |
• | the accuracy of our estimates and judgments relating to our critical accounting policies and any changes in financial reporting standards or interpretations; |
• | any inability to design, implement, and maintain effective internal controls when required by law, or inability to timely remediate internal controls that are deemed ineffective; and |
• | the other factors described elsewhere in this Quarterly Report on Form 10-Q or as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or as described in the other documents and reports we file with the Securities and Exchange Commission (the “SEC”). |
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements in this Quarterly Report are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K, that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make in this Quarterly Report. Such risk factors may be updated from time to time in our periodic filings with the SEC. Our periodic filings are accessible on the SEC’s website at www.sec.gov.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report to conform these statements to actual results or to changes in our expectations.
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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
Channels for Disclosure of Information
Investors and others should note that we may announce material information to the public through filings with the SEC, our Investors Relations website (https://ir.certara.com), press releases, public conference calls and public webcasts. We use these channels to communicate with the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time.
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CERTARA, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Item | Page | |||
---|---|---|---|---|
PART I – FINANCIAL INFORMATION | ||||
1. | 6 | |||
Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 | 6 | |||
7 | ||||
8 | ||||
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 | 10 | |||
11 | ||||
2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | ||
42 | ||||
42 | ||||
PART II – OTHER INFORMATION | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
43 | ||||
45 |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CERTARA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| MARCH 31, | DECEMBER 31, | ||||
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) |
| 2022 |
| 2021 | ||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for credit losses of $ |
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Restricted cash |
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Prepaid expenses and other current assets |
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Total current assets |
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Other assets: |
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Property and equipment, net |
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Operating lease right-of-use assets | | | ||||
Goodwill |
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Intangible assets, net of accumulated amortization of $ |
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Deferred income taxes | | | ||||
Other long-term assets |
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Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses |
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Current portion of deferred revenue |
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Current portion of long-term debt |
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Current operating lease liabilities | | | ||||
Other current liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Deferred revenue, net of current portion |
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Deferred income taxes |
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Operating lease liabilities, net of current portion | | | ||||
Long-term debt, net of current portion and debt discount |
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Non-current finance lease liabilities |
| — |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred shares, $ |
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Common shares, $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Treasury stock at cost, | ( | ( | ||||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of the condensed consolidated financial statements
6
CERTARA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, |
| ||||||
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) |
| 2022 |
| 2021 |
| ||
Revenues | $ | | $ | | |||
Cost of revenues |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Intangible asset amortization |
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Depreciation and amortization expense |
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Total operating expenses |
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Income from operations |
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Other income (expenses): |
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Interest expense |
| ( |
| ( | |||
Miscellaneous, net |
| |
| ( | |||
Total other expenses |
| ( |
| ( | |||
Income before income taxes |
| |
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Provision for income taxes |
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Net income |
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Other comprehensive loss: |
|
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Foreign currency translation adjustment |
| ( |
| ( | |||
Change in fair value of interest rate swap, net of tax $ | | | |||||
Total other comprehensive loss |
| ( |
| ( | |||
Comprehensive loss | $ | ( | $ | ( | |||
Net income per share attributable to common stockholders: | |||||||
Basic | $ | | $ | | |||
Diluted | $ | | $ | | |||
Weighted average common shares outstanding: | |||||||
Basic | | | |||||
Diluted |
| |
| |
The accompanying notes are an integral part of the condensed consolidated financial statements
