UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Trading Symbol(s)
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Name of each exchange on which registered
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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.
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Accelerated Filer |
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Non-accelerated Filer |
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Smaller reporting company |
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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 by Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 31, 2023, the number of outstanding shares of the registrant’s Class A Common Stock was
Definitive Healthcare Corp.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2023
TABLE OF CONTENTS
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Part I. |
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Item 1. |
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Condensed Consolidated Statements of Changes in Total Equity |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II. |
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Item 1. |
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Item 1A. |
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
GLOSSARY
As used in this Quarterly Report on Form 10-Q, the terms identified below have the meanings specified below unless otherwise noted or the context indicates otherwise. References in this Form 10-Q to “Definitive Healthcare Corp.” refer to Definitive Healthcare Corp. and not to any of its subsidiaries unless the context indicates otherwise. References in this Form 10-Q to “Definitive Healthcare”, “Definitive”, the “Company”, “we”, “us”, and “our” refer (1) prior to the consummation of the Reorganization Transactions, to Definitive OpCo and its consolidated subsidiaries, and (2) after the consummation of the Reorganization Transactions, to Definitive Healthcare Corp. and its consolidated subsidiaries unless the context indicates otherwise.
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, such as those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, regional, national, or global political, economic, business, competitive, market, and regulatory conditions.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with Part I, Item 1A, “Risk Factors,” in our Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K/A”) filed with the Securities and Exchange Commission (“SEC”) on August 14, 2023, and Part II, Item 1A in this Quarterly Report and the other cautionary statements that are included elsewhere in this Quarterly Report and in our public filings, including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law.
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
(Unaudited)
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(As Restated) |
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September 30, 2023 |
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December 31, 2022 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Current portion of deferred contract costs |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Other assets |
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Deferred contract costs, net of current portion |
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Intangible assets, net |
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Goodwill |
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Total assets |
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$ |
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$ |
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Liabilities and Equity |
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Current liabilities: |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Current portion of deferred revenue |
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Current portion of term loan |
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Current portion of operating lease 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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Term loan, net of current portion |
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Operating lease liabilities, net of current portion |
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Tax receivable agreements liability, net of current portion |
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Deferred tax liabilities |
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Other long-term liabilities |
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Total liabilities |
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Equity: |
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Class A Common Stock, par value $ |
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Class B Common Stock, par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Accumulated deficit |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See notes to condensed consolidated financial statements
5
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share amounts and per share data)
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(As Restated) |
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(As Restated) |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of revenue: |
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Cost of revenue exclusive of amortization |
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Amortization |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Product development |
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General and administrative |
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Depreciation and amortization |
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Transaction, integration, and restructuring expenses |
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Goodwill impairment |
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Total operating expenses |
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Loss from operations |
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Other income (expense), net: |
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Interest income |
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Interest expense |
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( |
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( |
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Other income, net |
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Total other income, net |
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Net loss before income taxes |
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( |
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( |
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Benefit from income taxes |
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Net loss |
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( |
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( |
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( |
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( |
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Less: Net loss attributable to noncontrolling interests |
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( |
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( |
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( |
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( |
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Net loss attributable to Definitive Healthcare Corp. |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per share of Class A Common Stock: |
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Basic and diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted average Class A Common Stock outstanding: |
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Basic and diluted |
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See notes to condensed consolidated financial statements
6
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(amounts in thousands)
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(As Restated) |
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(As Restated) |
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2023 |
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2022 |
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2023 |
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2022 |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive loss: |
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Foreign currency translation adjustments |
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( |
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( |
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( |
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( |
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Unrealized gain (loss) on available-for-sale securities |
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( |
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( |
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Unrealized (loss) gain on interest rate hedging instruments |
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( |
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( |
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Comprehensive loss |
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( |
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( |
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( |
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( |
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Less: Comprehensive loss attributable to noncontrolling interests |
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( |
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( |
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( |
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( |
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Comprehensive loss attributable to Definitive Healthcare Corp. |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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See notes to condensed consolidated financial statements
7
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
(amounts in thousands, except share amounts)
(Unaudited)
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Accumulated |
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Additional |
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Other |
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Class A |
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Class A |
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Class B |
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Class B |
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Paid-In |
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Accumulated |
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Comprehensive |
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Noncontrolling |
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Total |
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Stock |
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Amount |
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Stock |
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Amount |
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Capital |
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Deficit |
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Income |
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Interests |
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Equity |
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Balance at January 1, 2023, as restated |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net loss, as restated |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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( |
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Vested incentive units |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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Issuance of Class A Common Stock upon vesting of RSUs |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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Shares withheld related to net share settlement |
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( |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Effect of LLC unit exchanges, as restated |
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( |
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— |
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— |
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— |
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( |
) |
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( |
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Forfeited unvested incentive units |
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— |
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— |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2023, as restated |
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$ |
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$ |
— |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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— |
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— |
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Vested incentive units |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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Issuance of Class A Common Stock upon vesting of RSUs |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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Shares withheld related to net share settlement |
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( |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
Effect of LLC unit exchanges |
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( |
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— |
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— |
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— |
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( |
) |
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( |
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Forfeited unvested incentive units |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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— |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributions to noncontrolling interests |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance at June 30, 2023 |
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$ |
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$ |
— |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
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|||||||
Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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( |
) |
Vested incentive units |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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|
Issuance of Class A Common Stock upon vesting of RSUs |
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— |
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— |
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— |
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|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
||
Shares withheld related to net share settlement |
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
Effect of LLC unit exchanges |
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|||
Forfeited unvested incentive units |
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Equity-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|||
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Balance at September 30, 2023 |
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
|||||||
8
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY (CONTINUED)
(amounts in thousands, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
Other |
|
|
|
|
|
|||||||||
|
Class A |
|
Class A |
|
Class B |
|
Class B |
|
Paid-In |
|
Accumulated |
|
Comprehensive |
|
Noncontrolling |
|
Total |
|
|||||||||
|
Stock |
|
Amount |
|
Stock |
|
Amount |
|
Capital |
|
Deficit |
|
Income |
|
Interests |
|
Equity |
|
|||||||||
Balance at January 1, 2022, as restated |
|
|
|
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||||
Net loss, as restated |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
|
( |
) |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|||
Vested incentive units |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
|
|
— |
|
|
Effect of LLC unit exchanges, as restated |
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|||
Forfeited unvested incentive units |
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Equity-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|||
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Balance at March 31, 2022, as restated |
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
|||||||
Net loss, as restated |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
|
( |
) |
Other comprehensive income, as restated |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|||
Vested incentive units |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
|
|
— |
|
|
Issuance of Class A Common Stock upon vesting of RSUs |
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
||
Effect of LLC unit exchanges, as restated |
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|||
Forfeited unvested incentive units |
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Equity-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|||
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Balance at June 30, 2022, as restated |
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
|||||||
Net loss, as restated |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
|
( |
) |
Other comprehensive income, as restated |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|||
Vested incentive units |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
|
|
— |
|
|
Issuance of Class A Common Stock upon vesting of RSUs |
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
||
Shares withheld related to net share settlement |
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
Effect of LLC unit exchanges, as restated |
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|||
Forfeited unvested incentive units |
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Equity-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
|||
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Balance at September 30, 2022, as restated |
|
|
$ |
|
|
|
$ |
— |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
|||||||
See notes to condensed consolidated financial statements.
9
DEFINITIVE HEALTHCARE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
|
|
(As Restated) |
|
||
|
|
2023 |
|
|
2022 |
|
||
Cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
|
|
|
|
||
Amortization of deferred contract costs |
|
|
|
|
|
|
||
Equity-based compensation |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Provision for doubtful accounts receivable |
|
|
|
|
|
|
||
Non-cash restructuring charges |
|
|
|
|
|
|
||
Goodwill impairment charge |
|
|
|
|
|
|
||
Tax receivable agreement remeasurement |
|
|
( |
) |
|
|
( |
) |
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Deferred contract costs |
|
|
( |
) |
|
|
( |
) |
Contingent consideration |
|
|
|
|
|
( |
) |
|
Accounts payable, accrued expenses, and other liabilities |
|
|
( |
) |
|
|
|
|
Deferred revenue |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows (used in) provided by investing activities: |
|
|
|
|
|
|
||
Purchases of property, equipment, and other assets |
|
|
( |
) |
|
|
( |
) |
Purchases of short-term investments |
|
|
( |
) |
|
|
( |
) |
Maturities of short-term investments |
|
|
|
|
|
|
||
Cash paid for acquisitions, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows used in financing activities: |
|
|
|
|
|
|
||
Repayments of term loans |
|
|
( |
) |
|
|
( |
) |
Taxes paid related to net share settlement of equity awards |
|
|
( |
) |
|
|
( |
) |
Payment of contingent consideration |
|
|
|
|
|
( |
) |
|
Payments under tax receivable agreement |
|
|
( |
) |
|
|
|
|
Payments of equity offering issuance costs |
|
|
( |
) |
|
|
( |
) |
Member distributions |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
||
Supplemental cash flow disclosures: |
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest |
|
$ |
|
|
$ |
|
||
Income taxes |
|
$ |
|
|
$ |
|
||
Acquisitions: |
|
|
|
|
|
|
||
Net assets acquired, net of cash acquired |
|
$ |
|
|
$ |
|
||
Working capital adjustment receivable |
|
|
|
|
|
|
||
Initial cash investment in prior year |
|
|
|
|
|
( |
) |
|
Contingent consideration |
|
|
( |
) |
|
|
( |
) |
Net cash paid for acquisitions |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
||
Capital expenditures included in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
||
Unpaid equity offering costs included in accrued expenses |
|
$ |
|
|
$ |
|
||
See notes to condensed consolidated financial statements
10
DEFINITIVE HEALTHCARE CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
Description of Business and Organization
Definitive Healthcare Corp. (the “Company”) was formed on
In connection with the IPO, the Company completed the following transactions (the “Reorganization Transactions”). Definitive OpCo entered into an amended and restated limited liability company agreement (the “Amended LLC Agreement”) pursuant to which members of Definitive OpCo prior to the IPO who continued to hold limited liability company interests (“LLC Units”) in Definitive OpCo following the consummation of the Reorganization Transactions acquired the right to require Definitive OpCo to redeem all or a portion of their LLC Units for newly issued shares of Class A Common Stock on a one-for-one basis. Until redeemed or exchanged, each LLC Unit is paired with one share of Definitive Healthcare Corp. Class B Common Stock. The total shares of Class B Common Stock outstanding is equal to the number of vested LLC Units outstanding, excluding LLC Units held by the Company. Unvested LLC Units are paired with Class B Common Stock, which are issued but do not have voting rights and are deemed not outstanding until the corresponding LLC Units have vested. Certain entities treated as corporations for U.S. federal income tax purposes that held LLC Units (individually, a “Blocker Company” and collectively, the “Blocker Companies”) each merged with a merger subsidiary of Definitive Healthcare Corp., and subsequently merged into Definitive Healthcare Corp. (the “Mergers”). The former shareholders of the Blocker Companies collectively received a number of shares of Class A Common Stock in the Mergers equal to the number of LLC Units held by the Blocker Companies prior to the Mergers.
Following the Reorganization Transactions, Definitive Healthcare Corp. became a holding company, with its sole material asset being a controlling equity interest in Definitive OpCo. Definitive Healthcare Corp. operates and controls all of the business and affairs of Definitive OpCo, and through Definitive OpCo and its subsidiaries, conducts its business. Accordingly, Definitive Healthcare Corp. consolidates the financial results of Definitive OpCo, and reports the noncontrolling interests of unexchanged LLC Unit holders on its condensed consolidated financial statements.
In connection with the Reorganization Transactions and the IPO, Definitive Healthcare Corp entered into a tax receivable agreement. See Note 15. Income Taxes.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with rules applicable to quarterly financial information. Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative nongovernmental GAAP as found in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The condensed consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 are unaudited and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022. All adjustments, consisting of normal recurring adjustments, except as otherwise noted, considered, in the opinion of management, necessary for a fair presentation of the unaudited interim condensed consolidated financial statements for these interim periods have been included.
