DEFINITIVE HEALTHCARE CORP. 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 2021 Form 10-K filed with theSecurities and Exchange Commission ("SEC") onMarch 15, 2022 . 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 2021 Form 10-K.
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 over 3,000 customers as ofSeptember 30, 2022 . We 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.
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
Recent Developments
Acquisition
OnFebruary 18, 2022 , the Company purchased the remaining 65% ofAnalytical Wizard, Inc.'s equity for$65.0 million , net of cash acquired and an estimated working capital adjustment and other customary purchase price adjustments. The total purchase consideration of$99.4 million , which includes the 35% investment the Company made in AW inDecember 2021 , consisted of$98.4 million in cash consideration, net of working capital adjustments, and$1.0 million in estimated contingent consideration. The purchase price was primarily comprised of acquired customer relationships, technology and goodwill. The Company has included the financial results of this business in the condensed consolidated financial statements from the date of acquisition. The purchase accounting for this transaction is not yet finalized. Refer to Note 3. Acquisitions in the footnotes to the condensed consolidated financial statements included within this Form 10-Q for further information.
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 COVID-19 pandemic, theRussia -Ukraine war, global geopolitical tension and more recently, rising inflation and interest rates, volatility in the capital markets 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. 31 -------------------------------------------------------------------------------- At the outset of the COVID-19 pandemic, we experienced a brief slowdown in new bookings during the second quarter of 2020. In response to the pandemic, we introduced information on telehealth adoption, COVID-19 analytics and more, and benefitted from reduced travel expenses. As the pandemic evolves, its continued impacts are uncertain, as are the impacts of worsening global macroeconomic conditions worldwide. Our current and prospective customers 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. We are continuing to evaluate these impacts and the potential for future impacts on our business and results of operations.
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 continue 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. As ofSeptember 30, 2022 andDecember 31, 2021 , we had over 3,000 and 2,800 customers, respectively. 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.
Our customers have historically increased their spending by adding intelligence modules and 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 is fed directly into our product innovation teams, enhancing the development of new intelligence modules. 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 platform currently offers 19 intelligence modules. Our success 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 and have launched 19 highly integrated intelligence modules to date. 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.
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
non-cash items and 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 measure to Adjusted Gross Profit and
Adjusted Gross Margin is GAAP Gross Profit, and the most directly comparable
GAAP financial measure to Adjusted EBITDA and Adjusted EBITDA Margin is GAAP net
loss.
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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 condensed 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 revenue less cost of revenue, excluding acquisition-related depreciation and amortization, and a small quantity of stock-based compensation. 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. 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 to Adjusted Gross Profit and Adjusted Gross Margin for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
Reported gross profit $ 47,658 $ 32,599 $ 129,224 $ 90,050
Amortization of intangible assets
resulting from acquisition-
related purchase accounting
adjustments (a) 2,910 5,096 13,314 15,125
Equity compensation costs 236 48 698 79
Adjusted Gross Profit $ 50,804 $ 37,743 $ 143,236 $ 105,254
Revenue $ 57,382 $ 43,084 $ 162,054 $ 119,841
Adjusted Gross Margin 89 % 88 % 88 % 88 %
(a)
Amortization of intangible assets resulting from purchase accounting adjustments
represents non-cash amortization of acquired intangibles, primarily resulting
from the Advent Acquisition.
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 and (iv) other non-recurring and one-time expenses. We exclude these
items because they are non-cash or non-recurring in nature, 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.
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--------------------------------------------------------------------------------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,
(in thousands) 2022 2021 2022 2021
Net loss $ (6,354 ) $ (20,966 ) $ (28,990 ) $ (46,493 )
Interest expense, net 2,466 7,186 6,930 23,956
Loss from extinguishment of debt - 9,873 9,873
Income tax benefit (15 ) - (141 ) -
Depreciation & amortization 13,192 15,116 44,218 44,710
EBITDA 9,289 11,209 22,017 32,046
Other (income) expense, net (a) (5,528 ) (119 ) (9,429 ) (143 )
Equity-based compensation (b) 9,133 2,317 25,010 4,338
Transaction, integration and
restructuring expenses (c) 2,945 (137 ) 6,362 3,332
Other non-recurring items (d) 547 1,149 2,738 3,313
Adjusted EBITDA $ 16,386 $ 14,419 $ 46,698 $ 42,886
Revenue $ 57,382 $ 43,084 $ 162,054 $ 119,841
Adjusted EBITDA Margin 29 % 33 % 29 % 36 %
(a)
Primarily represents foreign exchange and TRA liability remeasurement gains and
losses.