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CERTARA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
ACCUMULATED | ||||||||||||||||||||
ADDITIONAL | OTHER | TOTAL | ||||||||||||||||||
(IN THOUSANDS, | COMMON STOCK | PAID-IN | ACCUMULATED | COMPREHENSIVE | TREASURY | STOCKHOLDERS' | ||||||||||||||
EXCEPT SHARE DATA) |
| SHARES | AMOUNT | CAPITAL | DEFICIT | LOSS | STOCK | EQUITY | ||||||||||||
Balance as of December 31, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | — | $ | | |||||||
Equity-based compensation awards | — | — | | — | — | — | | |||||||||||||
Change in fair value from interest rate swap, net of tax | — | — | — | — | | — | | |||||||||||||
Net income | — | — | — | | — | — | | |||||||||||||
Foreign currency translation adjustment, net of tax | — | — | — | — | ( | — | ( | |||||||||||||
Balance as of March 31, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | — | $ | | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements
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CERTARA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
ACCUMULATED | ||||||||||||||||||||
OTHER | TOTAL | |||||||||||||||||||
(IN THOUSANDS, | COMMON STOCK | ADDITIONAL | ACCUMULATED | COMPREHENSIVE | TREASURY | STOCKHOLDERS' | ||||||||||||||
EXCEPT SHARE DATA) |
| SHARES | AMOUNT | PAID-IN CAPITAL | DEFICIT | LOSS | STOCK | EQUITY | ||||||||||||
Balance as of December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||
Equity-based compensation awards |
| — | — | | — | — | — | | ||||||||||||
Restricted stock withheld for tax liability | ( | — | — | — | — | ( | ( | |||||||||||||
Change in fair value from interest rate swap, net of tax | — | — | — | — | | — | | |||||||||||||
Net income |
| — | — | — | | — | — | | ||||||||||||
Foreign currency translation adjustment, net of tax |
| — | — | — | — | ( | — | ( | ||||||||||||
Balance as of March 31, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | |
The accompanying notes are an integral part of the condensed consolidated financial statements
9
CERTARA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, | |||||||
(IN THOUSANDS) |
| 2022 |
| 2021 |
| ||
Cash flows from operating activities: |
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|
| ||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization of property and equipment |
| |
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Amortization of intangible assets |
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Amortization of debt issuance costs |
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(Recovery of) provision for credit losses |
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| ( | |||
Loss on retirement of assets |
| |
| — | |||
Equity-based compensation expense |
| |
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Deferred income taxes |
| ( |
| | |||
Changes in assets and liabilities, net of acquisitions: |
| ||||||
Accounts receivable |
| ( |
| ( | |||
Prepaid expenses and other assets |
| |
| ( | |||
Accounts payable and other liabilities |
| ( |
| ( | |||
Deferred revenue | | ( | |||||
Other current liabilities | ( | — | |||||
Changes in operating lease assets and liabilities, net | | ( | |||||
Net cash provided by operating activities |
| |
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Cash flows from investing activities: |
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|
| |||
Capital expenditures |
| ( |
| ( | |||
Capitalized development costs | ( |
| ( | ||||
Business acquisitions, net of cash acquired |
| ( |
| ( | |||
Net cash used in investing activities |
| ( |
| ( | |||
Cash flows from financing activities: |
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|
| |||
Payments on long-term debt and finance lease obligations | ( | ( | |||||
Payments on financing component of interest rate swap |
| ( | — | ||||
Payment of taxes on shares withheld for employee taxes |
| ( | — | ||||
Net cash used in financing activities |
| ( |
| ( | |||
Effect of foreign exchange rate changes on cash and cash equivalents, and restricted cash |
| ( |
| ( | |||
Net (decrease) increase in cash and cash equivalents, and restricted cash |
| ( |
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Cash and cash equivalents, and restricted cash, at beginning of period |
| |
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Cash and cash equivalents, and restricted cash, at end of period | $ | | $ | | |||
Supplemental disclosures of cash flow information |
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Cash paid for interest | $ | | $ | | |||
Cash paid for taxes | $ | | $ | | |||
Supplemental schedule of non-cash investing and financing activities |
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Liabilities assumed in connection with business acquisition | $ | — | $ | |
The accompanying notes are an integral part of the condensed consolidated financial statements
10
CERTARA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. | Description of Business |
Certara, Inc. and its wholly-owned subsidiaries (together, the “Company”) deliver software products and technology-driven services to customers to efficiently carry out and realize the full benefits of biosimulation in drug discovery, preclinical and clinical research, regulatory submissions and market access. The Company is a global leader in biosimulation, and the Company’s biosimulation software and technology-driven services help optimize, streamline, or even waive certain clinical trials to accelerate programs, reduce costs, and increase the probability of success. The Company’s regulatory science and market access software and services are underpinned by technologies such as regulatory submissions software, natural language processing, and Bayesian analytics. When combined, these solutions allow the Company to offer customers end-to-end support across the entire product life cycle. On October 1, 2020, the Company amended the certificate of incorporation of EQT Avatar Topco, Inc. to change the name of the Company to Certara, Inc.