Refer to Note 2. Summary of Significant Accounting Policies in the notes to the consolidated financial statements in the 2022 Form 10-K/A for the Company’s significant accounting policies and estimates.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, revenue recognition, allowance for doubtful accounts, contingencies, valuations, useful lives of intangible assets acquired in business combinations, equity-based compensation, and income taxes. Actual results could differ from those estimates.
11
Adoption of Recently Issued Financial Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13—Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. This standard is intended to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope, such as trade receivables. The amendment is effective for fiscal years beginning after December 15, 2022. The Company adopted the update effective January 1, 2023 and the adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements for the quarter ended September 30, 2023.
Recently Issued Accounting Pronouncements Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB or other accounting standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, we do not believe that the adoption of recently issued standards have had or may have a material impact on our condensed consolidated statements or disclosures.
Restatement of Previously Issued Financial Statements
The financial statements for the three and nine months ended September 30, 2022, have been restated to reflect the correction of misstatements related to the collection of sales taxes from sales of services to customers further described below (the “Misstatements”), along with other immaterial adjustments. The Company also restated all amounts within the notes to the financial statements. A description of adjustments and their impact on the previously issued financial statements are included below.
In the first quarter of 2023, the Company began a review of its sales tax positions, and related accounting matters, with the assistance of outside consultants. As a result of the review, the Company determined during the second quarter of 2023 that sales in certain states were subject to sales tax and that the Company had not assessed such sales tax on sales of its services to customers. The Company determined that it did not accrue sales taxes and corrected these Misstatements by recording sales tax accruals through general and administrative expense as of the end of each affected period. These accrual amounts assume that (i) customers who have not yet provided certificates or other documentation of exemption from sales tax are taxable, (ii) maximum interest and penalty assessments may be imposed, and (iii) the Company will not receive waivers of interest and penalties or other benefits under agreements it may obtain with jurisdictions from its outreach with voluntarily disclosures. The Company expects to make adjustments to the sales tax liability in future periods based on the results of the voluntary disclosure agreements, including, but not limited to, classification of exempt sales based on customer exemption certificates, waivers of interest and penalties, or other benefits. The Misstatements that appeared in the previously issued financial statements were material, and the Company has also corrected other immaterial errors, which are further described below.
12
As described in additional detail in the Explanatory Note in our 2022 Form 10-K/A, the Company restated its audited consolidated financial statements as of and for the years ended December 31, 2022, 2021 and 2020, as well as the unaudited condensed consolidated quarterly financial information for the quarterly periods in the fiscal years ended December 31, 2022, 2021, and 2020, to reflect the correction of the Misstatements and other immaterial adjustments, and to make corresponding disclosures. The Company also filed an Amendment No. 1 on Form 10-Q/A to amend the Quarterly Report on Form 10-Q for the three months ended March 31, 2023 with the SEC on August 14, 2023, to restate its unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022.
A summary of the impacts of the Misstatements and other immaterial adjustments is as follows:
|
|
Three Months Ended September 30, 2022 |
|
|
Nine Months Ended September 30, 2022 |
|
||||||||||
(in thousands) |
|
As previously reported |
|
|
As Restated |
|
|
As previously reported |
|
|
As Restated |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to Definitive Healthcare Corp. |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
As of |
|
|||||
|
|
September 30, 2022 |
|
|||||
(in thousands) |
|
As previously reported |
|
|
As Restated |
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Total liabilities |
|
|
|
|
|
|
||
Total equity |
|
|
|
|
|
|
||
The categories of restatement adjustments and their impacts on previously reported financial statements are described below:
13
The following table sets forth the corrections in each of the line items affected in the consolidated statements of operations for each respective period:
(in thousands) |
|
Three Months Ended September 30, 2022 |
|
|
Nine Months Ended |
|
||
Increase in general and administrative expense (a) |
|
$ |
|
|
$ |
|
||
Increase in gain on remeasurement of TRA liability (other income) (b) |
|
|
|
|
|
|
||
Increase in benefit from income taxes (c) |
|
|
|
|
|
|
||
Increase in net loss due to restatement items |
|
|
|
|
|
|
||
Increase in net loss attributable to noncontrolling interests due to restatement items (d) |
|
|
|
|
|
|
||
Increase in net loss attributable to Definitive Healthcare Corp. due to restatement items |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
See footnote descriptions above |
|
|||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
(in thousands, except share amounts and per share data) |
|
As previously reported |
|
|
As Restated |
|
|
As previously reported |
|
|
As Restated |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue exclusive of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction, integration, and restructuring expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss from operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Benefit from income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Less: Net loss attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to Definitive Healthcare Corp. |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss per share of Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average Common Stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
14
The following table sets forth the corrections in each of the line items affected in the condensed consolidated balance sheets for September 30, 2022:
(in thousands) |
|
As previously reported |
|
|
Restatement Adjustments |
|
|
As Restated |
|
|||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|||
Accrued expenses and other current liabilities |
|
|
|
|
|
|
|
|
|
|||
Total current liabilities |
|
|
|
|
|
|
|
|
|
|||
Tax receivable agreements liability, net of current portion |
|
|
|
|
|
( |
) |
|
|
|
||
Total liabilities |
|
|
|
|
|
|
|
|
|
|||
Additional paid-in capital |
|
|
|
|
|
( |
) |
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Noncontrolling interests |
|
|
|
|
|
( |
) |
|
|
|
||
Total equity |
|
|
|
|
|
( |
) |
|
|
|
||
Total liabilities and equity |
|
|
|
|
|
|
|
|
|
|||
The following table sets forth the corrections in each of the line items affected in the condensed consolidated statements of changes in total equity for September 30, 2022:
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
||||
(in thousands) |
|
Capital |
|
|
Deficit |
|
|
Interests |
|
|
Equity |
|
||||
As reported |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Adjustment due to cumulative error correction |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
As restated |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
The Company did not present tables for quarterly adjustments within the consolidated statements of cash flows since all of the foregoing adjustments only affected financial statement line items within cash flows from operating activities. The adjustments did not affect total cash flows from operating activities, financing activities, or investing activities for any period presented.
15
2. Acquisitions
Populi, Inc.
On July 21, 2023, the Company completed the acquisition of Populi, Inc. (“Populi”), a provider-focused data and analytics company that works with healthcare organizations to optimize physician relationships, reduce network leakage, and expand market share, for total estimated consideration of $
The consideration transferred for the transaction is summarized as follows:
(in thousands) |
|
|
|
|
Cash consideration paid at closing |
|
$ |
|
|
Working capital adjustment |
|
|
( |
) |
Contingent consideration |
|
|
|
|
Purchase price |
|
$ |
|
|
The contingent consideration is based on the achievement of certain revenue metrics during the two-year period following the acquisition date, with potential earn-out payouts ranging from $
The purchase price allocations for the Populi acquisition are provisional and are based on the information that was available as of the acquisition date to estimate the fair values of assets acquired and liabilities assumed. The Company is gathering and reviewing additional information necessary to finalize the values assigned to the acquired assets and liabilities assumed, as well as acquired identified intangible assets and goodwill. Therefore, the provisional measurements of fair values reported as of September 30, 2023 are subject to change. The Company is expected to finalize the purchase price allocations as soon as practicable, but no later than one year from the acquisition date.
(in thousands) |
|
|
|
|
Purchase price allocation: |
|
Preliminary |
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
Property and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Accounts payable and accrued expenses |
|
|
( |
) |
Deferred revenue |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
Total assets acquired and liabilities assumed |
|
|
|
|
Goodwill |
|
|
|
|
Purchase price |
|
$ |
|
|
As a result of the Populi acquisition, the Company recorded goodwill, developed software, customer relationships, and tradename of $
16
The developed software represents Populi’s proprietary solutions that are designed to assist organizations in optimizing physician relationships, reducing network leakage, and expanding market share. The Company used the income approach, specifically the multi-period excess earnings method, to determine the value of developed software. Significant assumptions include an obsolescence factor, tax rate, and discount rate. The developed software was valued at $
Customer relationships represent the estimated fair value of the underlying relationships with the acquired entity’s business customers. The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. Significant assumptions include estimated attrition rates, discount rates, and tax rates reflecting the different risk profiles of the asset depending upon the acquisition. The value assigned to customer relationships is $
The tradename represents the estimated fair value of the registered trade name associated with the Populi corporate brand. The Company estimated the fair value of the trademark using a relief from royalty method of the income approach. Significant assumptions include forecast of royalty rate, tax rate, and discount rate. The trademark was valued at $
The amortization periods for the developed software, customer relationships, and tradenames are
In connection with the acquisition, the Company recognized acquisition related costs of $
Unaudited Pro Forma Supplementary Data as if the transaction had occurred on January 1, 2022:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
(in thousands) |
|
|
|
|
|
|
||
Revenue |
|
$ |
|
|
$ |
|
||
Net loss |
|
|
( |
) |
|
|
( |
) |
These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the acquisition actually taken place on January 1, 2022. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the acquisition.
Analytical Wizards
On December 22, 2021, Definitive Healthcare, LLC (“DH, LLC”), an indirect wholly owned subsidiary of Definitive Healthcare Corp. made a $
17
In February 2022, the Company completed the purchase the remaining
Upon the consummation of the acquisition, AW became an indirect wholly owned subsidiary of Definitive Healthcare Corp. The total consideration for the initial investment and subsequent exercise of the Purchase Option was $
The consideration transferred for the transaction is summarized as follows:
(in thousands) |
|
|
|
|
Initial cash investment in December 2021 |
|
$ |
|
|
Cash consideration paid at closing |
|
|
|
|
Working capital adjustment |
|
|
( |
) |
Contingent consideration |
|
|
|
|
Purchase price |
|
$ |
|
|
The contingent consideration was based on the achievement of certain expense control metrics during the two-year period following the acquisition date, with potential earn-out payouts ranging from $
The Company finalized the purchase price allocations of the AW acquisition during the first quarter of 2023. Acquisition-date fair values of assets and liabilities pertaining to this business combination have been allocated as follows:
(in thousands) |
|
|
|
|
|
|
|
|
|
|||
Purchase price allocation: |
|
Preliminary, as originally reported |
|
|
Measurement period adjustments |
|
|
As adjusted |
|
|||
Cash |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accounts receivable |
|
|
|
|
|
( |
) |
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
|||
Property and equipment |
|
|
|
|
|
|
|
|
|
|||
Intangible assets |
|
|
|
|
|
|
|
|
|
|||
Right-of-use asset, operating leases |
|
|
|
|
|
|
|
|
|
|||
Other assets |
|
|
|
|
|
|
|
|
|
|||
Accounts payable and accrued expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Right-of-use liability, operating leases |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Deferred taxes |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Other liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total assets acquired and liabilities assumed |
|
|
|
|
|
|
|
|
|
|||
Goodwill |
|
|
|
|
|
( |
) |
|
|
|
||
Purchase price |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
As a result of the AW acquisition, the Company recorded goodwill, customer relationships, developed software, and tradename of $
18
Customer relationships represent the estimated fair value of the underlying relationships with the acquired entity’s business customers. The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. Significant assumptions include estimated attrition rates, discount rates, and tax rates reflecting the different risk profiles of the asset depending upon the acquisition. The value assigned to customer relationships is $
The developed software represents AW’s two modules. Passport Promotional Analytics helps customers to optimize internal investment and business management by focusing on driving incremental efficiencies in sales, cost management, profit optimization, and productive gains. Passport Planning and Performance helps customers to analyze large data sets in order to proactively predict business outcomes. The Company used the income approach, specifically the relief-from-royalty method, to determine the value of developed software. Significant assumptions include forecast of royalty rate, tax rate, and discount rate. The developed software was valued at $
The tradename represents the estimated fair value of the registered trade name associated with the AW corporate brand. The Company estimated the fair value of the trademark using a relief from royalty method of the income approach. Significant assumptions include forecast of royalty rate, tax rate, and discount rate. The trademark was valued at $
The amortization periods for the customer relationships, developed software, and tradenames are
In connection with the acquisition, the Company recognized acquisition related costs of $
During the nine months ended September 30, 2022, AW’s post-acquisition revenue and net loss on a standalone basis were not material.