(b)
Equity-based compensation represents non-cash compensation expense recognized in
association with equity awards made to employees and directors.
(c)
Transaction and integration expenses primarily represent legal, accounting and
consulting expenses and fair value adjustments for contingent consideration
related to our acquisitions, including a go-to market integration project
conducted in the third quarter of 2022. Restructuring expenses relate to
impairment and restructuring charges related to office relocations.
(d)
Non-recurring items represent expenses that are typically one-time or
non-operational in nature. One-time expenses are comprised primarily of
professional fees related to financing, capital structure changes and other
non-recurring set-up costs related to public company operations for the current
period, and IPO readiness costs for the prior period.
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 push out final decisions to later periods. This behavior includes upsells to existing customers and as a result, we expect NDR growth rates at the end of 2022 and 2023 to be reduced unless conditions improve.
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 highest 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 macroenvironment challenges, which have
resulted in elongating deal cycles as customers implement more stringent
approval processes or push out final decisions to later periods. We expect this
trend to reduce our revenue growth rate in 2023 if the macroenvironment remains
challenged.
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The following table presents cRPO as of September 30, 2022 and December 31,
2021 :
September 30, December 31,
(in thousands) 2022 2021
Current $ 159,699 $ 155,134
Non-current 86,902 95,354
Total $ 246,601 $ 250,488
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. In February 2022 , we completed our acquisition of
Analytical Wizards. This acquisition further strengthens our data platform and
our business. 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 3. Acquisitions in the notes to our condensed consolidated
financial statements included elsewhere in this Form 10-Q for further details.
Components of our Results of Operations
Revenue
For the nine months endedSeptember 30, 2022 , we derived approximately 98% 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 insignificant and is recognized at a point in time, when the performance obligations under the terms of the contract are satisfied and control has been transferred to the customer.
Because of the macroenvironment challenges described above, we expect a reduction in our revenue growth rate for 2023.
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 stay consistent or 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.
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.
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. While rising inflation and increases to the cost of and competition
for labor could negatively impact our operating expenses in the future,
currently we do not believe that this is materially affecting our business.
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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 marketing costs.
We continue 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 module
improvements for our customers, enhance our software development team and invest
in automation and A.I. to drive higher quality data and deeper insights.
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 administrative costs have increased relative to prior periods due to
the incremental costs associated with operating as a public company, including
corporate insurance costs, incremental accounting and legal expenses, and
additional resources associated with controls, reporting, and disclosure.
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.
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 office relocations.
Other Expense, Net
Other expense, net consists primarily of interest expense, net and other income (expense), net.
Interest expense, net consists primarily of interest expense on our debt obligations and the amortization of debt discounts and debt issuance costs, less interest income. We expect to realize a reduction in our interest expense during 2022 over prior periods resulting from the repayment of a portion of our outstanding indebtedness with the proceeds from the IPO inSeptember 2021 . Should the recent rise in interest rates continue, it is expected that interest expense will increase in 2023 for the unhedged portion of our outstanding debt while interest rate swap agreements will keep the hedged portion of outstanding debt fixed. 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. 36 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth a summary of our condensed consolidated statements of operations for the periods presented:
Three Months Ended Nine Months Ended September
September 30, 30,
(in thousands) 2022 2021 2022 2021
Revenue $ 57,382 $ 43,084 $ 162,054 $ 119,841
Cost of revenue:
Cost of revenue exclusive 6,569 5,129 18,717 13,895
of amortization
Amortization 3,155 5,356 14,113 15,896
Total cost of revenue 9,724 10,485 32,830 29,791
Gross profit 47,658 32,599 129,224 90,050
Operating expenses:
Sales and marketing 21,184 14,376 66,062 39,003
Product development 9,205 4,746 24,761 12,817
General and administrative 13,718 7,880 33,564 18,891
Depreciation and 10,037 9,760 30,105 28,814
amortization
Transaction, integration 2,945 (137 ) 6,362 3,332
and restructuring expenses
Total operating expenses 57,089 36,625 160,854 102,857
Loss from operations (9,431 ) (4,026 ) (31,630 ) (12,807 )
Other income (expense), 3,062 (16,940 ) 2,499 (33,686 )
net
Loss before income taxes (6,369 ) (20,966 ) (29,131 ) (46,493 )
Income tax benefit 15 - 141 -
Net loss (6,354 ) (20,966 ) (28,990 ) (46,493 )
Less: Net loss
attributable to Definitive
OpCo prior to the - (7,816 ) - (33,343 )
Reorganization
Transactions
Less: Net loss
attributable to (3,665 ) (5,172 ) (12,527 ) (5,172 )
noncontrolling interests
Net loss attributable to
Definitive Healthcare $ (2,689 ) $ (7,978 ) $ (16,463 ) $ (7,978 )
Corp.