The Company has operations in the United States, Canada, Spain, Luxembourg, Portugal, United Kingdom, Germany, France, Netherlands, Denmark, Switzerland, Italy, Poland, Japan, Philippines, India, Australia and China.
2. | Summary of Significant Accounting Policies |
There have been no changes other than what is discussed herein to the Company’s significant accounting policies as compared to the significant accounting policies described in Note 2 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as of and for the year ended December 31, 2021.
(a) | Basis of Presentation and Use of Estimates |
The preparation of condenesd consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, among other estimates, assumptions used in the allocation of the transaction price to separate performance obligations, estimates towards the measure of progress of completion on fixed-price service contracts, the determination of fair values and useful lives of long-lived assets as well as intangible assets, goodwill, allowance for credit losses for accounts receivable, recoverability of deferred tax assets, recognition of deferred revenue, value of interest rate swaps, determination of fair value of equity-based awards and assumptions used in testing for impairment of long-lived assets. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.
(b) Unaudited Interim Financial Statements
The accompanying condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021, and the related interim disclosures are unaudited.
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. These unaudited condensed consolidated financial statements include all adjustments necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s 2021 audited consolidated financial statements and notes thereto. The information as of December 31, 2021 in the Company’s condensed consolidated balance sheet included herein is derived from the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
(c) | Accounting Pronouncements Not Yet Adopted |
In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”. The ASU requires that entities increase disclosures about government assistance received relating to accounting policy, nature of the assistance, and the effect of the assistance on the financial statements. The ASU is effective for annual periods beginning after December 15, 2021. Early application of the ASU is permitted. The Company is currently evaluating the impact of these amendments on its consolidated financial statements.
(d) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
(e) | Cash and Cash Equivalents, and Restricted Cash |
Cash equivalents include highly liquid investments with maturities of three months or less from the date purchased.
Restricted cash represents cash that is reserved to support a financing program and unexpended restricted grant funds. The restricted cash balance was $
The following table provides a reconciliation of cash and cash equivalents and restricted cash to the amounts presented in the condensed consolidated statements of cash flows:
| MARCH 31, | DECEMBER 31, | MARCH 31, | ||||||
| 2022 |
| 2021 |
| 2021 | ||||
Cash and cash equivalents | $ | | $ | | $ | | |||
Restricted cash, current |
| |
| |
| | |||
Total cash and cash equivalents and restricted cash | $ | | $ | | $ | |
(f) | Derivative Instruments |
The Company has an interest rate swap agreement that was designated as a cash flow hedge of interest rate risk for a notional amount of $
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the condensed consolidated balance sheets and the changes in the fair value of the embedded at-the-market derivative is recognized in other comprehensive loss. At March 31, 2022, the financing component is recorded in current portion of interest rate swap liability in the amount of $
The following table sets forth the assets that is measured at fair value on a recurring basis by the levels in the fair value hierarchy at March 31, 2022:
| LEVEL 1 |
| LEVEL 2 |
| LEVEL 3 |
| TOTAL | |||||
Asset |
|
|
|
|
|
|
|
| ||||
Interest rate swap asset | $ | — | $ | | $ | — |
| $ | | |||
Total | $ | — | $ | | $ | — | $ | |
The following table sets forth the assets that were measured at fair value on a recurring and non-recurring basis by their levels in the fair value hierarchy at December 31, 2021:
| LEVEL 1 |
| LEVEL 2 |
| LEVEL 3 |
| TOTAL | |||||
Asset |
|
|
|
|
|
|
|
| ||||
Interest rate swap asset | $ | — | $ | | $ | — | $ | | ||||
Total | $ | — | $ | | $ | — | $ | |
For more information regarding fair value measurement and fair value hierarchy, see NOTE 2. “Summary of Significant Accounting Policies” in the notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The net amount of deferred losses related to derivative instruments designated as cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months is insignificant.