Unaudited Pro Forma Supplementary Data:
|
|
Nine Months Ended September 30, 2022 |
|
|
(in thousands) |
|
(As Restated) |
|
|
Revenue |
|
$ |
|
|
Net loss |
|
|
( |
) |
The unaudited pro forma supplementary data presented in the table above shows the effect of the AW acquisitions as if the transaction had occurred on January 1, 2022.
19
3. Revenue
The Company disaggregates revenue from its arrangements with customers by type of service as it believes these categories best depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following table represents a disaggregation of revenue from arrangements with customers for the three and nine months ended September 30, 2023 and 2022, respectively:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Subscription services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Professional services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The opening and closing balances of the Company’s receivables, deferred contract costs and contract liabilities from contracts with customers are as follows:
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
Deferred contract costs, current portion |
|
|
|
|
|
|
||
Deferred contract costs, long-term |
|
|
|
|
|
|
||
Deferred revenues |
|
|
|
|
|
|
||
Deferred Contract Costs
A summary of the activity impacting the deferred contract costs for the nine months ended September 30, 2023 and the year ended December 31, 2022 is presented below:
(in thousands) |
|
Nine Months Ended September 30, 2023 |
|
|
Twelve Months Ended December 31, 2022 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Costs amortized |
|
|
( |
) |
|
|
( |
) |
Additional amounts deferred |
|
|
|
|
|
|
||
Balance at end of period |
|
|
|
|
|
|
||
Classified as: |
|
|
|
|
|
|
||
Current |
|
|
|
|
|
|
||
Non-current |
|
|
|
|
|
|
||
Total deferred contract costs (deferred commissions) |
|
$ |
|
|
$ |
|
||
Contract Liabilities
A summary of the activity impacting deferred revenue balances during the nine months ended September 30, 2023 and for the year ended December 31, 2022 is presented below:
(in thousands) |
|
Nine Months Ended September 30, 2023 |
|
|
Twelve Months Ended December 31, 2022 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Revenue recognized |
|
|
( |
) |
|
|
( |
) |
Additional amounts deferred |
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
|
|
$ |
|
||
20
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be invoiced and recognized as revenue in future periods. Transaction price allocated to remaining performance obligations is influenced by several factors, including seasonality, the timing of renewals, and disparate contract terms. The Company’s backlog represents installment billings for periods beyond the current billing cycle. The majority of the Company’s noncurrent remaining performance obligations will be recognized in the next 13 to 36 months.
The remaining performance obligations consisted of the following:
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Current |
|
$ |
|
|
$ |
|
||
Non-current |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
4. Short-term Investments
Short-term investments classified as available-for-sale consisted of the following:
|
|
September 30, 2023 |
|
|||||||||||||
(in thousands) |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
US Treasuries |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Agency bonds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial paper |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Certificates of deposit |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total short-term investments |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
December 31, 2022 |
|
|||||||||||||
(in thousands) |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
US Treasuries |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Agency bonds |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial paper |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Certificates of deposit |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total short-term investments |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
All short-term investments had stated maturity dates of less than one year.
5. Accounts Receivable
Accounts receivable consisted of the following:
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Unbilled receivable |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
21
6. Property and Equipment
Property and equipment consisted of the following:
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Computers and software |
|
$ |
|
|
$ |
|
||
Furniture and equipment |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation and amortization expense associated with property and equipment was $
22
7. Goodwill and Intangible Assets
The carrying amounts of goodwill and intangible assets, as of September 30, 2023 and December 31, 2022, consisted of the following:
|
|
September 30, 2023 |
|
|||||||||
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Developed technologies |
|
|
|
|
|
( |
) |
|
|
|
||
Tradenames |
|
|
|
|
|
( |
) |
|
|
|
||
Database |
|
|
|
|
|
( |
) |
|
|
|
||
Total finite-lived intangible assets |
|
|
|
|
|
( |
) |
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Total goodwill and intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
December 31, 2022 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|||
(in thousands) |
|
(As Restated) |
|
|||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Developed technologies |
|
|
|
|
|
( |
) |
|
|
|
||
Tradenames |
|
|
|
|
|
( |
) |
|
|
|
||
Database |
|
|
|
|
|
( |
) |
|
|
|
||
Total finite-lived intangible assets |
|
|
|
|
|
( |
) |
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
|
|||
Total goodwill and intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Amortization expense associated with finite-lived intangible assets was $
Estimated total intangible amortization expense during the next five years and thereafter is as follows:
(in thousands) |
|
|
|
|
2023, excluding the nine months ended September 30, 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
The Company determined it had
23
Goodwill Impairment
Goodwill and acquired intangible assets are initially recorded at fair value and tested periodically for impairment. The Company performs an impairment test of goodwill during the fourth quarter of each fiscal year and more frequently if indicators of potential impairment arise.
During the three months ended September 30, 2023, the Company experienced a decline in its market capitalization as a result of a sustained decrease in the Company’s stock price, which represented a triggering event requiring management to perform a quantitative goodwill impairment test as of September 30, 2023. As a result of the impairment test, the Company determined that the fair value of its single reporting unit was lower than its carrying value and, accordingly, recorded a non-cash, pretax, goodwill impairment charge of $
In calculating the goodwill impairment charge, the Company estimated the fair value of its single reporting unit using a combination of an income and market approach. The income approach utilizes a discounted cash flow model associated with the business, including the amount and timing of future expected cash flows, tax attributes, technology and customer attrition rates, a terminal value growth rate, and an appropriate market-participant, risk-adjusted, weight average cost of capital in each case using estimates that the Company considered to be reasonable and appropriate. The market approach utilizes the Company's market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying the number of shares of Class A Common Stock outstanding by the market price of its Class A Common Stock. The control premium is determined by utilizing data from publicly available premium studies for similarly situated public company transactions. A goodwill impairment loss is recognized for the difference between the carrying value of the reporting unit and the fair value.
As of September 30, 2023 and December 31, 2022, goodwill consisted of the following:
(in thousands) |
|
Nine Months Ended |
|
|
Twelve Months Ended |
|
||
Goodwill - beginning of period |
|
$ |
|
|
$ |
|
||
Goodwill acquired during period |
|
|
|
|
|
|
||
Goodwill impairment loss |
|
|
( |
) |
|
|
|
|
Goodwill - end of period |
|
$ |
|
|
$ |
|
||
The Company also considered its intangible assets with finite useful lives, which are amortized over their estimated useful lives, generally on a straight-line basis. These assets are reviewed for impairment when facts or circumstances indicate that the carrying values may not be recoverable. The decline in the Company’s market capitalization driven by a sustained decrease in the Company’s stock price was considered to represent a triggering event and the Company’s intangible assets were reviewed for impairment. Based on quantitative and qualitative analyses performed, management concluded the assets were recoverable and no impairment charge was recorded.
24
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
(in thousands) |
|
|
|
|
(As Restated) |
|
||
Payroll and payroll-related |
|
$ |
|
|
$ |
|
||
Tax receivable agreement, current portion |
|
|
|
|
|
|
||
Contingent consideration, current |
|
|
|
|
|
|
||
Sales, franchise, and other taxes |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
During the first and third quarters of 2023, the Company announced restructuring plans intended to reduce operating costs, improve operating margins, and continue advancing the Company’s ongoing commitment to profitable growth. During the three and nine months ended September 30, 2023, the Company incurred restructuring and related charges of $
In the first quarter of 2023, the Company began a review of its sales tax positions, and related accounting matters, with the assistance of outside consultants. As a result of the review, the Company determined during the second quarter of 2023 that sales in certain states were subject to sales tax and that the Company had not assessed such sales tax on sales of its services to customers. As of September 30, 2023 and December 31, 2022, the Company has recorded a sales tax accrual, which includes assumed maximum penalties and interest of $
25
9. Long-Term Debt
Long-term debt consisted of the following as of September 30, 2023 and December 31, 2022, respectively:
|
|
September 30, 2023 |
|
|||||||||
(in thousands) |
|
Principal |
|
|
Unamortized debt |
|
|
Total debt, |
|
|||
2021 Term Loan |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Less: current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
|
|
|
|
|
$ |
|
|||
|
|
December 31, 2022 |
|
|||||||||
(in thousands) |
|
Principal |
|
|
Unamortized debt |
|
|
Total debt, |
|
|||
2021 Term Loan |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Less: current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|||
Long-term debt |
|
|
|
|
|
|
|
$ |
|
|||
During the nine months ended September 30, 2023, the Company repaid $
2021 Credit Agreement
In September 2021, DH Holdings entered into a credit agreement (the “2021 Credit Agreement”) with Bank of America, N.A., as administrative agent, the other lenders party thereto and the other parties specified therein. The 2021 Credit Agreement provides for (i) a $
DH Holdings is required to pay the lenders under the 2021 Credit Agreement an unused commitment fee of between
For both the 2021 Term Loan and 2021 Revolving Line of Credit, DH Holdings may elect from several interest rate options based on the LIBO Rate or the Base Rate plus an applicable margin. The applicable margin is based on the total leverage ratio beginning in the fiscal year ended December 31, 2022. As of September 30, 2023, the effective interest rate was
On October 31, 2022, the Company amended the 2021 Credit Agreement to replace the LIBO rate with Term Secured Overnight Financing Rate (“SOFR”) plus an applicable rate.
In connection with the 2021 Credit Agreement, the Company capitalized financing costs totaling $
26
10. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to risks from changes in interest rates related to the 2021 Term Loan (See Note 9. Long-Term Debt). The Company uses derivative financial instruments, specifically, interest rate swap contracts, in order to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Our primary objective in holding derivatives is to reduce the volatility of cash flows associated with changes in interest rates. The Company does not enter into derivative transactions for speculative or trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company entered into
As of September 30, 2023, the
The derivative interest rate swaps are designated and qualify as cash flow hedges. Consequently, the change in the estimated fair value of the effective portion of the derivative is recognized in accumulated other comprehensive income (“AOCI”) on our consolidated balance sheets and reclassified to interest expense, net, when the underlying transaction has an impact on earnings. The Company expects to recognize approximately $
The fair values of the interest rate swaps and their respective locations in our condensed consolidated balance sheets at September 30, 2023 and December 31, 2022 were as follows:
(in thousands) |
|
|
|
|
|
|
|
|
||
Description |
|
Balance Sheet Location |
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
derivative asset |
|
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
derivative asset |
|
Other assets |
|
|
|
|
|
|
||
27
11. Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants on the measurement date, and establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value as follows:
Level 1 - Observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs that are supported by little or no market activity, including the Company’s own assumptions in determining fair value.
The Company’s financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and equivalents, short-term investments, accounts receivable, accounts payable, long-term and short-term debt, and contingent consideration payable. The estimated fair value of cash included in cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying value due to due to their short maturities (less than 12 months).
Debt
The Company’s short- and long-term debt are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The carrying values and estimated fair values of the Company’s short- and long-term debt approximate their carrying values as of September 30, 2023 and December 31, 2022, based on interest rates currently available to the Company for similar borrowings.
Money market funds (included in cash and cash equivalents)
Money market funds are recorded at fair value using quoted market prices in active markets and are classified as Level 1 in the fair value hierarchy.
Short-term investments
The Company estimates the fair values of investments in U.S. treasuries, agency bond securities, commercial paper, and certificates of deposit using level 2 inputs, taking into consideration valuations obtained from a third-party pricing service. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, market yield curves, benchmark securities, prepayment/default projections based on historical data, and other observable inputs.
Derivative financial instruments
Currently, the Company uses interest rate swaps to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of its derivatives held as of September 30, 2023 and December 31, 2022 were classified as Level 2 in the fair value hierarchy.
