.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
For the quarterly period ended September 30, 2023
Or
For the transition period from _____ to _____
Commission File Number: 001-38993
(Exact name of registrant as specified in its charter)
________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices, including zip code)
(801 ) 708-6800
(Registrant’s telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | Emerging growth company | ||||||||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 3, 2023, the Registrant had 57,550,324 shares of common stock outstanding.
HEALTH CATALYST, INC.
Table of Contents
| Page | ||||||||
Special Note Regarding Forward-looking Statements
As used in this Quarterly Report on Form 10-Q, unless expressly indicated or the context otherwise requires, references to “Health Catalyst,” “we,” “us,” “our,” “the Company,” and similar references refer to Health Catalyst, Inc. and its consolidated subsidiaries. This Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are only predictions based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. These forward-looking statements, which are subject to a number of risks, uncertainties, and assumptions, generally relate to future events or our future financial or operating performance. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would,” “target,” “project,” or “contemplate,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of expectations, projections, plans, strategy, intentions, or future results of operations or financial performance. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about our:
•ability to attract new clients and retain and expand our relationships with existing clients;
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•ability to expand our service offerings and develop new platform features;
•future financial performance, including trends in revenue, costs of revenue, gross margin, and operating expenses;
•ability to compete successfully in competitive markets;
•ability to respond to rapid technological changes;
•expectations and management of future growth;
•ability to enter new markets and manage our expansion efforts, particularly internationally;
•ability to attract and retain highly-qualified employees, whom we refer to as team members;
•ability to effectively and efficiently protect our brand;
•ability to timely scale and adapt our infrastructure;
•ability to maintain, protect, and enhance our intellectual property and not infringe upon others’ intellectual property;
•ability to successfully identify, acquire, and integrate companies and assets; and
•expectations regarding the impact of any macroeconomic challenges (including high inflationary and/or high interest rate environments, or market volatility caused by bank failures and measures taken in response thereto), natural disasters or public health emergencies, such as the COVID-19 pandemic, on our business and results of operations.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q and other documents that may be filed by us from time to time with the Securities and Exchange Commission (the SEC). Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements and you should not place undue reliance on our forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
You should read this Quarterly Report on Form 10-Q in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2022, included in our Annual Report on Form 10-K.
Summary of Risk Factors
•We operate in a highly competitive industry, and if we are not able to compete effectively, our business and results of operations will be harmed.
•We may be unable to successfully execute on our growth initiatives, business strategies, or operating plans.
•If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.
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•Macroeconomic challenges (including high inflationary and/or high interest rate environments, or market volatility and measures taken in response thereto) and the lingering effects of the global coronavirus (COVID-19) pandemic could harm our business, results of operations, and financial condition.
•If we do not continue to innovate and provide services that are useful to clients and users, we may not remain competitive, and our revenue and results of operations could suffer.
•Our business could be adversely affected if our clients are not satisfied with our cloud-based data platform, software analytics applications, and professional services expertise (our Solution).
•If our existing clients do not continue or renew their contracts with us, renew at lower fee levels, or decline to purchase additional technology and services from us, it could have a material adverse effect on our business, financial condition, and results of operations.
•Our Solution is dependent on our ability to source data from third parties, and such third parties could take steps to block our access to data, or increase fees or impose fees for such access, which could impair our ability to provide our Solution, limit the effectiveness of our Solution, or adversely affect our financial condition and results of operations.
•Failure by our clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could harm our business.
•If our security measures are breached or unauthorized access to client data is otherwise obtained or we cannot comply with evolving federal and state healthcare regulatory and data privacy laws and regulations, our Solution may be perceived as not being secure, clients may reduce the use of or stop using our Solution, and/or we may incur significant liabilities.
•Our results of operations have in the past fluctuated and may continue to fluctuate significantly, and if we fail to meet the expectations of analysts or investors, our stock price and the value of an investment in our common stock could decline substantially.
•Our pricing may change over time and our ability to efficiently price our Solution will affect our results of operations and our ability to attract or retain clients.
•If our Solution fails to provide accurate and timely information, or if our content or any other element of our Solution is associated with faulty clinical decisions or treatment, we could have liability to clients, clinicians, patients, or others, which could adversely affect our results of operations.
•We rely on third-party providers, including Microsoft Azure, for computing infrastructure, network connectivity, and other technology-related services needed to deliver our Solution. Any disruption in the services provided by such third-party providers could adversely affect our business and subject us to liability.
•We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties, and our own systems for providing our Solution to our users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, potentially require us to issue credits to our clients, and negatively impact our relationships with users or clients, adversely affecting our brand and our business.