(g) | Revenue Recognition |
The Company’s revenue consists of fees for perpetual and term licenses for the Company’s software products, post-contract customer support (referred to as maintenance), software as a service (“SaaS”) and professional services including training and other revenue. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company typically recognizes license revenue at a point in time upon delivering the applicable license. The revenue related to the support and maintenance performance obligation will be recognized on an over-time basis using time elapsed methodology. The revenue related to software training and software implementation performance will be recognized at the completion of the service.
The following describes the accounting policies for multiple performance obligations and the nature of the Company’s primary types of revenues and the revenue recognition policies as they pertain to the types of transactions the Company enters into with its customers.
Arrangements with Multiple Performance Obligations
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For contracts with multiple performance obligations, the Company determines if the products or services are distinct and allocates the consideration to each distinct performance obligation on a relative standalone selling price basis. When products and services are not distinct, the Company determines an appropriate measure of progress based on the nature of its overall promise for the single performance obligation. The delivery of a particular type of software and each of the user licenses would be one performance obligation. However, any training, implementation, or support and maintenance promises as part of the software license agreement would be considered separate performance obligations, as those promises are distinct and separately identifiable from the software licenses. The payment terms in these arrangements are sufficiently short such that there is no significant financing component to the transaction.
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 upfront at the point in time when the software license has been 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 (“SSP”) 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. Revenue allocated to maintenance services is recognized ratably over the contract term beginning on the delivery date of each offering. Maintenance contracts generally have a term of
Subscription Revenues
Subscription revenues consists of subscription fees for access to, and related support for, our cloud-based solutions. The Company typically invoices subscription fees in advance in annual installments and recognizes subscription revenue ratably over the term of the applicable agreement, usually
Services and Other Revenues
The Company’s primary services offering includes consulting 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.
The Company’s professional services contracts are either time-and-materials, fixed fee or prepaid. Services revenues are generally recognized over time as the services are performed. Generally, these services are delivered to customers electronically. Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are incurred. Revenues for fixed price services and prepaid are generally recognized over time applying input methods to estimate progress to completion. Accordingly, the number of resources being paid for and
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varying lengths of time they are being paid for, determine the measure of progress. Training revenues are recognized as the services are performed over time. However, due to short period over which the transfer of control occurs for a classroom or on-site training course, the revenue related to these performance obligations is recognized at the completion of the course for administrative feasibility purposes. The training services generally do not provide for any non-cash consideration nor is there consideration payable to a customer.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (deferred revenue, contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., quarterly or monthly) or upon achievement of contractual milestones.
Contract assets relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts (i.e., unbilled revenue, a component of accounts receivable in the Consolidated Balance Sheets). Contract assets are billed and transferred to customer accounts receivable when the rights become unconditional. The Company typically invoices customers for term licenses, subscriptions, maintenance and support fees in advance with payment due before the start of the subscription term, ranging from
The unsatisfied performance obligations as of March 31, 2022 were approximately $
Deferred Contract Acquisition Costs
Under ASC 606, sales commissions paid to the sales force and the related employer payroll taxes, collectively “deferred contract acquisition costs”, are considered incremental and recoverable costs of obtaining a contract with a customer. The Company has determined that sales commissions paid are an immaterial component of obtaining a customer’s contract and has elected to expense sales commissions when paid.
Sources and Timing of Revenue
The Company’s performance obligations are satisfied either over time or at a point in time. The following table presents the Company’s revenue by timing of revenue recognition to understand the risks of timing of transfer of control and cash flows:
| ||||||
| THREE MONTHS ENDED MARCH 31, | |||||
| 2022 | 2021 | ||||
Software licenses transferred at a point in time | $ | | $ | | ||
Software licenses transferred over time |
| |
| | ||
Service revenues earned over time |
| |
| | ||
Total | $ | | $ | |
(h) | Earnings per Share |
Basic earnings per common share is computed by dividing the net income that is attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period, without consideration for potentially dilutive securities. The dilutive effect of potentially dilutive securities is excluded from basic earnings per share
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and is included in the calculation of diluted earnings per share. Restricted stock and restricted stock units granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share.