28
Contingent consideration
The deferred consideration resulting from the acquisition of Populi in the third quarter of 2023, which is subject to meeting certain revenue metrics during calendar years 2024 and 2025, is measured at fair value on a recurring basis. The fair value was estimated based on the present value of the amount expected to be paid at the end of the measurement period. At September 30, 2023, the fair value of the contingent consideration was estimated to be $
The deferred consideration that resulted from the acquisition of Analytical Wizards in the first quarter of 2022, which is subject to the meeting of certain expense control metrics during the two-year period following the acquisition, is also measured at fair value on a recurring basis. The fair value was estimated based on the present value of the amount expected to be paid at the end of the measurement period. At September 30, 2023, the fair value of the contingent consideration was estimated to be $
Earnout liabilities are classified within Level 3 in the fair value hierarchy because the methodology used to develop the estimated fair value includes significant unobservable inputs reflecting management’s own assumptions.
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Additions |
|
|
|
|
|
|
||
Net change in fair value and other adjustments |
|
|
|
|
|
|
||
Payments |
|
|
|
|
|
( |
) |
|
Balance at end of period |
|
$ |
|
|
$ |
|
||
29
Non-recurring fair value measurements
Certain assets and liabilities, including property, plant, and equipment, lease right-of-use assets, goodwill, and other intangible assets, are measured at fair value on a non-recurring basis. These assets are remeasured when the derived fair value is below the carrying value on the Company’s condensed consolidated balance sheet. For these assets, the Company does not periodically adjust carrying value to fair value except in the event of impairment. When impairment has occurred, the Company measures the required charges and adjusts the carrying value as discussed in Note 2. Summary of Significant Accounting Policies of the notes to the consolidated financial statements in the Company’s 2022 Form 10-K/A.
The Company performed an interim goodwill impairment test during the third quarter of 2023 and concluded that the carrying value of its single reporting unit exceeded its fair value and recorded a $
At September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
September 30, 2023 |
|
|||||||||||||
(in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Commercial paper (maturities less than 90 days) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Treasuries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency bonds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrued expenses and other current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current portion of contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Long-term portion of contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
December 31, 2022 |
|
|||||||||||||
(in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Commercial paper (maturities less than 90 days) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit (maturities less than 90 days) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency bonds (maturities less than 90 days) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Treasuries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency bonds |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial paper |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
||||
30
At September 30, 2023 and December 31, 2022, except for the contingent consideration noted above, the estimated fair values of all of the Company’s financial assets and liabilities subject to the three-level fair value hierarchy approximated their carrying values due to their short-term maturities (less than 12 months).
12. Noncontrolling Interest
Definitive Healthcare Corp. operates and controls all of the business and affairs of Definitive OpCo, and through Definitive OpCo and its subsidiaries, conducts its business. Accordingly, Definitive Healthcare Corp. consolidates the financial results of Definitive OpCo, and reports the noncontrolling interests of its consolidated subsidiaries on its condensed consolidated financial statements based on the LLC Units held by Continuing Pre-IPO LLC Members other than Definitive Healthcare Corp. Changes in Definitive Healthcare Corp.'s ownership interest in its consolidated subsidiaries are accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Units by such Continuing Pre-IPO LLC Members will result in a change in ownership and reduce or increase the amount recorded as noncontrolling interests and increase or decrease additional paid-in capital in the Company’s Condensed Consolidated Balance Sheets.
During the nine months ended September 30, 2023,
As of September 30, 2023 and December 31, 2022, Definitive Healthcare Corp. held ownership interests in Definitive OpCo of
13. Accumulated Other Comprehensive Income
The following table summarize the changes in accumulated balances of other comprehensive income for the three and nine months ended September 30, 2023 and 2022, respectively.
|
Three Months Ended September 30, 2023 |
|
|
Nine Months Ended September 30, 2023 |
|
||||||||||||||||||||
(in thousands) |
Unrealized Gain (Loss) on Cash Flow Hedges |
|
Unrealized (Loss) Gain on Investments |
|
Foreign Currency Translation Adjustments |
|
Total |
|
|
Unrealized Gain (Loss) on Cash Flow Hedges |
|
Unrealized Loss on Investments |
|
Foreign Currency Translation Adjustments |
|
Total |
|
||||||||
Beginning balance |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||||
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
( |
) |
|
|
|||||
Amounts reclassified from AOCI |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Ending balance |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||||
|
Three months ended September 30, 2022, as restated |
|
|
Nine months ended September 30, 2022, as restated |
|
||||||||||||||||||||
(in thousands) |
Unrealized Gain (Loss) on Cash Flow Hedges |
|
Unrealized (Loss) Gain on Investments |
|
Foreign Currency Translation Adjustments |
|
Total |
|
|
Unrealized Gain on Cash Flow Hedges |
|
Unrealized Loss on Investments |
|
Foreign Currency Translation Adjustments |
|
Total |
|
||||||||
Beginning balance |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
( |
) |
|
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
|
|
|||||
Amounts reclassified from AOCI |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||||||
Ending balance |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||||
31
14. Equity-Based Compensation
The Company recognizes equity-based compensation expense associated with awards granted under equity incentive plans. Equity-based compensation expense is allocated to all departments based on the recipients of the compensation.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(in thousands) |
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Cost of revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
32
15. Income Taxes
During the nine months ended September 30, 2023, management performed an assessment of the recoverability of deferred tax assets. Management determined, based on the accounting standards applicable to such assessment, that there was sufficient negative evidence as a result of the Company’s scheduled reversal of deferred tax liabilities and cumulative losses to conclude it was more likely than not that its deferred tax assets would not be realized and has recorded a valuation allowance against its deferred tax assets that are not more likely than not to be realized. In the event that management was to determine that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made which would reduce the provision for income taxes.
As of September 30, 2023 and December 31, 2022, the Company has recorded net deferred tax liabilities of $
The Company recognizes uncertain income tax positions when it is more-likely-than-not the position will be sustained upon examination. As of September 30, 2023 and December 31, 2022, the Company has
The Company's effective tax rate was
As described above, the Company has a valuation allowance as it has not yet attained a sustained level of profitability and the objectively verifiable negative evidence outweighed the positive evidence. The income of the Company’s subsidiaries is generally subject to corporate-level taxation, and certain of these subsidiaries have a valuation allowance whereas others do not. The effective tax rates for each period generally arise from the tax provisions for Company subsidiaries without valuation allowances, and the impact of any revaluation of deferred taxes arising from changes in the states effective tax rates. Such revaluations are caused by changes in state apportionment factors arising from fluctuations in the mix of sales, property and payroll by state, certain state tax rate changes and certain state tax incentives.
Tax Receivable Agreement
Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company expects to obtain an increase in its share of the tax basis in the net assets of Definitive OpCo when LLC Interests are redeemed or exchanged by other members. The Company intends to treat any redemptions and exchanges of LLC Interest as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) among Definitive Healthcare Corp., Definitive OpCo, and the TRA Parties and has recorded a liability under the TRA of $
33
16. Loss Per Share
Basic net loss per share of Class A Common Stock is computed by dividing net income attributable to Definitive Healthcare Corp. by the weighted-average number of shares of Class A Common Stock outstanding during the period, excluding unvested equity awards and subsidiary member units not exchanged. Diluted earnings per share of Class A Common Stock is calculated by dividing net income attributable to Definitive Healthcare Corp., adjusted for the assumed exchange of all potentially dilutive securities by the weighted-average number of shares of Class A Common Stock outstanding.
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
(in thousands) |
|
|
|
(As Restated) |
|
|
|
|
|
(As Restated) |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Less: Net loss attributable to noncontrolling interests |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to Definitive Healthcare Corp. |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
( |
) |
The following table sets forth the computation of basic and diluted net loss per share of Class A Common Stock for the three and nine months ended September 30, 2023 and 2022 (per share amounts unaudited).
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
(in thousands, except number of shares and per share amounts) |
|
|
|
(As Restated) |
|
|
|
|
|
(As Restated) |
|
||||
Basic net loss per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Allocation of net loss attributable to Definitive Healthcare Corp. |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares of Class A Common Stock outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share, basic and diluted |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Shares of the Company’s Class B Common Stock do not participate in the earnings or losses of Definitive Healthcare Corp. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B Common Stock under the two-class method has not been presented.
The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the period presented because their effect would have been anti-dilutive:
|
Nine Months Ended September 30, |
|
|||||
|
2023 |
|
|
2022 |
|
||
Definitive OpCo LLC Units (vested and unvested) |
|
|
|
|
|
||
Restricted Stock Units |
|
|
|
|
|
||
17. Related Parties
The Company has engaged in revenue transactions within the ordinary course of business with entities affiliated with its Sponsors and with members of the Company’s board of directors. During each of the three months ended September 30, 2023 and 2022 the Company recorded revenue from related parties of $
34
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report and with our audited Consolidated Financial Statements, “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 Form 10-K/A.
As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in “Risk Factors” under Part II, Item 1A in this Quarterly Report and in Part I, Item 1A of our 2022 Form 10-K/A.
Overview
Definitive Healthcare is a leading provider of healthcare commercial intelligence. Our solutions provide accurate and comprehensive information on healthcare providers and their activities to help our customers optimize everything from product development to go-to-market planning and sales and marketing execution. Delivered through our software as a service (“SaaS”) platform, our intelligence has become important to the commercial success of our approximately 2,900 customers as of September 30, 2023. We generally define a customer as a company that maintains one or more active paid subscriptions to our platform.
Our customers include biopharmaceutical and medical device companies, healthcare information technology companies, healthcare providers, and other diversified companies, such as staffing firms, commercial real estate firms, financial institutions, and other organizations seeking commercial success in the attractive but complex healthcare ecosystem. Within these organizations, our platform is leveraged by a broad set of functional groups, including sales, marketing, clinical research & product development, strategy, talent acquisition, and physician network management. We offer access to our platform on a subscription basis, and we generate substantially all of our revenue from subscription fees.
We were founded in 2011 by our Executive Chairman, Jason Krantz. Mr. Krantz founded the company to provide healthcare commercial intelligence that enables companies that compete within or sell into the healthcare ecosystem to make better, informed decisions and be more successful. Over time, we have expanded our platform with new intelligence modules, innovative analytics, workflow capabilities, and additional data sources.
We believe any company selling or competing within the healthcare ecosystem is a potential customer for us and contributes to our estimated current total addressable market of over $10 billion. In total, we have identified more than 100,000 potential customers that we believe could benefit from our platform.
Restatement
As described in Note 1 of “Notes to the Consolidated Financial Statements,” we have restated our consolidated financial statements and Item 2. Management’s Discussion of Financial Condition and Results of Operations for the three and nine months ended September 30, 2022.
35
Recent Developments
Acquisitions
On July 21, 2023, the Company completed the acquisition of Populi, Inc. (“Populi”), a provider-focused data and analytics company that works with healthcare organizations to optimize physician relationships, reduce network leakage, and expand market share, for total estimated consideration of $54.1 million, subject to working capital adjustments, with the potential for additional consideration up to $28.0 million, subject to meeting certain revenue metrics during calendar years 2024 and 2025. The initial accounting for the business combination is incomplete as a result of the timing of the acquisition. See Note 2. Acquisitions.
Restructuring charges
During the first and third quarters of 2023, we announced restructuring plans intended to reduce operating costs, improve operating margins, and continue advancing our ongoing commitment to profitable growth. During the three and nine months ended September 30, 2023, we incurred restructuring and related charges of $2.1 million and $4.6 million, respectively, consisting primarily of severance payments, employee benefits, and related cash expenses. These charges were recognized within Transaction, integration, and restructuring expenses in our condensed consolidated statements of operations. We do not expect to incur any further material charges associated with the restructuring plans.
