Certara, Inc. 2020 Form 10-K Summary
Business context and reporting period
Certara provides biosimulation software and technology-enabled services supporting drug discovery, clinical development, regulatory submissions, and market access. Its platform served more than 1,650 biopharmaceutical companies and academic institutions across 61 countries. The filing covers the fiscal year ended December 31, 2020, and was filed March 15, 2021. Certara completed its initial public offering on December 15, 2020, and began Nasdaq trading on December 11, 2020 under the symbol CERT.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $243.5 million | $208.5 million | 17% increase |
| Software revenue | $73.5 million | $68.3 million | 7% increase |
| Services revenue | $170.1 million | $140.2 million | 21% increase |
| Gross profit | $142.8 million | $128.7 million | 11% increase |
| Gross margin | 58.6% | 61.7% | Declined |
| Loss from operations | $(24.4) million | $19.6 million | Turned to loss |
| Net loss | $(49.4) million | $(8.9) million | Loss increased |
| Net loss per diluted share | $(0.37) | $(0.07) | Loss increased |
| Adjusted EBITDA | $87.9 million | $68.4 million | 28% increase |
| Adjusted net income | $22.0 million | $0.8 million | Improved |
| Cash flow from operations | $44.8 million | $38.0 million | 18% increase |
| Cash and cash equivalents | $271.4 million | $29.3 million | Substantial increase |
Operating expenses increased to $167.2 million from $109.1 million. The largest driver was equity-based compensation of $64.5 million, compared with $1.7 million in 2019, primarily related to the exchange of Class B units and IPO-related equity awards. Intangible asset amortization was $37.4 million, and interest expense was $25.3 million.
Bookings increased to $288.3 million from $259.5 million. The full-year software renewal rate was 90%, and the technology-enabled services net revenue repeat rate was 116%. Customers generating at least $100,000 of annual customer value increased to 261 from 228.
Liquidity, debt, and cash flow
- Cash, cash equivalents, and restricted cash totaled $273.3 million at December 31, 2020.
- Operating activities generated $44.8 million; investing activities used $8.6 million, including $7.1 million of capitalized software development costs; and financing activities provided $208.2 million.
- The IPO generated $316.3 million of net proceeds before certain offering costs. The company used proceeds to repay the $80.0 million outstanding principal under the Loan Agreement and $3.0 million of accrued interest.
- Outstanding term debt under the Credit Agreement was $304.1 million, or $298.8 million net of debt issuance costs. The term loan matures in 2024.
- The $20.0 million revolving facility had $19.9 million of availability after outstanding letters of credit. The company was in compliance with its debt covenants at year-end.
- Contractual obligations included $304.1 million of principal debt payments, $41.2 million of expected debt interest, and $20.9 million of operating lease obligations.
Material changes versus the prior comparable period
- Revenue growth accelerated the business, particularly in technology-enabled services, biosimulation, and regulatory services.
- Gross margin declined because cost of revenues grew 26%, faster than revenue, reflecting higher headcount and $8.6 million of additional stock-based compensation.
- Operating results deteriorated from $19.6 million of operating income to a $24.4 million operating loss, principally because general and administrative expense increased 85% to $88.5 million and included a $39.8 million increase in stock-based compensation.
- Net loss increased by $40.5 million, although adjusted EBITDA and adjusted net income improved materially.
- Cash liquidity increased substantially following the IPO, while total principal debt declined by approximately $104.1 million due primarily to repayment of the $100.0 million Loan Agreement.
- The company transitioned from private to public ownership, issued 14.6 million primary IPO shares, and had 152.98 million common shares outstanding at December 31, 2020.
- COVID-19 did not have a material adverse effect on financial condition, results of operations, or cash flows through year-end, although management continued to identify significant uncertainty and operational risks.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expects continued investment in scientific personnel, sales and marketing, research and development, international expansion, and potential acquisitions. It expects operating expenses and headcount to increase, generally at a rate below revenue growth, and expects interest expense to decline following debt repayment.
Management describes biosimulation adoption, regulatory acceptance, cloud-based solutions, cross-selling, and expansion into market access as key growth opportunities. It estimates a total addressable market of $11.6 billion, with expected annual growth of approximately 12% to 15%, but cautions that such estimates are inherently uncertain.
- COVID-19 may disrupt customer R&D spending, clinical trials, regulatory activity, employee productivity, sales cycles, and third-party infrastructure.
- The business operates in a competitive and fragmented market, including competition from specialized software providers, contract research organizations, internal customer development, and open-source tools.
- Revenue depends on customer renewals, project timing, customer funding, contract scope, and the ability to accurately price fixed-fee work. Bookings are not necessarily a reliable indicator of future revenue.
- The ten largest customers represented 28% of revenue in both 2020 and 2019, creating customer concentration risk.
- Certara relies substantially on third-party cloud providers and faces cybersecurity, data privacy, intellectual property, and service continuity risks.
- Debt bears variable interest rates, is secured by substantially all relevant assets, and is subject to restrictive covenants and leverage requirements.
- Goodwill and other intangible assets totaled $915.0 million at year-end, including $518.6 million of goodwill. No impairment was recorded in 2020.
- Equity-based compensation was unusually high at $64.5 million and materially affected GAAP profitability and operating expenses.
- EQT owned approximately 49.0% of outstanding common stock and could nominate a majority of the board, creating controlling-stockholder and governance risks.
- The company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether revenue growth and bookings convert into recurring, profitable revenue after the IPO-related compensation effects normalize.
- The sustainability of the 90% software renewal rate and 116% services net revenue repeat rate.
- Future gross margins, adjusted EBITDA margins, and the extent to which stock-based compensation remains a recurring expense.
- The company’s ability to reduce debt before the substantial 2024 term-loan maturity and manage exposure to variable interest rates.
- Customer concentration, contract cancellations, fixed-fee project performance, and accounts-receivable collectability.
- Progress in integrating acquisitions and expanding cloud, market access, regulatory science, and international offerings.
- Potential goodwill or intangible-asset impairment and the realization of tax attributes subject to ownership-change limitations.
- Cybersecurity, privacy, regulatory compliance, litigation, and third-party hosting incidents.
- The impact of EQT’s voting control, registration rights covering approximately 64.9% of outstanding shares, and potential future stock sales on governance and share-price volatility.