Diluted earnings per share is computed by dividing the earnings attributable to stockholders by the weighted-average number of shares and potentially dilutive securities outstanding during the period.
(i) | COVID-19 |
Since the first quarter of 2020, the COVID-19 pandemic has posed a significant threat to public health as well as the global and U.S. economies. The continued spread of variants of COVID-19 may adversely impact our business, financial condition or results of operations as a result of increased costs, negative impacts to our workforce, delay or cancellation of projects due to disruption of clinical trials, or a sustained economic downturn. Although the spread of the virus seems to have subsided, the possibility of a resurgence due to a new strain is possible. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the global and US economy and our business.
3. Public Offerings
The Company is party to a registration rights agreement with EQT AB and its affiliates (“EQT AB”), Arsenal, EQT, and certain other stockholders (“Institutional Investors”). It contains provisions that entitle EQT and the other Institutional Investors thereto to certain rights to have their securities registered by the Company under the Securities Act. EQT is entitled to an unlimited number of “demand” registrations, subject to certain limitations. Every Institutional Investor that holds registration rights is also be entitled to customary “piggyback” registration rights. In addition, the amended and restated registration rights agreement provides that the Company will pay certain expenses of the Institutional Investors relating to such registrations and indemnify them against certain liabilities which may arise under the Securities Act of 1933.
The registration rights agreement will terminate (i) with the prior written consent of the Institutional Investors in connection with a change of control; (ii) for those holders (other than the Institutional Investors) that beneficially own less than
On March 29, 2021, the Company completed an underwritten secondary public offering in which certain selling stockholders, including EQT, sold
On September 13, 2021, the Company completed another public offering, at a public offering price of $
On November 22, 2021, the Company completed another secondary public offering in which certain selling stockholders, including EQT, sold
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in this transaction and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders. The Company incurred costs of $
4. | Concentrations of Credit Risk |
Financial instruments that potentially subject the Company to concentrations of credit risk have consisted principally of cash and cash equivalent investments and trade receivables. The Company invests available cash in bank deposits, investment-grade securities, and short-term interest-producing investments, including government obligations and other money market instruments. At March 31, 2022 and December 31, 2021, the investments were bank deposits and overnight sweep accounts. The Company has adopted credit policies and standards to evaluate the risk associated with sales that require collateral, such as letters of credit or bank guarantees, whenever deemed necessary. Management believes that any risk of loss is significantly reduced due to the nature of the customers and distributors with which the Company does business.
As of March 31, 2022 and December 31, 2021, no single customer accounted for more than 10% of the Company’s accounts receivable. No customers accounted for more than 10% of the Company’s revenues during the three months ended March 31, 2022 and 2021.
5. | Acquisitions |
Acquisitions have been accounted for using the acquisition method of accounting pursuant to FASB ASC 805, “Business Combinations.” Amounts allocated to the purchased assets and liabilities are based upon the total purchase price and the estimated fair values of such assets and liabilities on the effective date of the purchase as determined by an independent third party. The results of operations have been included in the Company’s results of operations prospectively from the date of acquisition.
Author! B.V.
On March 2, 2021, the Company completed a transaction which qualified as a business combination for a total consideration of $
Insight Medical Writing Limited
On June 7, 2021, the Company completed a transaction which qualified as a business combination for a total consideration of $
Pinnacle 21, LLC
On October 1, 2021, the Company acquired
The acquisition of Pinnacle was treated as a purchase in accordance with ASC 805, “Business Combinations”, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction.
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The following table summarizes the fair value of the consideration paid as well as the fair values of the assets acquired and liabilities assumed as of the date of the acquisition:
Fair value of consideration: |
| Pinnacle | |
Cash paid to sellers |
| $ | |
Cash paid to others and escrow | |||
Unregistered shares of Certara, Inc. ( | |||
Total consideration | $ | | |
Assets acquired and liabilities assumed: | |||
Cash and cash equivalents | $ | ||
Accounts receivable | |||
Other current assets | |||
Property and equipment | |||
Deferred tax assets | |||
Identifiable intangible assets: | |||
Trademark | |||
Acquired software | |||
Customer relationships | |||
Goodwill | |||
Long-term deposits | |||
Current liabilities | ( | ||
Current portion of deferred revenue | ( | ||
Net assets acquired | $ | |
The fair value of the unregistered shares given as part of the purchase consideration was determined based on the market price of Certara stock on the closing date less a
The acquisition was structured as an asset acquisition for income tax purposes; therefore, the Company’s tax basis in Pinnacle’s identifiable assets reflects the fair value of consideration paid. However, the company did not recognize tax basis in certain liabilities assumed at the acquisition date; resulting in deferred income taxes being recorded in purchase accounting.