Three Months Ended
Revenue Revenue increased$14.3 million , or 33%, in the three months endedSeptember 30, 2022 compared with the same period in the prior year, driven by higher subscription revenue of$13.4 million . This increase was primarily due to net expansion with existing customers, as well as organic addition of new customers, and the addition of new customers resulting from the acquisition of Analytical Wizards. Cost of Revenue Cost of revenue decreased$0.8 million , or 7%, in the three months endedSeptember 30, 2022 compared with the same period in the prior year, primarily due to lower amortization of acquired technology costs, partially offset by increased hosting fees, increases in employee benefit and insurance costs and, to a lesser extent, incremental personnel costs resulting from the acquisition of Analytical Wizards. Operating Expenses Operating expenses increased$20.5 million , or 56%, during the three months endedSeptember 30, 2022 compared with the same period in the prior year. While inflation has generally contributed to rising vendor and labor costs, we believe the increase to operating expenses was primarily due to:
•
An increase in sales and marketing expense of$6.8 million for the three months endedSeptember 30, 2022 , due primarily to increased personnel costs resulting from additional hiring, as well as increases in stock-based compensation expense and in employee benefit and insurance costs; 37 --------------------------------------------------------------------------------
•
An increase in product development expense of$4.5 million for the three months endedSeptember 30, 2022 , due primarily to increased personnel costs resulting from additional hiring and the acquisition of Analytical Wizards, as well as increases in stock-based compensation expense and in employee benefit and insurance costs;
•
An increase in general and administrative expense of$5.8 million for the three months endedSeptember 30, 2022 , due primarily to increased personnel costs arising from additional hiring and increases in employee benefit and insurance costs, as well as increases in stock-based compensation expense, bad debt expense and additional accounting and legal expenses resulting from the transition to becoming a publicly-traded company. If the macroenvironment trends described above continue, we may experience additional increases in bad debt expense in the future;
•
An increase in transaction, integration and restructuring expenses of
Other Income (Expense), Net
Total other income, net was$3.1 million for the three months endedSeptember 30, 2022 , driven primarily by a TRA liability remeasurement gain of$5.2 million , partially offset by$2.5 million of interest expense, net. Total other expense, net of$16.9 million for the three months endedSeptember 30, 2021 was driven by a$9.9 million loss from the extinguishment of debt and interest expense of$7.2 million . Interest expense, net was lower in the three months endedSeptember 30, 2022 compared with the same period in the prior year due to lower interest rates and a lower outstanding debt balance resulting from the refinancing of the Company's debt in September of 2021.
Nine Months Ended
Revenue Revenue increased$42.2 million , or 35%, in the nine months endedSeptember 30, 2022 compared with the same period in the prior year, driven by higher subscription revenue of$40.6 million . This increase was primarily due to net expansion with existing customers, as well as organic addition of new customers, and the addition of new customers resulting from the acquisition of Analytical Wizards. Cost of Revenue Cost of revenue increased$3.0 million , or 10%, in the nine months endedSeptember 30, 2022 compared with the same period in the prior year, primarily due to increased data and hosting fees, increases in employee benefit and insurance costs and, to a lesser extent, incremental personnel costs resulting from the acquisition of Analytical Wizards, partially offset by lower amortization of acquired technology costs.