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Part I. Financial Information
Item 1. Financial Statements
HEALTH CATALYST, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| As of September 30, | As of December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 14) | |||||||||||
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| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Technology | $ | $ | $ | $ | |||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
Cost of revenue, excluding depreciation and amortization: | |||||||||||||||||||||||
| Technology | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
Total cost of revenue, excluding depreciation and amortization | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest and other income (expense), net | ( | ||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares outstanding used in calculating net loss per share, basic | |||||||||||||||||||||||
| Weighted-average shares outstanding used in calculating net loss per share, diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Change in net unrealized gains (losses) on available for sale investments | ( | ( | |||||||||||||||||||||
| Change in foreign currency translation adjustment | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Common Stock and Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock and Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Issuance of common stock for settlement of contingent consideration | — | — | |||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
| Common Stock and Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Vesting of restricted stock units and restricted shares | — | — | — | — | |||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | ||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
| Common Stock and Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| — | ( | — | ( | ||||||||||||||||||||||||||
| Vesting of restricted stock units and restricted shares | — | — | |||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | |||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock for settlement of contingent consideration | — | — | |||||||||||||||||||||||||||
| Issuance of common stock related to acquisitions | — | — | |||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
HEALTH CATALYST, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Non-cash operating lease expense | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Investment discount and premium (accretion) amortization | ( | ( | |||||||||
| Provision for expected credit losses | |||||||||||
| Deferred tax provision (benefit) | ( | ||||||||||
| Change in fair value of contingent consideration liabilities | ( | ||||||||||
| Other | ( | ||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Prepaid expenses and other assets | |||||||||||
Accounts payable, accrued liabilities, and other liabilities | |||||||||||
| Deferred revenue | ( | ( | |||||||||
| Contingent consideration liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
Proceeds from the sale and maturity of short-term investments | |||||||||||
| Purchase of short-term investments | ( | ( | |||||||||
| Capitalization of internal-use software | ( | ( | |||||||||
| Purchase of intangible assets | ( | ( | |||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Acquisition of businesses, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
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| Cash flows from financing activities | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Payments of acquisition-related consideration | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosures of non-cash investing and financing information | |||||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease obligations | $ | $ | |||||||||
Purchase of intangible assets included in accounts payable and accrued liabilities | |||||||||||
| Stock-based compensation capitalized as internal-use software | |||||||||||
| Capitalized internal-use software included in accounts payable and accrued liabilities | |||||||||||
| Purchase of property and equipment included in accounts payable and accrued liabilities | |||||||||||
| Common stock issued in connection with acquisitions | |||||||||||
| Common stock issued for settlement of contingent consideration | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
11
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Nature of operations
Health Catalyst, Inc. (Health Catalyst) was incorporated under the laws of Delaware in September 2011. We are a leading provider of data and analytics technology and services to healthcare organizations. Our Solution comprises our cloud-based data platform, software analytics applications, and professional services expertise. Our clients, which are primarily healthcare providers, use our Solution to manage their data, derive analytical insights to operate their organization, and produce measurable clinical, financial, and operational improvements.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the applicable regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K.
Interim unaudited condensed consolidated financial statements
The accompanying interim condensed consolidated balance sheet as of September 30, 2023, the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, our interim condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and our interim condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 are unaudited. Our condensed consolidated balance sheet as of December 31, 2022 was derived from audited financial statements, but does not include all disclosures required by GAAP. Our interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year or any other period.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Health Catalyst and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, reserves for expected credit losses, useful lives of property and equipment, capitalization and estimated useful life of internal-use software, impairment assessments of goodwill, intangible assets, and other long-lived assets, fair value of financial instruments, deferred tax assets, stock-based compensation, contingent consideration, the period of benefit for deferred contract acquisition costs, the incremental borrowing rate used for operating leases, and tax uncertainties. Actual results could differ significantly from those estimates.
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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Segment reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker (CODM) in assessing performance and making decisions regarding resource allocation. We operate our business in two
Net loss per share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share is calculated by giving effect to all potentially dilutive common stock equivalents outstanding for the period, when dilutive. For purposes of this calculation, stock options, restricted stock units (RSUs), performance-based restricted stock units (PRSUs), convertible senior notes, restricted shares, and purchase rights committed under the employee stock purchase plan are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is anti-dilutive.
Revenue recognition
We derive our revenue primarily from technology subscriptions and professional services. We determine revenue recognition by applying the following steps:
•Identification of the contract, or contracts, with a client;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, we satisfy the performance obligation.
We recognize revenue net of any taxes collected from clients and subsequently remitted to governmental authorities.
Technology revenue
Technology revenue primarily consists of subscription fees charged to clients for access to use our technology. We provide clients access to our technology through either an all-access or limited-access, modular subscription.
The majority of our subscription arrangements are cloud-based and do not provide clients the right to take possession of the technology or contain a significant penalty if the client were to take possession of the technology. Revenue from cloud-based subscriptions is recognized ratably over the contract term beginning on the date that the service is made available to the client. Our subscription contracts generally have a or five-year term, of which many are terminable after one year upon 90 days’ notice.