The fair value of the intangible assets is based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements within the fair value measurement hierarchy. The fair value of the customer relationships (Distributor method), trademarks (Relief from Royalty method) and developed technology (Multi-Period Excess Earnings Method) was determined under the income approach.
Goodwill of $
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Integrated Nonclinical Development Solutions
On January 3, 2022, the Company completed the acquisition of Integrated Nonclinical Development Solutions, Inc. (“INDS”), a company that provides the SEND Explorer software and drug development consulting for a total consideration of $
The current purchase price allocation is preliminary. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired, and liabilities assumed, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition date during the measurement period. Any adjustments to the preliminary purchase price allocation identified during the measurement period, which will not exceed one year from the acquisition date, will be accounted for prospectively.
The condensed consolidated financial statements include the operating results of each acquisition from the date of acquisition. Pro forma results of operations revenue and net income subsequent to the acquisition date for three months ended March 31, 2022 have not been presented because the effects of the acquisition was not material to our financial results.
6. | Prepaid Expenses and Other Current Assets and Other Supplemental Assets Information |
| March 31, | December 31, | ||||
| 2022 |
| 2021 | |||
Prepaid expenses | $ | | $ | | ||
Income tax receivable |
| |
| | ||
Research and development tax credit receivable |
| |
| | ||
Current portion of interest rate swap asset | | | ||||
Other current assets | | | ||||
Prepaid expenses and other current assets | $ | | $ | |
Other long-term assets consisted of the following:
| March 31, | December 31, | ||||
| 2022 |
| 2021 | |||
Long-term deposits | $ | | $ | | ||
Deferred financing cost |
| |
| | ||
Total other long-term assets | $ | | $ | |
7. | Long-Term Debt and Revolving Line of Credit |
Effective August 14, 2017, the Company entered into a credit agreement with lenders for a $
The Company and lenders entered into Amendment No. 1 to the Credit Agreement on January 25, 2018, where an additional tranche of $
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The Company and lenders entered into Amendment No. 2 to the Credit Agreement on April 3, 2018, where an additional tranche of $
The Company and lenders entered into a third amended and restated loan agreement on June 17, 2021 (“Third Amendment”), which provides for, among other things, (i) the extension of the termination date applicable to the revolving credit commitments under the Credit Agreement to August 2025, (ii) the extension of the maturity date applicable to the term loans under the Credit Agreement to August 2026, and (iii) an increase of approximately $
As of March 31, 2022 and December 31, 2021, available borrowings under the revolving lines of credits were $
The Company was in compliance with all financial covenants as of March 31 2022 and December 31, 2021. Borrowings under the Credit Agreement are subject to a variable interest rate at LIBOR plus a margin. The applicable margins are based on achieving certain levels of compliance with financial covenants.
The effective interest rate was
Interest incurred on the Credit Agreement with respect to the term loan amounted to $
Long-term debt consists of the following:
MARCH 31, | DECEMBER 31, | |||||
| 2022 |
| 2021 | |||
Term loans | $ | | $ | | ||
Revolving line of credit |
| — |
| — | ||
Less: debt issuance costs |
| ( |
| ( | ||
Total |
| |
| | ||
Current portion of long-term debt |
| ( |
| ( | ||
Long-term debt, net of current portion and debt issuance costs | $ | | $ | |
The principal amount of long-term debt outstanding as of March 31, 2022 matures in the following years:
| Remainder of 2022 |
| 2023 |
| 2024 | 2025 | 2026 |
| TOTAL | |||||||||
Maturities | $ | | $ | | $ | | $ | | $ | | $ | |
The Credit Agreement requires the Company to make an annual mandatory prepayment as it relates to the Company’s Excess Cash Flow calculation. For the year ended December 31, 2021, the Company was not required to make a mandatory
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prepayment on the term loan. For the credit agreement, the Company is required to make a quarterly principal payment of $
The fair values of the Company’s variable interest term loan and revolving line of credit are not significantly different than their carrying value because the interest rates on these instruments are subject to change with market interest rates.