Operating Expenses
Operating expenses increased$58.0 million , or 56%, during the nine months endedSeptember 30, 2022 compared with the same period in the prior year. While inflation has generally contributed to rising vendor and labor costs, we believe the increase to operating expenses was primarily due to:
•
An increase in sales and marketing expense of$27.1 million for the nine months endedSeptember 30, 2022 , due primarily to increased personnel costs resulting from additional hiring, as well as increases in stock-based compensation expense and in employee benefit and insurance costs;
•
An increase in product development expense of$11.9 million for the nine months endedSeptember 30, 2022 , due primarily to increased personnel costs resulting from additional hiring and the acquisition of Analytical Wizards, as well as increases in stock-based compensation expense and in employee benefit and insurance costs;
•
An increase in general and administrative expense of$14.7 million for the nine months endedSeptember 30, 2022 , due primarily to increased personnel costs arising from additional hiring and increases in employee benefit and insurance costs, as well as increases in stock-based compensation expense, bad debt expense and additional accounting and legal expenses resulting from the transition to becoming a publicly traded company. If the macroenvironment trends described above continue, we may experience additional increases in bad debt expense in the future;
•
An increase in transaction, integration and restructuring expenses of
38
--------------------------------------------------------------------------------Other Income (Expense), Net
Total other income, net was$2.5 million for the nine months endedSeptember 30, 2022 , driven primarily by a TRA liability remeasurement gain of$8.3 million , partially offset by$6.9 million of interest expense, net. Total other expense, net of$33.7 million for the nine months endedSeptember 30, 2021 was driven by a$9.9 million loss from the extinguishment of debt and interest expense, net of$24.0 million . Interest expense, net was lower in the nine months endedSeptember 30, 2022 compared with the same period in the prior year due to lower interest rates and a lower outstanding debt balance resulting from the refinancing of the Company's debt in September of 2021.
Liquidity and Capital Resources
Overview
As ofSeptember 30, 2022 , we had$228.8 million of cash and cash equivalents,$120.8 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 primarily for investment in long-term growth of the business through capital expenditures and acquisitions, as well as debt services and distributions to members of Definitive OpCo. In addition, onOctober 7, 2022 , we filed a registration statement on Form S-3 with theSEC using a "shelf" registration process. If and when we utilize the shelf registration, we will be able to, from time to time, offer and sell, either individually or in combination, in one or more offerings of the securities described in the shelf registration statement. Each time we offer securities under this shelf registration, we will provide a prospectus supplement that will contain more specific information about the terms of that offering. 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 ofDefinitive Healthcare Corp. Definitive Healthcare Corp. has no independent means of generating revenue. The Amended LLC Agreement provides that certain distributions will be made to coverDefinitive Healthcare Corp.'s taxes and such tax distributions are also expected to be used byDefinitive Healthcare Corp. to satisfy its obligations under the TRA. We have broad discretion to make distributions out of Definitive OpCo. In the eventDefinitive 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 restrictDH Holdings and its subsidiaries from paying such distributions, subject to certain exceptions. Further,Definitive OpCo andDefinitive Healthcare Corp. are generally prohibited underDelaware 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 ofDefinitive OpCo andDH Holdings (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries ofDH Holdings are generally subject to similar legal limitations on their ability to make distributions toDH 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 2021 Form 10-K 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. 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. 39 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
(in thousands) 2022 2021
Cash provided by (used in):
Operating activities $ 39,799 $ 20,993
Investing activities (181,017 ) (5,662 )
Financing activities (17,239 ) 149,695
Change in cash and cash equivalents (excluding
effect of exchange rate changes) $ (158,457
)
Cash Flows provided by Operating Activities
Net cash provided by operating activities was$39.8 million during the nine months endedSeptember 30, 2022 , primarily as a result of a net loss of$29.0 million , offset by non-cash charges of$68.8 million . The non-cash charges were primarily comprised of amortization of intangible assets of$42.5 million , equity compensation costs of$25.0 million , and amortization of deferred contract costs of$6.3 million , offset by a gain on remeasurement of the TRA of$8.3 million . The net decrease in operating assets and liabilities of$0.1 million was primarily the result of cash outflows resulting from an increase in deferred contract costs of$10.1 million , a decrease in deferred revenue due to the time of billings and cash received in advance of revenue recognition for subscription services of$3.0 million , and a decrease in accounts payable, accrued expenses, and other current liabilities, collectively, of$2.4 million . These decreases were almost entirely offset by decreases in accounts receivable of$12.5 million and a decrease in prepaids and other assets of$2.6 million . Net cash provided by operating activities was$21.0 million during the nine months endedSeptember 30, 2021 , primarily as a result of a net loss of$46.5 million , which was offset by non-cash charges of$66.9 million . The non-cash charges were primarily comprised of amortization of intangible assets of$43.5 million , a loss on the extinguishment of the previous debt facility of$9.9 million , equity compensation costs of$4.3 million , a$3.2 million increase in the earnout liability related to the Monocl acquisition, amortization of deferred contract costs of$3.2 million , and amortization of debt issuance costs of$1.5 million . The change in operating assets and liabilities was primarily the result of an increase in deferred revenue of$9.0 million due to the timing of billings and cash received in advance of revenue recognition for subscription services and a decrease in accounts receivable of$5.2 million , partially offset by an increase in deferred contract costs of$9.0 million and cash outflows resulting from lower accounts payable, accrued expenses and other current liabilities collectively of$4.0 million .