Subscriptions that allow the client to take software on-premise without significant penalty are treated as time-based licenses. These arrangements generally include access to technology, access to unspecified future products, and maintenance and support. Revenue for upfront access to our technology library is recognized at a point in time when the technology is made available to the client. Revenue for access to unspecified future products included in time-based license subscriptions is recognized ratably over the contract term beginning on the date that the access is made available to the client.
13
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Professional services revenue
Professional services revenue primarily includes data and analytics services, domain expertise services, Tech-enabled Managed Services, and implementation services. Professional services arrangements typically include a fee for making full-time equivalent (FTE) services available to our clients on a monthly basis. FTE services generally consist of a blend of analytic engineers, analysts, and data scientists based on the domain expertise needed to best serve our clients. Professional services are typically considered distinct from the technology offerings and revenue is generally recognized as the service is provided using the “right to invoice” practical expedient.
Contracts with multiple performance obligations
Many of our contracts include multiple performance obligations. We account for performance obligations separately if they are capable of being distinct within the context of the contract. In these circumstances, the transaction price is allocated to separate performance obligations on a relative standalone selling price basis. We determine standalone selling prices based on the observable price a good or service is sold for separately when available. In cases where standalone selling prices are not directly observable, based on information available, we utilize the expected cost plus a margin, adjusted market assessment, or residual estimation method. We consider all information available including our overall pricing objectives, market conditions, and other factors, which may include client demographics and the types of users.
Standalone selling prices are not directly observable for our all-access and limited-access technology arrangements, which are composed of cloud-based subscriptions, time-based licenses, and perpetual licenses. For these technology arrangements, we generally use the residual estimation method due to a limited number of standalone transactions and/or prices that are highly variable.
Variable consideration
We have also entered into at-risk and shared savings arrangements with certain clients whereby we receive variable consideration based on the achievement of measurable improvements that may include cost savings or performance against metrics. For these arrangements, we estimate revenue using the most likely amount that we will receive. Estimates are based on our historical experience and best judgment at the time to the extent it is probable that a significant reversal of revenue recognized will not occur. Due to the nature of our arrangements, certain estimates may be constrained until the uncertainty is further resolved.
Contract balances
Contract assets resulting from services performed prior to invoicing clients are recorded as unbilled accounts receivable and are presented on our condensed consolidated balance sheets in aggregate with accounts receivable. Unbilled accounts receivable generally become billable at contractually specified dates or upon the attainment of contractually defined milestones. As of September 30, 2023 and December 31, 2022, the unbilled accounts receivable included in accounts receivable on our condensed consolidated balance sheets was $2.9 million and $0.9 million, respectively.
We record contract liabilities as deferred revenue when cash payments are received or due in advance of performance. Deferred revenue primarily relates to the advance consideration received from the client. As of September 30, 2023 and December 31, 2022, the total of current and non-current deferred revenue on our condensed consolidated balance sheets was $53.4 million and $55.1 million, respectively.
Deferred costs
We capitalize sales commissions and associated fringe costs, such as benefits and payroll taxes, paid to direct sales personnel and other incremental costs of obtaining contracts with clients, provided we expect to recover those costs. We determine that costs should be deferred based on our sales compensation plans when the commissions are incremental and would not have occurred absent the client contract.
14
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
As of September 30, 2023 and December 31, 2022, $2.1 million and $1.5 million, respectively, of deferred contract acquisition costs are expected to be amortized within the next 12 months and are included in prepaid expenses and other assets on the condensed consolidated balance sheets. As of September 30, 2023 and December 31, 2022, the remaining $3.6 million and $2.6 million, respectively, of deferred contract acquisition costs are included in non-current other assets.
Commissions paid upon the initial acquisition of a contract are amortized on a straight-line basis over an estimated period of benefit of four years . Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition. The period of benefit was estimated by considering factors such as estimated average client life, the rate of technological change in our subscription service, and the impact of competition in our industry. As our average client life significantly exceeded the rate of change in our technology, we concluded that the rate of change in the technology underlying our subscription service was the most significant factor in determining the period of benefit for which the asset relates. In evaluating the rate of change in our technology, we considered the competition in our industry, our commitment to continuous innovation, and the frequency of product, platform, and technology updates. We determined that the impact of competition in our industry is reflected in the period of benefit through the rate of technological change. Amortization of deferred contract acquisition costs was $0.6 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, and $1.6 million and $1.7 million for the nine months ended September 30, 2023 and 2022, respectively, and is included within sales and marketing expense in the condensed consolidated statements of operations.
We defer certain costs to fulfill a contract when the costs are expected to be recovered, are directly related to in-process contracts, and enhance resources that will be used in satisfying performance obligations in the future. These deferred fulfillment costs primarily consist of employee compensation incurred as part of the implementation of new contracts. Amortization of deferred fulfillment costs is included within cost of revenue in the condensed consolidated statements of operations. We periodically review these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit. There were no impairment losses recorded during the periods presented.