8. | Leases |
The Company leases certain office facilities and equipment under non-cancelable operating and finance leases with remaining terms from
Operating lease ROU assets are included in other asset section while finance lease ROU assets are included in "Property and equipment, net" in the condensed consolidated balance sheets. With respect to operating lease liabilities, current lease liabilities and non-current operating lease liabilities are included in “Current operating lease liabilities” and "Operating lease liabilities, net of current portion”. Current finance lease liabilities and non-current finance lease liabilities are included in "Other current liabilities" and "Non-current finance lease liabilities" in the condensed consolidated balance sheets. At March 31, 2022, The weighted average remaining lease terms were
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at March 31, 2022 and December 31, 2021:
Lease Position | Balance Sheet Classification | March 31, 2022 | December 31, 2021 | ||||
Assets | |||||||
Operating lease assets | Operating lease right-of-use assets | $ | | $ | | ||
Finance lease assets | | | |||||
Total lease assets | $ | | $ | | |||
Liabilities | |||||||
Current | |||||||
Operating | Current operating lease liabilities | $ | | $ | | ||
Finance | | | |||||
Noncurrent | |||||||
Operating | Operating lease liabilities, net of current portion | | | ||||
Finance | Non-current finance lease liabilities | — | | ||||
Total lease liabilities | $ | | $ | | |||
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The following table summarizes by year the maturities of our minimum lease payments as of March 31, 2022.
| OPERATING |
| FINANCE | |||
LEASES | LEASES | |||||
|
| |||||
Remainder of 2022 | $ | $ | ||||
2023 | ||||||
2024 | — | |||||
2025 | — | |||||
2026 | — | |||||
Thereafter | — | |||||
Total future lease payments | ||||||
Less: imputed interest | ( | ( | ||||
Total | $ | $ |
9. | Accrued Expenses and Other Supplemental Liabilities Information |
Accrued expenses consist of the following:
| March 31, | December 31, | ||||
| 2022 |
| 2021 | |||
Accrued compensation |
| $ | | $ | | |
Legal and professional accruals |
|
| |
| | |
Local sales and VAT taxes |
|
| |
| — | |
Interest payable |
|
| |
| | |
Income taxes payable |
|
| |
| | |
Accrued business acquisition liabilities |
|
| |
| — | |
Other |
|
| |
| | |
Total accrued expenses |
| $ | | $ | |
Other current liabilities consist of the following:
| March 31, | December 31, | ||||
| 2022 |
| 2021 | |||
Current portion of interest rate swap liability |
| $ | | $ | | |
Current finance lease liabilities |
|
| |
| | |
Total other current liabilities |
| $ | | $ | |
10. | Equity-Based Compensation |
Restricted Stock
The majority of the company’s restricted stock awarded to its employees were originally issued in December 2020 to exchange the Class B Profits Interest Unit (the “Class B Plan”) of EQT, former parent of the Company.
Modification accounting was not required for the time-based vesting Class B Units for which the vesting conditions, classification and fair market value did not change as a result of the shares of restricted common stock that replaced them. The original grant date fair value will continue to be recognized on a straight-line basis. Modification accounting was
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required for the performance-based vesting Class B Units that were exchanged for time-based vesting restricted common stock, given the vesting conditions were changed.
Share based compensation for the restricted stock exchanged for the time-based Class B Units is recognized on a straight-line basis over the requisite service period of the award, which is generally
In 2021, the Company granted
WEIGHTED- | |||||
AVERAGE | |||||
GRANT DATE | |||||
| SHARES |
| FAIR VALUE | ||
Non-vested restricted stock as of December 31, 2021 | < |