Goodwill Impairment
During the three months ended September 30, 2023, we experienced a decline in our market capitalization as a result of a sustained decrease in our stock price, which represented a triggering event requiring our management to perform a quantitative goodwill impairment test as of September 30, 2023. As a result of the impairment test, we determined that the fair value of our single reporting unit was lower than its carrying value and, accordingly, recorded a non-cash, pretax, goodwill impairment charge of $287.4 million. The goodwill impairment charge did not affect our liquidity or the financial covenants in any of our outstanding debt agreements. See Note 7. Goodwill and Intangible Assets. Our reporting unit is at risk for future goodwill impairments if we experience a continued decline in our market capitalization or worsening macroeconomic conditions.
Macroeconomic Conditions
As a corporation with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, the Russia-Ukraine war, the evolving conflict in Israel and surrounding areas, global geopolitical tension, and more recently, a potential shutdown of the U.S. federal government, rising inflation and interest rates, volatility in the capital markets, liquidity concerns at, and failures of, banks and other financial institutions, and related market uncertainty. We continuously monitor the direct and indirect impacts, and the potential for future impacts, of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. While our revenue and earnings have historically been relatively predictable as a result of our subscription-based business model, the potential implications of these macroeconomic events on our business, results of operations, and overall financial position, particularly in the long term, introduce additional uncertainty.
Our current and prospective customers and their business spendings are impacted by worsening macroeconomic conditions to varying degrees and as a result, in some cases we are observing deal cycles lengthen for new and existing customers, in part as a result of more stringent approval processes, as well as a significant number of deferred purchasing decisions. We are also experiencing heightened customer churn. These trends have been particularly pronounced for smaller customers and in the life science and provider markets. We expect this will impact our growth unless macroeconomic conditions improve. We are continuing to evaluate these and other past and potential future direct and indirect impacts on our business and results of operations.
36
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depend on many factors, including the following:
Acquiring New Customers
We plan to organically grow the number of customers that use our platform by increasing demand for our platform and penetrating our addressable market. Our results of operations and growth prospects will depend, in part, on our ability to attract new customers. We intend to drive new customer acquisition with our efficient go-to-market engine by continuing to invest in our sales and marketing efforts and developing new use cases for our platform. Customers generating more than $100,000 in ARR, which we refer to as Enterprise Customers, represent the majority of our ARR and are a key focus of our go-to-market programs. As of September 30, 2023, we had 555 Enterprise Customers and approximately 2,900 customers overall, and as of December 31, 2022, we had 537 Enterprise Customers and approximately 3,000 customers overall. While our Enterprise Customer count has grown, our total customer counts decreased slightly in 2023, reflecting the impact of macroeconomic conditions on our prospective and existing customers. We have identified more than 100,000 potential customers across the healthcare ecosystem that we believe could benefit from our platform. Our ability to attract and acquire new customers is dependent on the strength of our platform and effectiveness of our go-to-market strategy, as well as macroeconomic factors and their impact on our potential customers’ business spending.
Expanding Relationships with Existing Customers
We believe there is a significant opportunity to generate additional revenue from our existing customer base of approximately 2,900 and 3,000 customers as of September 30, 2023 and December 31, 2022, respectively.
Our customers have historically increased their spending by adding functionality and by expanding use-cases across departments. Our customers are typically assigned to one of our vertically-focused teams, which is responsible for driving usage and increasing adoption of the platform, identifying expansion opportunities, and driving customer renewals. Real-time input from these customer centric teams feeds directly into our product innovation teams, enhancing the development of new capabilities. We believe this feedback loop and our ability to innovate creates significant opportunities for continual existing customer expansion. Our ability to generate additional revenue from existing customers is also subject to such existing customers’ business spending trends and the impact of macroeconomic conditions thereon.
Our progress in expanding usage of our platform with our existing customers is demonstrated by our NDR, which is further described below.
Continuing to Innovate and Expand Our Platform
The growth of our business is driven in part by our ability to apply our deep healthcare domain expertise to innovate and expand our platform. We have continually created new products since our founding in 2011. We plan to continue to invest significantly into our engineering and research and development efforts to enhance our capabilities and functionality and facilitate the expansion of our platform to new use cases and customers. In addition, we work to continuously release updates and new features. While we are primarily focused on organic investments to drive innovation, we will also evaluate strategic acquisitions and investments that further expand our platform.
37
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe certain non-GAAP measures are useful in evaluating our operating performance. Non-GAAP measures include, but are not limited to, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin. We believe these non-GAAP measures are useful to investors because they eliminate certain items that affect period-over-period comparability and provide consistency with past financial performance and additional information about our underlying results and trends by excluding certain items that may not be indicative of our business, results of operations, or outlook.
We view Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin as operating performance measures. As such, we believe the most directly comparable GAAP financial measures to Adjusted Gross Profit and Adjusted Gross Margin are GAAP Gross Profit and GAAP Gross Margin, respectively, and the most directly comparable GAAP financial measure to Adjusted EBITDA and Adjusted EBITDA Margin is GAAP net loss and GAAP net loss margin, respectively.
Non-GAAP measures are supplemental financial measures of our performance and should not be considered substitutes for net loss, gross profit, or any other measure derived in accordance with GAAP. This information should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. There are limitations to these non-GAAP financial measures because they are not prepared in accordance with GAAP and may not be comparable to similarly titled measures of other companies due to potential differences in methods of calculation and items or events being adjusted. In addition, other companies may use different measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.
Adjusted Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as Gross Profit, excluding acquisition-related depreciation and amortization, and stock-based compensation costs. Adjusted Gross Profit differs from Gross Profit, in that Gross Profit includes the impact of acquisition-related depreciation and amortization expense and stock-based compensation. We exclude acquisition-related depreciation and amortization expense as they have no direct correlation to the cost of operating our business on an ongoing basis. Gross Margin is defined as Gross Profit as a percentage of revenue and Adjusted Gross Margin is defined as Adjusted Gross Profit as a percentage of revenue. These are key metrics used by management and our board of directors to assess our operations.
The following table presents a reconciliation of Gross Profit and Gross Margin to Adjusted Gross Profit and Adjusted Gross Margin for the periods presented:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
(in thousands) |
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
||||||||
Reported gross profit and margin |
|
$ |
53,430 |
|
|
|
82 |
% |
|
$ |
47,658 |
|
|
|
83 |
% |
|
$ |
150,514 |
|
|
|
81 |
% |
|
$ |
129,224 |
|
|
|
80 |
% |
Amortization of intangible |
|
|
2,303 |
|
|
|
4 |
% |
|
|
2,910 |
|
|
|
5 |
% |
|
|
6,907 |
|
|
|
4 |
% |
|
|
13,314 |
|
|
|
8 |
% |
Equity compensation costs |
|
|
276 |
|
|
|
— |
|
|
|
236 |
|
|
|
— |
|
|
|
830 |
|
|
|
— |
|
|
|
698 |
|
|
|
— |
|
Adjusted gross profit and margin |
|
$ |
56,009 |
|
|
|
86 |
% |
|
$ |
50,804 |
|
|
|
89 |
% |
|
$ |
158,251 |
|
|
|
85 |
% |
|
$ |
143,236 |
|
|
|
88 |
% |
38
Adjusted EBITDA and Adjusted EBITDA Margin
We present “Adjusted EBITDA” as a measure of our operating performance. EBITDA is defined as earnings before (i) debt-related costs, including interest expense and loss from extinguishment of debt, (ii) interest income, (iii) provision for taxes, and (iv) depreciation and amortization. Management further adjusts EBITDA in its presentation of Adjusted EBITDA to exclude (i) other (income) expense, (ii) equity-based compensation, (iii) acquisition, integration, and restructuring expenses, (iv) goodwill impairments, and (v) other non-recurring and one-time expenses. We exclude these items because they are by nature non-cash, non-recurring, and/or unrelated to our core operations, and therefore we do not believe them to be representative of ongoing operational performance. Adjusted EBITDA Margin is defined as Adjusted EBITDA as a percentage of revenue. Adjusted EBITDA and Adjusted EBITDA Margin are key metrics used by management and our board of directors to assess the profitability of our operations. We believe these metrics provide useful measures to investors to assess our operating performance and in measuring the profitability of our operations on a consolidated level.
The following table presents a reconciliation of Net loss to Adjusted EBITDA for the periods presented:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
(As Restated) |
|
|
|
|
|
|
|
|
(As Restated) |
|
||||||||||||||
(in thousands) |
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
||||||||
Net loss and margin |
|
$ |
(248,688 |
) |
|
|
(381 |
)% |
|
$ |
(6,885 |
) |
|
|
(12 |
)% |
|
$ |
(276,265 |
) |
|
|
(149 |
)% |
|
$ |
(30,066 |
) |
|
|
(19 |
)% |
Interest expense, net |
|
|
433 |
|
|
|
1 |
% |
|
|
2,466 |
|
|
|
4 |
% |
|
|
1,434 |
|
|
|
1 |
% |
|
|
6,930 |
|
|
|
4 |
% |
Benefit from income taxes |
|
|
(17,534 |
) |
|
|
(27 |
)% |
|
|
(15 |
) |
|
|
(0 |
)% |
|
|
(19,728 |
) |
|
|
(11 |
)% |
|
|
(654 |
) |
|
|
(0 |
)% |
Depreciation & amortization |
|
|
13,027 |
|
|
|
20 |
% |
|
|
13,192 |
|
|
|
23 |
% |
|
|
38,749 |
|
|
|
21 |
% |
|
|
44,218 |
|
|
|
27 |
% |
EBITDA and margin |
|
|
(252,762 |
) |
|
|
(387 |
)% |
|
|
8,758 |
|
|
|
15 |
% |
|
|
(255,810 |
) |
|
|
(138 |
)% |
|
|
20,428 |
|
|
|
13 |
% |
Other income, net (a) |
|
|
(29,589 |
) |
|
|
(45 |
)% |
|
|
(5,628 |
) |
|
|
(10 |
)% |
|
|
(25,161 |
) |
|
|
(14 |
)% |
|
|
(9,716 |
) |
|
|
(6 |
)% |
Equity-based compensation (b) |
|
|
11,994 |
|
|
|
18 |
% |
|
|
9,133 |
|
|
|
16 |
% |
|
|
35,485 |
|
|
|
19 |
% |
|
|
25,010 |
|
|
|
15 |
% |
Transaction, integration, and restructuring expenses (c) |
|
|
3,505 |
|
|
|
5 |
% |
|
|
2,945 |
|
|
|
5 |
% |
|
|
9,666 |
|
|
|
5 |
% |
|
|
6,362 |
|
|
|
4 |
% |
Goodwill impairment (d) |
|
|
287,400 |
|
|
|
440 |
% |
|
|
— |
|
|
|
0 |
% |
|
|
287,400 |
|
|
|
155 |
% |
|
|
— |
|
|
|
0 |
% |
Other non-recurring items (e) |
|
|
1,196 |
|
|
|
2 |
% |
|
|
1,178 |
|
|
|
2 |
% |
|
|
3,072 |
|
|
|
2 |
% |
|
|
4,614 |
|
|
|
3 |
% |
Adjusted EBITDA and margin |
|
$ |
21,744 |
|
|
|
33 |
% |
|
$ |
16,386 |
|
|
|
29 |
% |
|
$ |
54,652 |
|
|
|
29 |
% |
|
$ |
46,698 |
|
|
|
29 |
% |
39
Key Metrics
We monitor the following key metrics to help us evaluate our business performance, identify financial trends, formulate business plans, and make strategic operational decisions.
Net Dollar Retention Rate (“NDR”)
We believe the growth in use of our platform by our existing customers is an important measure of the health of our business and our future growth prospects. We evaluate and report on our NDR on an annual basis to measure this growth. We define NDR as the percentage of ARR retained from existing customers across a defined period, after accounting for upsell, down-sell, pricing changes, and churn. We calculate NDR as beginning ARR for a period, plus (i) expansion ARR (including, but not limited to, upsell and pricing increases), less (ii) churn (including, but not limited to, non-renewals, and contractions), divided by (iii) beginning ARR for a period.
Unfavorable macroeconomic challenges are elongating deal cycles as customers implement more stringent approval processes or delay spending decisions, which impacts revenue from our existing customers, including upsells. We have also experienced a significant number of deferred purchasing decisions and heightened customer churn, particularly in the life science and provider markets. As a result, we expect our NDR rates for 2023 to be reduced relative to year end 2022.