Cost of revenue, excluding depreciation and amortization
Cost of technology revenue primarily consists of costs associated with hosting and supporting our technology, including third-party cloud computing and hosting costs, license and revenue share fees, contractor costs, and salary and related personnel costs for our cloud services and support teams. Cost of professional services revenue primarily consists of salary and related personnel costs, travel-related costs, and independent contractor costs. Cost of revenue excludes costs related to depreciation and amortization.
Cash and cash equivalents
We consider all highly liquid investments purchased with a remaining maturity of three months or less at the time of acquisition to be cash equivalents.
Accounts receivable
Accounts receivable are non-interest bearing and are recorded at the original invoiced amount less an allowance for credit losses based on the probability of future collections. Our allowance is based on our estimate of expected credit losses for outstanding trade accounts receivables and unbilled receivables.
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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Allowance for credit losses at the beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for expected credit losses | |||||||||||||||||||||||
| Less: Write-offs, net of recoveries | ( | ( | |||||||||||||||||||||
| Allowance for credit losses at the end of period | $ | $ | $ | $ | |||||||||||||||||||
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. We have adopted the short-term lease recognition exemption policy. All of our leasing commitments are classified either as operating leases or otherwise qualify as short-term leases with lease terms of 12 months or less.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our lease contracts do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.
The operating lease ROU asset also includes any lease payments made and excludes lease executory costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the applicable option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We do not have lease agreements that contain non-lease components, which generally would be accounted for separately.
During the nine months ended September 30, 2023 and 2022, we identified asset impairment indicators for multiple portions of our corporate office space designated for subleasing. We performed a recoverability test of the relevant asset groups, comprised of operating lease ROU and other related assets, and determined that the carrying value of these asset groups was not fully recoverable. As a result, we measured and recognized total impairment charges of $2.7 million and $3.7 million during the nine months ended September 30, 2023 and 2022, respectively, representing the amount by which the carrying value exceeded the estimated fair value of these asset groups. The impairment charges were recorded as part of general and administrative expense in our condensed consolidated statements of operations. During the nine months ended September 30, 2023, $2.0 million of the impairment charge was allocated to ROU assets and the remaining $0.7 million was allocated to leasehold improvements, while during the nine months ended September 30, 2022, $2.5 million of the impairment charge was allocated to ROU assets and the remaining $1.2 million was allocated to leasehold improvements.
16
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation. Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of each asset category is as follows:
| Computer equipment | |||||
| Furniture and fixtures | |||||
| Leasehold improvements | Lesser of lease term or estimated useful life | ||||
| Computer software | |||||
| Capitalized internal-use software costs | |||||
When there are indicators of potential impairment, we evaluate the recoverability of the carrying values by comparing the carrying amount of the applicable asset group to the estimated undiscounted future cash flows expected to be generated by the asset group over the remaining useful life of the primary asset, plus any terminal value, in the asset group. If the carrying amount of the asset group exceeds those estimated future net cash flows, an impairment charge is recognized based on the amount by which the carrying value of the long-lived assets exceeds the fair value of the assets.
Intangible assets
Intangible assets include developed technologies, client relationships, client contracts, and trademarks that were acquired in business combinations and asset acquisitions. Intangible assets also include the purchase of third-party computer software. The intangible assets are amortized using the straight-line method over the assets’ estimated useful lives. The estimated useful life of each asset category is as follows:
| Developed technologies | |||||
| Client relationships and contract backlog | |||||
| Computer software licenses | |||||
| Trademarks | |||||
Goodwill
We record goodwill as the difference between the aggregate consideration paid for a business combination and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, client relationships, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. Goodwill is assessed for impairment annually on October 31 or more frequently if indicators of impairment are present or circumstances suggest that impairment may exist.
Our first step in the goodwill impairment test is a qualitative analysis of factors that could be indicators of potential impairment. Judgment in the assessment of qualitative factors of impairment may include changes in business climate, market conditions, or other events impacting the reporting unit. Next, if a quantitative analysis is necessary, we compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. Performing a quantitative goodwill impairment test includes the determination of the fair value of a reporting unit, which requires management to use significant judgment and estimation. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of the reporting units, as well as the sensitivity of the respective fair values to the underlying significant assumptions. Typical methods to derive the fair value of reporting units include using the income or market approaches.
17
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Business combinations
The results of businesses acquired in a business combination are included in our condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair value on the acquisition date. Any excess consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. Significant estimation is required in determining the fair value of the client-related intangible assets and technology-related intangible assets. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We typically use the income approach or cost approach to measure the fair value of intangible assets. The significant assumptions used to form the basis of the estimates included the number of engineer hours required to develop technology, expected revenue including revenue growth rates, rate and timing of obsolescence, royalty rates and earnings before interest, taxes, depreciation and amortization (EBITDA) margin used in the estimate for client relationships, and backlog. Many of these significant assumptions were forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of material assets acquired and liabilities assumed in a business combination.