Cash Flows used in Investing Activities
Cash used in investing activities during the nine months ended
Cash used in investing activities during the nine months endedSeptember 30, 2021 was$5.7 million , primarily related to purchases of data and expenditures associated with the buildout of one of our office facilities.
Cash Flows (used in) provided by Financing Activities
Cash used in financing activities during the nine months endedSeptember 30, 2022 was$17.2 million , primarily driven by$6.9 million in tax distribution payments to members, repayments of the 2021 Term Loan of$5.2 million , taxes paid related to the net share settlement of equity awards of$2.7 million ,$1.3 million in payments of deferred equity offering issuance costs, and$1.1 million in payments of contingent consideration arising from the Monocl acquisition. Cash provided by financing activities during the nine months endedSeptember 30, 2021 was$149.7 million , primarily driven by net proceeds received from the Company's IPO inSeptember 2021 of$360.0 million and proceeds of$275.0 million from the 2021 Term Loan under the 2021 Credit Agreement executed in the third quarter of 2021. These cash inflows were partially offset by repayments of the 2019 Term Loan of$472.7 million , distribution payments made to members of$7.1 million , and payments of debt issuance costs of$3.5 million .
Refer to Debt Obligations for additional information related to our debt obligations.
Debt Obligations
The 2021 Term Loan of$275.0 million has a maturity date ofSeptember 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. 40 -------------------------------------------------------------------------------- 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$268.1 million outstanding on the 2021 Term Loan atSeptember 30, 2022 .
The 2021 Revolving Line of Credit is committed for
The 2021 Credit Agreement includes certain financial covenants, and the Company was compliant with its financial covenants under the 2021 Credit Agreement as ofSeptember 30, 2022 andDecember 31, 2021 .
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 byDefinitive 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 favorable tax attributes 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) tax basis adjustments resulting from the acquisition of LLC Units byDefinitive 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) theDefinitive Healthcare Corp.'s depreciation and amortization deductions and, therefore, may reduce the amount of tax that theDefinitive Healthcare Corp. would otherwise be required to pay in the future, although theIRS 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 ofDefinitive 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 ofDefinitive Healthcare Corp. (calculated with certain assumptions) to the amount of such taxes thatDefinitive Healthcare Corp. would have been required to pay had there been no tax basis adjustments of the assets ofDefinitive Healthcare Corp. as a result of redemptions or exchanges and no utilization of certain tax attributes of the Blocker Companies, and hadDefinitive 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 ifDefinitive Healthcare Corp. had exercised its right to terminate the TRA, or (iii) there is a change of control ofDefinitive Healthcare Corp. , in which case, all obligations (including any additional interest due relating to any deferred payments) generally will be accelerated and due as ifDefinitive 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 thatDefinitive 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 18. Income Taxes in our unaudited condensed consolidated financial statements.
Capital Expenditures
Capital expenditures decreased by$2.2 million to$3.5 million for the nine months endedSeptember 30, 2022 compared to$5.7 million for the same period in the prior year, primarily driven by higher capital expenditures in support of the Company's growth in the prior year that did not repeat in the first nine months of 2022.
Off-Balance Sheet Arrangements
As of
41
--------------------------------------------------------------------------------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 endedDecember 31, 2021 included in our 2021 Form 10-K. There have been no material changes to these policies or estimates as ofSeptember 30, 2022 .
JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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 2. Summary of Significant Accounting Policies in the Notes to the unaudited interim condensed consolidated financial statements.
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