Current Remaining Performance Obligations (“cRPO”)
We monitor current remaining performance obligations as a metric to help us evaluate the health of our business and identify trends affecting our growth. cRPO represents the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue within the next twelve months. cRPO is not necessarily indicative of future revenue growth. In addition to total contract volume, cRPO is influenced by several factors, including seasonality, disparate contract terms, and the timing of renewals, because renewals tend to be most frequent in the fourth quarter. Due to these factors, it is important to review cRPO in conjunction with revenue and other financial metrics.
Our cRPO will continue to be impacted by macroeconomic challenges, which have resulted in elongating deal cycles as customers implement more stringent approval processes or push out final decisions to later periods. We have also observed cancelations due to the impacts of such challenges on the financial condition of our customers, particularly in the life science and provider markets. We expect this trend to reduce our revenue growth rate for 2023 and 2024 relative to 2022.
The following table presents cRPO as of September 30, 2023 and December 31, 2022:
(in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Current |
|
$ |
170,782 |
|
|
$ |
183,527 |
|
Non-current |
|
|
82,462 |
|
|
|
93,464 |
|
Total |
|
$ |
253,244 |
|
|
$ |
276,991 |
|
Impact of Acquisitions
We seek to enhance our platform, data and business through internal development and through acquisitions of and investments in businesses that broaden and strengthen our platform. Acquisitions can result in transaction costs, amortization expenses and other adjustments as purchase accounting requires that all assets acquired and liabilities assumed be recorded at fair value on the acquisition date. Refer to Note 2. Acquisitions in the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q for further details.
40
Components of our Results of Operations
Revenue
For the nine months ended September 30, 2023, we derived approximately 97% of our revenue from subscription services and the remainder from professional services. Our subscription services consist primarily of subscription fees for access to our platform. Our subscription contracts typically have a term ranging from 1 to 3 years and are non-cancellable. We typically bill for services in advance annually, and we typically require payment at the beginning of each annual period. Our subscription revenue is recognized ratably over the contract term. Our professional services revenue typically is derived from non-recurring consulting services which are generally capable of being distinct and can be accounted for as separate performance obligations. Revenue related to these professional services is recognized at the time the services are performed.
Because of the macroeconomic challenges described above, we expect a reduction in our revenue growth rate for 2023 and 2024 relative to 2022.
Cost of Revenue
Cost of Revenue. Cost of revenue, excluding amortization of acquired technology and data, consists of direct expenses related to the support and operations of our SaaS platform, such as data and infrastructure costs, personnel costs for our professional services, customer support, and data research teams, such as salaries, bonuses, stock-based compensation, and other employee-related benefits, as well as allocated overheads. We anticipate that we will continue to invest in cost of revenue and that cost of revenue as a percentage of revenue will modestly increase as we add to our existing intelligence modules and invest in new products and data sources. Cost of data is included in the cost of revenue and is a fundamental driver of innovation.
Amortization. Includes amortization expense for technology and data acquired in business combinations and asset purchase agreements. We anticipate that amortization will only increase if we make additional acquisitions in the future.
At the beginning of 2023, additional third-party data sources were rolled out to our customers, which resulted in, and is expected to continue to result in, an increase of cost of revenue.
Gross Profit
Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of revenue. Gross profit and gross margin have been and will continue to be affected by various factors, including the costs associated with third-party data and third-party hosting services, leveraging economies of scale, and the extent to which we introduce new intelligence modules, features, or functionality, or expand our customer support and service organizations, hire additional personnel, or complete additional acquisitions. We expect that our gross profit and gross margin will fluctuate from period to period depending on the interplay of these various factors.
While we expect our overall gross profit to increase for 2023 due to anticipated revenue growth, our gross margin is expected to modestly decrease due to the expansion of data sources, as described above, and costs associated with the acquisition of Populi.
Operating Expenses
The most significant component of our operating expenses is personnel costs, which consist of salaries, bonuses, sales commissions, stock-based compensation, and other employee-related benefits. Operating expenses also include non-personnel costs such as facilities, technology, professional fees, and marketing. In light of macroeconomic conditions and their past and potential future impacts on our business, we have made efforts to contain our operating expenses, including implementing restructuring plans in the first and third quarters of 2023. Rising inflation, and in particular increases to the cost of labor due to cost-of-living increases, have negatively impacted our operating expenses, and we expect this to continue. However, inflation has not materially affected our business to date.
Sales and marketing. Sales and marketing expenses primarily consist of personnel costs such as salaries, bonuses, sales commissions, stock-based compensation, and other employee-related benefits for our sales and marketing teams, as well as non-personnel costs including overhead costs, technology, and advertising costs. While we have slowed hiring in response to macroeconomic conditions, and expect to maintain slower levels until macroeconomic conditions improve, we have continued to hire additional sales and marketing personnel, enhance our digital marketing infrastructure, and invest in marketing programs targeting our major vertical markets.
Product development. Product development expenses primarily consist of personnel costs such as salaries, bonuses, stock-based compensation, and other employee-related benefits for our engineering, data science, and product teams, as well as non-personnel costs including overhead costs. We believe that our core technologies and ongoing innovation represent a significant competitive advantage for us, and we continue to invest in systems optimization and product improvements for our customers, enhance our software development team and invest in automation and artificial intelligence to drive higher quality data and deeper insights.
41
General and administrative. General and administrative expenses primarily consist of personnel costs such as salaries, bonuses, stock-based compensation, and other employee-related benefits for our executive, finance, legal, human resources, IT and operations, and administrative teams, as well as non-personnel costs including overhead costs, professional fees, and other corporate expenses. General and administration expenses also include sales tax amounts payable to taxation authorities, inclusive of interest and penalties, for customers that we did not collect sales taxes from, due to misclassifications of products and services for sales tax purposes. We do not expect sales taxes and related interest and penalties to be an ongoing component of our general and administrative expense as we complete voluntary disclosure agreements, register with certain tax authorities, and commence collection of sales taxes from customers in these tax jurisdictions.
Depreciation and Amortization. Depreciation and amortization expenses consist primarily of amortization of intangible assets resulting from acquisitions and business combinations, as well as depreciation of property and equipment. We anticipate depreciation of property and equipment as a percentage of revenue to moderately decrease, although amortization will increase if we make additional acquisitions in the future.
Transaction, integration, and restructuring expenses. Transaction, integration, and restructuring expenses are costs directly associated with various acquisition and integration activities we have undertaken, primarily accounting and legal due diligence, and consulting and advisory fees, as well as expenses related to our restructuring plans announced in the first and third quarters of 2023 and our office relocations.
Goodwill impairment. Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination. Substantially all of our goodwill was recognized in the purchase price allocations when our Company was acquired in 2019 by advent, with smaller incremental amounts recognized in subsequent business combinations. Goodwill is not amortized, but is tested for impairment at the reporting unit level annually and more frequently if indicators of potential impairment arise. In conducting the impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount.
When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference. The Company performed interim goodwill impairment tests during the third quarter of 2023 and concluded that the carrying value of the single reporting unit exceeded its fair value and recorded a $287.4 million non-cash goodwill impairment charge for the three months ended September 30, 2023.
Other Expense, Net
Other expense, net consists primarily of interest expense, interest income, and other expense, net.
Interest expense consists of interest expense on our debt obligations and the amortization of debt discounts and debt issuance costs. We expect, as a result of recently rising interest rates, that interest expense will increase for 2023 over prior periods for the unhedged portion of our outstanding debt while interest rate swap agreements will keep the hedged portion of outstanding debt fixed.
Interest income consists of earnings resulting from our short-term investments.
Other income (expense), net consists primarily of the revaluation of tax receivable agreement liabilities and realized and unrealized gains and losses related to the impact of transactions denominated in a foreign currency. Significant changes in the projected liability resulting from the tax receivable agreement may occur based on changes in anticipated future taxable income, changes in applicable tax rates, or other changes in tax attributes that may occur and could affect the expected future tax benefits to be received by us. We do not have significant exposure to foreign exchange volatility and do not anticipate foreign currency transaction gains or losses to materially impact our results of operations.
42
Results of Operations
The following table sets forth a summary of our condensed consolidated statements of operations for the periods presented:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
(in thousands) |
|
|
|
|
(As Restated) |
|
|
|
|
|
(As Restated) |
|
||||
Revenue |
|
$ |
65,325 |
|
|
$ |
57,382 |
|
|
$ |
185,483 |
|
|
$ |
162,054 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue exclusive of amortization |
|
|
8,663 |
|
|
|
6,569 |
|
|
|
25,293 |
|
|
|
18,717 |
|
Amortization |
|
|
3,232 |
|
|
|
3,155 |
|
|
|
9,676 |
|
|
|
14,113 |
|
Total cost of revenue |
|
|
11,895 |
|
|
|
9,724 |
|
|
|
34,969 |
|
|
|
32,830 |
|
Gross profit |
|
|
53,430 |
|
|
|
47,658 |
|
|
|
150,514 |
|
|
|
129,224 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
22,804 |
|
|
|
21,184 |
|
|
|
70,929 |
|
|
|
66,062 |
|
Product development |
|
|
10,759 |
|
|
|
9,205 |
|
|
|
30,872 |
|
|
|
24,761 |
|
General and administrative |
|
|
14,545 |
|
|
|
14,349 |
|
|
|
42,294 |
|
|
|
35,440 |
|
Depreciation and amortization |
|
|
9,795 |
|
|
|
10,037 |
|
|
|
29,073 |
|
|
|
30,105 |
|
Transaction, integration, and restructuring expenses |
|
|
3,505 |
|
|
|
2,945 |
|
|
|
9,666 |
|
|
|
6,362 |
|
Goodwill impairment |
|
|
287,400 |
|
|
|
— |
|
|
|
287,400 |
|
|
|
— |
|
Total operating expenses |
|
|
348,808 |
|
|
|
57,720 |
|
|
|
470,234 |
|
|
|
162,730 |
|
Loss from operations |
|
|
(295,378 |
) |
|
|
(10,062 |
) |
|
|
(319,720 |
) |
|
|
(33,506 |
) |
Total other income, net |
|
|
29,156 |
|
|
|
3,162 |
|
|
|
23,727 |
|
|
|
2,786 |
|
Net loss before income taxes |
|
|
(266,222 |
) |
|
|
(6,900 |
) |
|
|
(295,993 |
) |
|
|
(30,720 |
) |
Benefit from income taxes |
|
|
17,534 |
|
|
|
15 |
|
|
|
19,728 |
|
|
|
654 |
|
Net loss |
|
|
(248,688 |
) |
|
|
(6,885 |
) |
|
|
(276,265 |
) |
|
|
(30,066 |
) |
Less: Net loss attributable to noncontrolling interests |
|
|
(77,162 |
) |
|
|
(3,865 |
) |
|
|
(84,110 |
) |
|
|
(12,979 |
) |
Net loss attributable to Definitive Healthcare Corp. |
|
$ |
(171,526 |
) |
|
$ |
(3,020 |
) |
|
$ |
(192,155 |
) |
|
$ |
(17,087 |
) |
43
Three Months Ended September 30, 2023 compared to Three Months Ended September 30, 2022
Revenue
Revenue increased $7.9 million, or 14%, in the three months ended September 30, 2023 compared with the same period in the prior year, driven primarily by higher subscription revenue of $6.4 million and higher professional service revenue of $1.5 million. Increases were primarily driven by the organic addition of new customers in the amount of $8.7 million and by the acquisition of Populi in the amount of $2.0 million, partially offset by a $2.8 million net reduction in revenue from customers that existed as of the end of the comparable prior-year period, which was driven primarily by heightened churn during the current period resulting from a challenging macroeconomic environment.
Cost of Revenue
Cost of revenue increased $2.2 million, or 22%, in the three months ended September 30, 2023 compared with the same period in the prior year. This increase was almost entirely driven by a $2.1 million increase in hosting fees and data subscription costs as a result of expanded customer usage of our platform, the rollout of additional third-party data sources to our customers at the beginning of 2023, and the Populi acquisition.