We expensed $1.6 million and $0.1 million of transaction costs associated with business combinations during the three months ended September 30, 2023 and 2022, respectively, and $1.6 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively. The costs were expensed as incurred and are included in general and administrative expense in our condensed consolidated statements of operations.
Contingent consideration liabilities
Our acquisition consideration in business combinations may include an estimate for contingent consideration that will be paid if certain earn-out performance targets are met. The resulting contingent consideration liabilities are categorized as a Level 3 fair value measurement because we estimate projections during the earn-out period utilizing unobservable inputs, including various potential pay-out scenarios based on billings and revenue-related earn-out targets. Changes to the unobservable inputs could have a material impact on our condensed consolidated financial statements. We generally value the expected contingent consideration and the corresponding liabilities using a probability model such as the Monte Carlo method based on estimates of potential payment scenarios. Probabilities are applied to each potential scenario and the resulting values are discounted using a rate that considers weighted average cost of capital as well as a specific risk premium associated with the riskiness of the earn-out itself, the related projections, projected payment dates, and volatility in the fair value of our common stock. The fair value of the contingent consideration is remeasured each reporting period.
18
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Development costs and internal-use software
For technology products that are developed to be sold externally, we determined that technological feasibility is reached shortly before the products are ready for general release. Any costs associated with software development between the time technological feasibility is reached and general release are inconsequential.
Stock-based compensation
Stock-based awards, including stock options, restricted stock units, performance-based restricted stock units, and restricted shares are measured and recognized in our condensed consolidated financial statements based on the fair value of the award on the grant date or, when applicable, the modification date. The grant date fair value of our stock-based awards is typically determined using the market closing price of our common stock on the date of grant; however, we also consider whether any adjustments are required when the market closing price does not reflect certain material non-public information that we know but is unavailable to marketplace participants on the date of grant. We record forfeitures of stock-based awards as the actual forfeitures occur.
For awards subject to performance conditions, we record expense when the performance condition becomes probable. Each reporting period we evaluate the probability of achieving the performance criteria, estimate the number of shares that are expected to vest, and adjust the related compensation expense accordingly. For awards subject to market conditions, we estimate the fair value as of the grant date using a Monte Carlo simulation valuation model which requires the use of various assumptions, including historic stock price volatility and risk-free interest rates as of the valuation date corresponding to the length of time remaining in the performance period. Stock-based compensation expense for awards with market conditions is recognized over the requisite service period using the accelerated attribution method and is not reversed if the market condition is not met.
Stock-based compensation expense related to purchase rights issued under the 2019 Health Catalyst Employee Stock Purchase Plan (ESPP) is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.
19
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Income taxes
Deferred income tax balances are accounted for using the asset and liability method and reflect the effects of temporary differences between the financial reporting and tax bases of our assets and liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets and liabilities are recorded for net operating loss (NOL) and tax credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.
We use a two-step approach to recognize and measure uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained upon audit. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. We do not currently accrue interest and penalties related to unrecognized tax benefits within the provision for income taxes because the impact would be immaterial due to our net operating losses and tax credit carryforwards. Significant judgment is required to evaluate uncertain tax positions.
Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We evaluate our uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Fair value of financial instruments
The carrying amounts reported in our condensed consolidated balance sheets for cash, receivables, accounts payable, and current accrued expenses approximate fair values because of the immediate or short-term maturity of these financial instruments. The carrying value of contingent consideration liabilities, operating lease liabilities, and convertible senior notes approximate fair value based on interest rates available for debt with similar terms at September 30, 2023 and December 31, 2022. Money market funds and short-term investments are measured at fair value on a recurring basis. Our contingent consideration liabilities are measured at fair value on a recurring basis based primarily on significant inputs not observable in the market.
20
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1- Quoted prices in active markets for identical assets or liabilities.
•Level 2- Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3- Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
All of our financial instruments are valued using quoted prices in active markets or based on other observable inputs. For Level 2 securities, we use a third-party pricing service which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application, and corroborative information. Our contingent consideration liabilities are categorized as a Level 3 fair value measurement because we estimate projections during the earn out period utilizing various potential pay-out scenarios.
Foreign currency
The functional currency of our international subsidiaries is generally their local currency. We translate these subsidiaries’ financial statements into U.S. dollars using month-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. We record translation gains and losses in accumulated other comprehensive loss in stockholders’ equity. We record foreign exchange gains and losses in interest and other expense, net. Our net foreign exchange gains and losses were not material for the periods presented.
Recent accounting pronouncements not yet adopted
There have been no recent accounting pronouncements issued which are expected to have a material effect on our condensed consolidated financial statements. Management continues to monitor and review recently issued accounting guidance upon issuance.
2. Business Combinations
The business acquisitions discussed below are included in our results of operations from their respective dates of acquisition.
2022 acquisitions
ARMUS Corporation
On April 29, 2022, we acquired ARMUS Corporation (ARMUS), a clinical registry development and data management technology company based in Foster City, California. We accounted for the acquisition of ARMUS as a business combination. ARMUS provides data abstraction, data validation, data management, data submission, and data reporting services to support participation in clinical quality registries for healthcare institutions around the world, including health systems, payers, medical device companies, and premier medical societies. The acquisition consideration transferred was $9.4 million and was comprised of net cash consideration of $9.3 million and Health Catalyst common shares with a fair value of $0.1 million. The purchase resulted in Health Catalyst acquiring 100 % ownership in ARMUS.
21
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
An additional 235,330 shares of our common stock subject to a restriction agreement (restricted shares) were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
The following table summarizes the acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of ARMUS (in thousands):
| Assets acquired: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other assets | |||||
| ROU lease asset | |||||
| Developed technologies | |||||
| Client relationships | |||||
| Trademarks | |||||
| Total assets acquired | |||||
| Less liabilities assumed: | |||||
| Accounts payable | |||||
| Accrued and other current liabilities | |||||
| Deferred revenue | |||||
| Lease liability | |||||
| Net deferred tax liabilities | |||||
| Total liabilities assumed | |||||
| Total assets acquired, net | |||||
| Goodwill | |||||
| Total consideration transferred, net of cash acquired | $ | ||||
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include developed technology, client relationships, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of four years , six years , and three years , respectively. The resulting goodwill from the ARMUS acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.
In addition to the purchase price, we agreed to make cash retention payments in an aggregate amount of $5.0 million to continuing ARMUS team members. The retention payments are generally subject to vesting based upon continued employment over a required service period of three years . Any forfeited retention payments are reallocated to remaining ARMUS team members until the aggregate amount of $5.0 million is fully paid. Such amounts are recorded as post-combination compensation expense and recognized on a straight-line basis over the relevant vesting terms. During the three and nine months ended September 30, 2023, we recognized compensation expense of $0.3 million and $1.0 million, respectively, related to these retention payments. As of September 30, 2023, there is an additional $2.0 million of unrecognized compensation expense related to these retention payments expected to be recognized over a weighted-average period of 1.6 years.
22
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
KPI Ninja, Inc.
On February 24, 2022, we acquired KPI Ninja, Inc. (KPI Ninja), a leading provider of interoperability, enterprise analytics, and value-based care solutions based in Lincoln, Nebraska. We accounted for the acquisition of KPI Ninja as a business combination. KPI Ninja is known for its powerful capabilities, flexible configurations, and comprehensive applications designed to fulfill the promise of data-driven healthcare. The acquisition consideration transferred was $21.4 million and was comprised of net cash consideration of $18.5 million and Health Catalyst common shares with a fair value of $2.9 million. The purchase resulted in Health Catalyst acquiring 100 % ownership in KPI Ninja.
An additional 356,919 shares of our common stock subject to a restriction agreement (restricted shares) were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
The following table summarizes the acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of KPI Ninja (in thousands):
| Assets acquired: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other assets | |||||
| Property and equipment, net | |||||
| Developed technologies | |||||
| Client relationships | |||||
| Trademarks | |||||
| Total assets acquired | |||||
| Less liabilities assumed: | |||||
| Accounts payable and other current liabilities | |||||
| Deferred revenue | |||||
| Net deferred tax liabilities | |||||
| Total liabilities assumed | |||||
| Total assets acquired, net | |||||
| Goodwill | |||||
| Total consideration transferred, net of cash acquired | $ | ||||
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include developed technology, client relationships, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of four years , six years , and five years , respectively. The resulting goodwill from the KPI Ninja acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.
In addition to the purchase price, we agreed to make cash retention payments in an aggregate amount of $3.0 million to continuing KPI Ninja team members. The retention payments are subject to vesting based upon continued employment over a required service period of four years . Any forfeited retention payments are reallocated to remaining KPI Ninja team members until the aggregate amount of $3.0 million is fully paid. Such amounts are recorded as post-combination compensation expense and recognized on a straight-line basis over the relevant vesting terms. During the three and nine months ended September 30, 2023, we recognized compensation expense of $0.2 million and $0.5 million, respectively, related to these retention payments. As of September 30, 2023, there was an additional $1.6 million of unrecognized compensation expense related to these retention payments expected to be recognized over a remaining weighted-average period of 2.4 years.