Operating Expenses
Operating expenses, which include a goodwill impairment charge of $287.4 million during the three months ended September 30, 2023 (refer to Note 7. Goodwill and Intangible Assets for further details), increased $291.1 million, or 504%, during the three months ended September 30, 2023 compared with the same period in the prior year. While inflation has generally contributed to rising vendor and labor costs, we believe the remainder of the increase to operating expenses as compared to the prior-year period was primarily due to:
Total Other Income, Net
Total other income, net was $29.2 million for the three months ended September 30, 2023 compared to total other income, net of $3.2 million, as restated, in the same period in the prior year. The overall increase was primarily attributed to a $24.0 million increase in other income, net, primarily due to a $24.4 million TRA liability remeasurement gain driven by future realizability of tax attributes payable under the TRA and the impact of the goodwill impairment and partially offset by a $0.5 million foreign currency translation loss, along with a $2.9 million increase in interest income earned from our short-term investments. These changes that contributed to the increase were partially offset by a $0.8 million increase in interest expense due to rising interest rates from our debt obligations.
Benefit from Income Taxes
Benefit from income taxes was $17.5 million for the three months ended September 30, 2023 compared to less than $0.1 million, as restated, in the same period in the prior year. The overall increase was primarily attributed to the impairment of goodwill during the current period, resulting in a reduction of indefinite-lived deferred tax liabilities.
44
Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022
Revenue
Revenue increased $23.4 million, or 14%, in the nine months ended September 30, 2023 compared with the same period in the prior year, driven primarily by higher subscription revenue of $21.2 million and higher professional service revenue of $2.2 million. Increases were primarily driven by the organic addition of new customers in the amount of $18.0 million, the acquisition of Populi in the third quarter of 2023 in the amount of $2.0 million, a $1.9 million net increase in revenue from customers that existed as of the end of the prior year period, and the acquisition of Analytical Wizards in the first quarter of 2022 in the amount of $1.6 million.
Cost of Revenue
Cost of revenue increased $2.1 million, or 7%, for the nine months ended September 30, 2023 compared with the same period in the prior year. This increase was driven primarily by a $5.8 million increase in hosting fees and data subscription costs as a result of expanded customer usage of our platform, the rollout of additional third-party data sources to our customers at the beginning of 2023, and the Populi acquisition, along with an increase of $0.7 million in employee costs due to the expansion of customer support and professional service roles, primarily resulting from the acquisition of Analytical Wizards in February 2022. These increases were partially offset by a $4.4 million reduction in amortization, primarily due to a substantial acquired data asset reaching the end of its economic life in July 2022.
Operating Expenses
Operating expenses, which include a goodwill impairment charge of $287.4 million during the nine months ended September 30, 2023 (refer to Note 7. Goodwill and Intangible Assets for further details), increased $307.5 million, or 189%, during the nine months ended September 30, 2023 compared with the same period in the prior year. While inflation has generally contributed to rising vendor and labor costs, we believe the remainder of the increase to operating expenses as compared to the prior-year period was primarily due to:
Total Other Income, Net
Total other income, net was $23.7 million for the nine months ended September 30, 2023 compared to total other income, net of $2.8 million, as restated, in the same period in the prior year. The overall increase was primarily attributed to a $15.4 million increase in other income, net, primarily due to a $16.4 million TRA liability remeasurement gain driven by future realizability of tax attributes payable under the TRA and the impact of the goodwill impairment and partially offset by a $1.0 million foreign currency translation loss, along with a $9.0 million increase in interest income earned from our short-term investments. The changes that contributed to the increase were partially offset by a $3.5 million increase in interest expense due to rising interest rates from our debt obligations.
Benefit from Income Taxes
Benefit from income taxes was $19.7 million for the nine months ended September 30, 2023 compared to $0.7 million, as restated, in the same period in the prior year. The overall increase was primarily attributed to the impairment of goodwill during the current period, resulting in a reduction of indefinite-lived deferred tax liabilities.
45
Liquidity and Capital Resources
Overview
As of September 30, 2023, we had $77.5 million of cash and cash equivalents, $229.6 million of short-term investments, and $75.0 million available under our revolving credit facility. Our principal sources of liquidity are cash and cash equivalents and short-term investments on hand, primarily from our IPO and follow-on offerings, as well as the cash flows we generate from operations. Our principal uses of liquidity have been and are expected to continue to be primarily for investment in long-term growth of the business through capital expenditures and acquisitions, including the acquisition of Populi in July 2023, as well as debt services (see Note 9. Long-Term Debt for further details) and distributions to members of Definitive OpCo.
All of our business is conducted through Definitive OpCo and its consolidated subsidiaries and affiliates, and the financial results are included in the condensed consolidated financial statements of Definitive Healthcare Corp. Definitive Healthcare Corp. has no independent means of generating revenue. The Amended LLC Agreement provides that certain distributions will be made to cover Definitive Healthcare Corp.'s taxes and such tax distributions are also expected to be used by Definitive Healthcare Corp. to satisfy its obligations under the TRA. We have broad discretion to make distributions out of Definitive OpCo. In the event Definitive Healthcare Corp. declares any cash dividend, we expect to cause Definitive OpCo to make distributions to us, in an amount sufficient to cover such cash dividends declared by us. Deterioration in the financial condition, earnings, or cash flow of Definitive OpCo and its subsidiaries for any reason could limit or impair their ability to pay such distributions. In addition, the terms of our 2021 Credit Agreement contain covenants that may restrict DH Holdings and its subsidiaries from paying such distributions, subject to certain exceptions. Further, Definitive OpCo and Definitive Healthcare Corp. are generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Definitive OpCo and DH Holdings (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries of DH Holdings are generally subject to similar legal limitations on their ability to make distributions to DH Holdings.
We believe that our cash flow from operations, availability under the 2021 Credit Agreement and available cash and cash equivalents and short-term investments will be sufficient to meet our liquidity needs for at least the next twelve months. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of additional equity, or a combination thereof. We cannot provide assurance that we will be able to obtain this additional liquidity on reasonable terms, or at all.
Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control. See “Risk Factors” in our 2022 Form 10-K/A and the factors described elsewhere in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Macroeconomic conditions, including rising inflation and a potential recession, could increase our anticipated funding requirements. In the event we need to seek additional funding, rising interest rates, stock market volatility, or other unfavorable macroeconomic conditions may also prevent us from obtaining additional financing on favorable terms or at all. Moreover, the recent closures of Silicon Valley Bank and Signature Bank have resulted in broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages that could impact us and our customers, and materially harm our business and financial condition. Our ability to access our cash, cash equivalents and investments, including transferring funds, making payments or receiving funds could be threatened and our ability to raise additional capital could be substantially impaired, any of which could materially and adversely affect our business and financial condition. Accordingly, we cannot provide assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional indebtedness or otherwise to meet our liquidity needs. In addition, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell or issue additional equity to finance such acquisitions, which could possibly result in additional expenses or dilution.
Credit Risk
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, and trade and other receivables. We hold cash with reputable financial institutions that often exceed federally insured limits. We manage our credit risk by concentrating our cash deposits with high-quality financial institutions and periodically evaluating the credit quality of those institutions. The carrying value of cash approximates fair value.
Impact of Inflation
We do not believe inflation has had a material effect on our business, financial condition, or results of operations. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset higher costs through price increases and our inability or failure to do so could potentially harm our business, financial condition, and results of operations.
46
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
Nine Months Ended September 30, |
|
|||||
(in thousands) |
|
2023 |
|
|
2022 |
|
||
Cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
36,481 |
|
|
$ |
39,799 |
|
Investing activities |
|
|
(86,189 |
) |
|
|
(181,017 |
) |
Financing activities |
|
|
(19,522 |
) |
|
|
(17,239 |
) |
Change in cash and cash equivalents (excluding effect of exchange rate changes) |
|
$ |
(69,230 |
) |
|
$ |
(158,457 |
) |
Cash Flows provided by Operating Activities
Net cash provided by operating activities was $36.5 million during the nine months ended September 30, 2023, primarily as a result of a net loss of $276.3 million, offset by non-cash charges of $327.9 million. The non-cash charges were primarily comprised of a $287.4 million goodwill impairment charge recorded during the third quarter of 2023, amortization of intangible assets of $37.4 million, equity compensation costs of $35.5 million, and a gain on remeasurement of the TRA of $25.0 million. The net decrease in operating assets and liabilities of $15.2 million for the nine months ended September 30, 2023 was primarily driven by a decrease in deferred revenue of $14.1 million due to the timing of billings and cash received in advance of revenue recognition for subscription services, an increase in deferred contract costs of $13.0 million, an increase in prepaid expenses and other assets of $5.8 million, and cash outflows resulting from lower accounts payable, accrued expenses, and other current liabilities, collectively, of $1.6 million. These factors were partially offset by a decrease in accounts receivable of $19.4 million.
Cash Flows used in Investing Activities
Cash used in investing activities during the nine months ended September 30, 2023 was $86.2 million, driven primarily by $213.6 million in purchases of short-term investments and $45.0 million in cash paid for the acquisition of Populi, net of cash acquired, partially offset by $174.8 million in maturities of short-term investments.
Cash Flows used in Financing Activities
Cash used in financing activities during the nine months ended September 30, 2023 was $19.5 million, primarily driven by $10.7 million in tax distribution payments to members, repayments of the 2021 Term Loan (as defined below) of $5.2 million, and taxes paid related to the net share settlement of equity awards of $3.4 million.
Refer to Debt Obligations for additional information related to our debt obligations.
Debt Obligations
On September 17, 2021, DH Holdings entered into the 2021 Credit Agreement, providing for (i) a $275.0 million term loan A facility (the “2021 Term Loan”) and (ii) a $75.0 million revolving credit facility (the “2021 Revolving Line of Credit”). The 2021 Term Loan of $275.0 million has a maturity date of September 17, 2026. The 2021 Term Loan was recorded net of $3.5 million in issuance costs, which are amortized to interest expense over the term of the loan using the effective interest method.
The 2021 Term Loan is subject to annual amortization of principal, payable in equal quarterly installments on the last day of each fiscal quarter, commencing on the Initial Amortization Date, equal to approximately 2.5% per annum of the principal amount of the term loans in the first year and second year after the Initial Amortization Date and approximately 5.0% per annum of the principal amount of the term loans in the third year, fourth year, and fifth year after the Initial Amortization Date. A balloon payment of approximately $220.0 million will be due at maturity. There was $261.3 million outstanding on the 2021 Term Loan at September 30, 2023.
The 2021 Revolving Line of Credit is committed for $75.0 million and has a maturity date of September 17, 2026. There was no outstanding balance as of September 30, 2023. On October 31, 2022, the Company amended the 2021 Credit Agreement to replace the LIBO rate with Term SOFR plus an applicable rate.
The 2021 Credit Agreement includes certain financial covenants, and the Company was compliant with its financial covenants under the 2021 Credit Agreement as of September 30, 2023 and December 31, 2022.
47
Tax Receivable Agreement
In connection with the Reorganization Transactions and the IPO, the Company entered into the TRA with certain of our pre- IPO unitholders and the former shareholders of certain Blocker Companies. The TRA provides for the payment by Definitive Healthcare Corp. of 85% of the amount of any tax benefits that it actually realizes, or in some cases is deemed to realize, as a result of (i) certain tax attributes that it acquired from the Blocker Companies in the Reorganization Transactions (including net operating losses and the unamortized portion of the increase in tax basis in the tangible and intangible assets of Definitive OpCo and its subsidiaries resulting from the prior acquisitions of interests in Definitive OpCo by the Blocker Companies), (ii) certain tax basis adjustments resulting from the acquisition of LLC Units by Definitive Healthcare Corp., and (iii) certain payments made under the TRA.