23
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
3. Revenue
Disaggregation of Revenue
The following table represents Health Catalyst’s revenue disaggregated by type of arrangement (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Recurring technology | $ | $ | $ | $ | |||||||||||||||||||
| One-time technology (i.e., perpetual license) | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Revenue related to contracts with clients located in the United States was 98.5 % and 98.6 % for the three months ended September 30, 2023 and 2022, respectively, and 98.3 % and 97.9 % for the nine months ended September 30, 2023 and 2022, respectively.
4. Goodwill and Intangible Assets
We operate our business in two
Goodwill by reporting unit is as follows (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | |||||||||||
| Technology | $ | $ | |||||||||
| Professional services | |||||||||||
| Total goodwill | $ | $ | |||||||||
As of September 30, 2023, intangible assets consisted of the following (in thousands):
| Gross | Accumulated Amortization | Net | |||||||||||||||
| (unaudited) | |||||||||||||||||
| Developed technologies | $ | $ | ( | $ | |||||||||||||
| Client relationships and contracts | ( | ||||||||||||||||
| Computer software licenses | ( | ||||||||||||||||
| Trademarks | ( | ||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||
Amortization expense of acquired intangible assets was $7.1 million and $9.4 million for the three months ended September 30, 2023 and 2022, respectively, and $22.4 million and $28.7 million for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense for intangible assets is included in depreciation and amortization in our condensed consolidated statements of operations. We have not incurred any intangible asset impairment charges for the three and nine months ended September 30, 2023 and 2022.
24
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
As of December 31, 2022, intangible assets consisted of the following (in thousands):
| Gross | Accumulated Amortization | Net | |||||||||||||||
| Developed technologies | $ | $ | ( | $ | |||||||||||||
| Client relationships and contracts | ( | ||||||||||||||||
| Computer software licenses | ( | ||||||||||||||||
| Trademarks | ( | ||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||
5. Property and Equipment
Property and equipment consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | |||||||||||
| Computer equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Capitalized internal-use software costs | |||||||||||
| Computer software | |||||||||||
| Total property and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Our long-lived assets are located in the United States. Depreciation expense totaled $3.1 million and $3.0 million for the three months ended September 30, 2023 and 2022, respectively, and $9.5 million and $7.9 million for the nine months ended September 30, 2023 and 2022, respectively. Depreciation expense includes the amortization of capitalized internal-use software costs.
During the nine months ended September 30, 2023 and the nine months ended September 30, 2022, we impaired $0.7 million and $1.2 million, respectively, of leasehold improvements related to our corporate office space designated for subleasing. Refer to Note 1 for additional details. During the three and nine months ended September 30, 2022, we also incurred a $1.2
We capitalized $3.0 million and $3.1 million of internal-use software costs for the three months ended September 30, 2023 and 2022, respectively, and $9.6 million and $10.5 million for the nine months ended September 30, 2023 and 2022, respectively. We incurred $2.1 million and $1.8 million of capitalized internal-use software cost amortization expense for the three months ended September 30, 2023 and 2022, respectively, and $6.4 million and $4.7 million for the nine months ended September 30, 2023 and 2022, respectively.
6. Short-term Investments
25
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes, by major security type, our cash equivalents and short-term investments that are measured at fair value on a recurring basis as of September 30, 2023 (in thousands):
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash equivalents | Short-term Investments | ||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| U.S. treasury notes | |||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||||||||||||||
| U.S. agency securities | ( | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
The following table summarizes, by major security type, our cash equivalents and short-term investments that are measured at fair value on a recurring basis as of December 31, 2022 (in thousands):
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash equivalents | Short-term Investments | ||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| U.S. treasury notes | ( | ||||||||||||||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||||||||||||||
| U.S. agency securities | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
The following table presents the contractual maturities of our short-term investments as of September 30, 2023 and December 31, 2022 (in thousands):
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| Due within one year | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Accrued interest receivables related to our available-for-sale securities of $0.6 million and $0.6 million as of September 30, 2023 and December 31, 2022, respectively, were included within prepaid expenses and other assets on our condensed consolidated balance sheets.
On a quarterly basis we evaluate unrealized losses on our available-for-sale debt securities and the related accrued interest receivables to determine whether a decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. We do not intend to sell investments that are in an unrealized loss position and it is not likely that we will be required to sell any investments before recovery of their amortized cost basis. As of September 30, 2023 and December 31, 2022, there were no material unrealized losses due to expected credit loss-related factors.
26
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
7. Fair Value of Financial Instruments
Assets measured at fair value on a recurring basis as of September 30, 2023 were as follows (in thousands):
| September 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury notes | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| U.S. agency securities | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
Assets measured at fair value on a recurring basis as of December 31, 2022 were as follows (in thousands):
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. Treasury notes | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| U.S. agency securities | |||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||
There were no transfers between Level 1 and Level 2 of the fair value measurement hierarchy during the three and nine months ended September 30, 2023 and 2022.
Convertible senior notes
As of September 30, 2023, the estimated fair value of our convertible senior notes, with aggregate principal totaling $230.0 million, was $219.2 million. We estimate the fair value based on quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). These convertible senior notes are recorded at face value less unamortized debt discount and transaction costs on our condensed consolidated balance sheets. Refer to Note 9—Convertible Senior Notes for further information.
Nonrecurring fair value measurements
We recorded impairment charges of $2.7 million and $3.7 million related to the impairment of ROU assets and leasehold improvements associated with office space designated for subleasing during the nine months ended September 30, 2023 and nine months ended September 30, 2022, respectively. These impairment charges were derived from the difference between the carrying value and the fair value of the relevant asset groups. The fair value of these asset groups was estimated using a discounted cash flow analysis of the office space designated for subleasing and included certain unobservable (Level 3) inputs, including the anticipated future sublease terms and rates.
27
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
8. Accrued Liabilities
As of September 30, 2023 and December 31, 2022, accrued liabilities consisted of the following (in thousands):
| As of September 30, | As of December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | |||||||||||
| Accrued compensation and benefit expenses | $ | $ | |||||||||
Restructuring liabilities(1) | |||||||||||
| Other accrued liabilities | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
__________________
(1)Restructuring liabilities include severance and other team member costs from workforce reductions. For additional details, refer to Note 18 in these condensed consolidated financial statements.
9. Convertible Senior Notes
Convertible senior notes
On April 14, 2020, we issued $230.0 million in aggregate principal amount of 2.50 % Convertible Senior Notes due 2025 (Notes), in a private placement to qualified institutional buyers exempt from registration under the Securities Act (Note Offering). The net proceeds from the issuance of the Notes were approximately $222.5 million, after deducting the initial purchasers’ discounts and offering expenses payable by us.
The Notes are governed by an indenture (the Indenture) between us, as the issuer, and U.S. Bank National Association, as trustee. The Notes are our senior, unsecured obligations and accrue interest payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, at a rate of 2.50 % per year. The Notes will mature on April 15, 2025, unless earlier converted, redeemed, or repurchased. The Indenture does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries.
On or after April 20, 2023, we may redeem, for cash, all or a portion of the Notes, at our option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
The Notes have an initial conversion rate of 32.6797 shares of our common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $30.60 per share of our common stock). Following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes at a purchase price equal to 100 % of the principal amount of the Notes plus accrued and unpaid interest.
Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on October 14, 2024, in integral multiples of $1,000 principal amount, only under the following circumstances:
•During any calendar quarter commencing after the calendar quarter ended on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading
28
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;
•During the five business day period after any five consecutive trading day period (the measurement period) in which the trading price as defined in the Indenture per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
•If we call such notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
•Upon the occurrence of specified corporate events described in the Indenture.
On or after October 15, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time irrespective of the foregoing circumstances. Upon conversion, holders will receive cash, shares of our common stock or a combination of cash and shares of common stock, at our election.
As of September 30, 2023, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not currently convertible.
The interest expense recognized related to the Notes was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Contractual interest expense | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance costs and discount | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The net carrying value of the liability component of the Notes was as follows (in thousands):
| September 30, 2023 | |||||
| (unaudited) | |||||
| Principal | $ | ||||
| Less: Unamortized issuance costs | ( | ||||
| Net carrying amount | $ | ||||
Based on the closing price of our common stock of $10.12 per share on the last trading day of the period ended September 30, 2023, the if-converted value of the Notes was less than their respective principal amounts.
Capped calls
On April 8, 2020, concurrently with the pricing of the Notes, we entered into privately negotiated capped call transactions (Base Capped Calls) with certain option counterparties. In addition, in connection with the initial purchasers’ exercise in full of their option to purchase additional Notes, on April 9, 2020, we entered into additional capped call transactions (together with the Base Capped Calls, the Capped Calls) with each of the option counterparties. We used approximately $21.7 million of the net proceeds from the Note Offering to pay the cost of the Capped Calls and allocated issuance costs. The Capped Calls have initial cap prices of $42.00 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to the cap price.
29
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
10. Stockholders’ Equity
Preferred stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 25,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, and privileges thereof, including voting rights. As of September 30, 2023 and December 31, 2022, no
Common stock
We had 500,000,000 0.001 57,368,674 55,764,942 324,562 503,020 one vote on all matters submitted to a vote of stockholders. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through September 30, 2023.
Share repurchase plan
During the third quarter of 2022, our board of directors authorized a share repurchase program to repurchase up to $40.0 million of our outstanding shares of common stock (Share Repurchase Plan). During the first quarter of 2023, we repurchased and retired 145,027 1.8 12.45 per share. This is in addition to the 709,139 8.4 million at an average purchase price of $11.81 per share during the third quarter of 2022. The total remaining authorization for future shares of common stock repurchases under our Share Repurchase Plan is $29.8 million as of September 30, 2023.
30
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
11. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||