In each case, these tax basis adjustments generated over time may increase (for tax purposes) the Definitive Healthcare Corp.’s depreciation and amortization deductions and, therefore, may reduce the amount of tax that the Definitive Healthcare Corp. would otherwise be required to pay in the future, although the IRS may challenge all or part of the validity of that tax basis, and a court could sustain such a challenge. The anticipated tax basis adjustments upon redemptions or exchanges of LLC Units may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. The payment obligations under the TRA are an obligation of Definitive Healthcare Corp., but not of Definitive OpCo. Definitive Healthcare Corp. expects to benefit from the remaining 15% of realized cash tax benefits. For purposes of the TRA, the realized cash tax benefits will be computed by comparing the actual income tax liability of Definitive Healthcare Corp. (calculated with certain assumptions) to the amount of such taxes that Definitive Healthcare Corp. would have been required to pay had there been no tax basis adjustments of the assets of Definitive Healthcare Corp. as a result of redemptions or exchanges and no utilization of certain tax attributes of the Blocker Companies, and had Definitive Healthcare Corp. not entered into the TRA. The term of the TRA will continue until all such tax benefits have been utilized or expired, unless (i) Definitive Healthcare Corp. exercises its right to terminate the TRA for an amount based on the agreed payments remaining to be made under the agreement, (ii) Definitive Healthcare Corp. breaches any of its material obligations under the TRA in which case all obligations (including any additional interest due relating to any deferred payments) generally will be accelerated and due as if Definitive Healthcare Corp. had exercised its right to terminate the TRA, or (iii) there is a change of control of Definitive Healthcare Corp., in which case, all obligations (including any additional interest due relating to any deferred payments) generally will be accelerated and due as if Definitive Healthcare Corp. had exercised its right to terminate the TRA as described above in clause (i). Estimating the amount of payments that may be made under the TRA is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The amount of the anticipated tax basis adjustments, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A Common Stock at the time of an exchange, the extent to which such exchanges are taxable, the amount of tax attributes, and the amount and timing of our income.
We expect that as a result of the size of the anticipated tax basis adjustment of the tangible and intangible assets of Definitive OpCo upon the exchange or redemption of LLC Units and our possible utilization of certain tax attributes, the payments that Definitive Healthcare Corp. may make under the TRA will be substantial. The payments under the TRA are not conditioned upon continued ownership of us by the exchanging holders of LLC Units. See Note 15. Income Taxes in our unaudited condensed consolidated financial statements.
Capital Expenditures
Capital expenditures decreased by $1.1 million to $2.4 million for the nine months ended September 30, 2023 compared to $3.5 million for the same period in the prior year, primarily due to fewer purchases of new data sources in the current year period.
Critical Accounting Policies and Estimates
Our unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that we believe to be reasonable. Actual results may differ from those estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts may differ from such estimated amounts, we believe such differences are not likely to be material. For additional detail regarding our critical accounting policies and estimates including business combinations, goodwill and indefinite-lived intangible assets, and income taxes, see our discussion for the year ended December 31, 2022 included in our 2022 Form 10-K/A. There have been no material changes to these policies or estimates as of September 30, 2023.
New Accounting Pronouncements
See new accounting pronouncements described under “—Adoption of Recently Issued Financial Accounting Standards” and “—Recently Issued Accounting Pronouncements Not Yet Adopted” within Note 1. Organization and Basis of Presentation in the Notes to the unaudited interim condensed consolidated financial statements.
48
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation, interest rates, or currency rates.
Interest Rate Risk
Our cash, cash equivalents, and short-term investments primarily consist of cash on hand and highly liquid investments in money market funds, U.S. government securities, and commercial paper. As of September 30, 2023, we had cash and cash equivalents of $77.5 million and short-term investments of $229.6 million.
Our operating results are subject to market risk from interest rate fluctuations on our 2021 Term Loan, which bears a variable interest rate based on the Secured Overnight Financing Rate (“SOFR”) or a Base Rate plus an applicable margin. In order to reduce the interest rate risk on our debt, we have entered into an interest rate swap agreement on a portion of our borrowings. As of September 30, 2023, the total principal balance outstanding was $261.3 million. Excluding the effect of the interest rate swap agreement, a hypothetical 1.0% increase or decrease in the interest rate associated with borrowings under the 2021 Credit Agreement would have resulted in an impact to interest expense of approximately $2.0 million for the nine months ended September 30, 2023.
Foreign Currency Exchange Risk
To date, the majority of our sales contracts have been denominated in U.S. dollars. We have one foreign entity established in Sweden and one in India. The functional currencies of these foreign subsidiaries are the Swedish Krona and the Indian Rupee, respectively. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect at the reporting date and revenue and expenses are translated at average exchange rates in effect during each reporting period. Realized and unrealized foreign currency transaction gains and losses are recorded to non-operating loss. As the impact of foreign currency exchange rates has not been material to our historical results of operations, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, management identified a material weakness in our internal control over financial reporting which was also disclosed in the 2022 Form 10-K/A. As a result of this material weakness, management concluded that our disclosure controls and procedures were not effective as of September 30, 2023.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We identified a material weakness in the design of our controls over the collection and remittance of sales taxes, as well as the accurate recording of our sales tax obligations in the financial statements. This material weakness resulted in the restatement of our financial statements as of and for the years ended December 31, 2022, 2021 and 2020, the unaudited condensed consolidated quarterly financial information for the quarterly periods in the years ended December 31, 2022, 2021, and 2020, as well as the unaudited condensed consolidated financial statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
This material weakness remains unremediated as of September 30, 2023. Management is taking steps to remediate this material weakness (see “Remediation Plan in Response to Material Weakness” below for details).
Remediation Plan in Response to Material Weakness
In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, has immediately dedicated resources, including the involvement of additional outside advisors, to put in place effective controls over identification of changes in products and services that affect classification of products and services for sales tax purposes. Certain remedial actions have been completed including engagement of additional third-party tax experts and a review of the classification for sales tax purposes of new and/or enhanced products and services. We are completing ongoing remediation steps, including enhancements to sales tax nexus reviews, and the collection, control and subsequent monitoring of applicable documentation of exempt status from customers in affected jurisdictions. We are in the process of implementing enhancements to our sales tax technology platform to automate steps in the process and will continue to further enhance these controls over the remainder of 2023.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2023, other than the items noted above regarding the remediation plan in response to the material weakness over sales tax reporting controls, no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings, claims, and governmental inspections, audits, or investigations that arise in the ordinary course of our business. There are inherent uncertainties in these matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Moreover, management’s views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. Although the outcomes of these matters cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters would not be expected to have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
For a more detailed discussion of our risks and uncertainties, see also Item 1A – Risk Factors in our 2022 Form 10-K/A. Except as noted below, there have been no material changes in our risk factors since the filing of our 2022 Form 10-K/A.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Pursuant to the terms of the Amended LLC Agreement, holders of LLC Units have the right to exchange all or a portion of their LLC Units for newly issued shares of Class A Common Stock on a one-for-one basis, which issuances are made in reliance on Section 4(a)(2) of the Securities Act. Upon any such exchange, a corresponding number of shares of Class B Common Stock held by such LLC Unit holders are cancelled. Such exchanges executed in the third quarter of 2023 are as follows:
Date of Exchange |
|
Number of Shares Exchanged |
|
|
July 5, 2023 |
|
|
108,573 |
|
July 24, 2023 |
|
|
30,125 |
|
July 31, 2023 |
|
|
11,401 |
|
August 22, 2023 |
|
|
2,898,179 |
|
September 11, 2023 |
|
|
5,000 |
|
September 25, 2023 |
|
|
4,188 |
|
Total |
|
|
3,057,466 |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Trading Arrangements
None.
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ITEM 6. EXHIBITS
Exhibits filed or furnished herewith are designated by an asterisk (*); all exhibits not so designated are incorporated by reference to a prior filing as indicated. Agreements included as exhibits are included only to provide information to investors regarding their terms. Agreements listed below may contain representations, warranties, and other provisions that were made, among other things, to provide the parties thereto with specified rights and obligations and to allocate risk among them, and no such agreement should be relied upon as constituting or providing any factual disclosures about Definitive Healthcare Corp., any other persons, any state of affairs, or other matters.
Exhibit Number |
|
Description |
3.1 |
|
|
3.2 |
|
|
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
10.4* |
|
|
10.5 |
|
|
31.1* |
|
|
31.2* |
|
|
32.1*+ |
|
|
101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
+ The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Definitive Healthcare Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
DEFINITIVE HEALTHCARE CORP. |
||
|
|
Registrant |
||
|
|
|
|
|
November 2, 2023 |
|
By: |
/s/ Robert Musslewhite
|
|
Date |
|
|
Name: |
Robert Musslewhite |
|
|
|
Title: |
Chief Executive Officer and Director (Principal Executive Officer) |
November 2, 2023 |
|
By: |
/s/ Richard Booth
|
|
Date |
|
|
Name: |
Richard Booth |
|
|
|
Title: |
Chief Financial Officer (Principal Financial Officer) |
53
Exhibit 10.4
EMPLOYMENT AGREEMENT
This Agreement (the “Agreement”), dated as of October 2, 2023, is made and entered into by and between Definitive Healthcare, LLC, a Massachusetts limited liability company (the “Company”), and Carrie Lazorchak (the “Executive”).
Introduction
The Company desires to retain the services of the Executive pursuant to the terms and conditions set forth herein and the Executive wishes to be employed by the Company on such terms and conditions. The Executive will be a senior executive of the Company, with significant access to information concerning the Company and its business. The disclosure or misuse of such information or the engaging in competitive activities would cause substantial harm to the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
2
3
4
5
6
For purposes of Section 409A of the Code, each payment made under this Agreement shall be treated as a separate payment. In no event may Executive, directly or indirectly, designate the calendar year of any payment. All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A of the Code, including, where applicable, the requirement that (i) any reimbursement be for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.
Notwithstanding anything to the contrary herein, if a payment or benefit under this Agreement is due to a “separation from service” for purposes of the rules under Treas. Reg. § 1.409A-3(i)(2) (payments to specified employees upon a separation from service) and Executive is determined to be a “specified employee” (as determined under Treas. Reg. § 1.409A-1(i)), such payment or benefit shall, to the extent necessary to comply with the requirements of Section 409A of the Code, be made or provided on the later of the date specified by the foregoing provisions of this Agreement or the date that is six months after the date of Executive’s separation from service (or, if earlier, the date of Executive’s death). Any installment payments that are delayed pursuant to this Section 13 shall be accumulated and paid in a lump sum on the first day of the seventh month following Executive’s separation from service, and the remaining installment payments shall begin on such date in accordance with the schedule provided in this Agreement.
7
8
records.
9
[ The remainder of this page is intentionally left blank.]
10
IN WITNESS WHEREOF, this Agreement has been executed and delivered as a sealed instrument as of the date first above written.
DEFINITIVE HEALTHCARE, LLC
By:_/s/ Robert Musslewhite_______________
Name: Robert Musslewhite Title: Chief Executive Officer
/s/ Carrie Lazorchak
Executive: Carrie Lazorchak
[Signature Page to Employment Agreement]
Exhibit 31.1
Management Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert Musslewhite, certify that:
|
|
|
|
|
Date: |
November 2, 2023
|
|
|
/s/ Robert Musslewhite |
|
|
|
|
Robert Musslewhite |
|
|
|
|
Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
1
Exhibit 31.2
Management Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Booth, certify that:
|
|
|
|
Date: |
November 2, 2023
|
|
/s/ Richard Booth |
|
|
|
Richard Booth |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
1
Exhibit 32.1
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Definitive Healthcare Corp. (the “Company”) for the quarterly period ended September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert Musslewhite, as Chief Executive Officer of the Company, and Richard Booth, as Chief Financial Officer of the Company, each hereby certifies, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
Date: November 2, 2023
|
/s/ Robert Musslewhite
|
Robert Musslewhite |
Chief Executive Officer |
(Principal Executive Officer) |
|
/s/ Richard Booth
|
Richard Booth |
Chief Financial Officer |
(Principal Financial Officer) |
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Definitive Healthcare Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
1