.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
For the quarterly period ended September 30, 2019
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.
Large accelerated filer | ☐ | Accelerated Filer | ☐ | Emerging growth company | |
☒ | 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 October 31, 2019, the Registrant had 36,565,033 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, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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,” “contemplate,” or the negative version of these words and other comparable terminology that concern our expectations, strategy, plans, intentions, or projections. 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 customers and retain and expand our relationships with existing customers; |
• | our ability to expand our service offerings and develop new platform features; |
• | our future financial performance, including trends in revenue, costs of revenue, gross margin, and operating expenses; |
• | our ability to compete successfully in competitive markets; |
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• | our ability to respond to rapid technological changes; |
• | our expectations and management of future growth; |
• | our ability to enter new markets and manage our expansion efforts, particularly internationally; |
• | our ability to attract and retain key employees, whom we refer to as team members; |
• | our ability to effectively and efficiently protect our brand; |
• | our ability to timely scale and adapt our infrastructure; |
• | our ability to maintain, protect, and enhance our intellectual property and not infringe upon others’ intellectual property; and |
• | our ability to successfully identify, acquire, and integrate companies and assets. |
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 as well as 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, 2018, included in our prospectus dated July 24, 2019 (File No. 333-232400) as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, or the Prospectus.
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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, | ||||||
2019 | 2018 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Short-term investments | |||||||
Accounts receivable, net(1) | |||||||
Deferred costs | |||||||
Prepaid expenses and other assets | |||||||
Total current assets | |||||||
Property and equipment, net | |||||||
Intangible assets, net | |||||||
Operating lease right-of-use assets | |||||||
Other assets | |||||||
Goodwill | |||||||
Total assets | $ | $ | |||||
Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued liabilities | |||||||
Acquisition-related consideration payable(1) | |||||||
Deferred revenue | |||||||
Operating lease liabilities | |||||||
Current portion of long-term debt | |||||||
Total current liabilities | |||||||
Long-term debt, net of current portion | |||||||
Acquisition-related consideration payable, net of current portion(1) | |||||||
Deferred revenue, net of current portion | |||||||
Operating lease liabilities, net of current portion | |||||||
Other liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 15) | |||||||
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Redeemable convertible preferred stock, $0.001 par value; no shares and 45,427,441 shares authorized as of September 30, 2019 and December 31, 2018, respectively; no shares and 22,713,694 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively; aggregated liquidation preference of $306,192 as of December 31, 2018 | |||||||
Stockholders’ deficit: | |||||||
Preferred stock, $0.001 par value per share; 25,000,000 and no shares authorized as of September 30, 2019 and December 31, 2018, respectively; no shares issued and outstanding as of September 30, 2019 and December 31, 2018 | |||||||
Common stock, $0.001 par value; 500,000,000 and 72,565,312 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 36,472,223 and 4,779,356 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | |||||||
Additional paid-in capital | |||||||
Accumulated deficit | ( | ) | ( | ) | |||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total stockholders’ equity (deficit) | ( | ) | |||||
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) | $ | $ | |||||
____________________
(1) | Includes amounts attributable to related party transactions. See Note 17 for further details. |
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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue(1): | |||||||||||||||
Technology | $ | $ | $ | $ | |||||||||||
Professional services | |||||||||||||||
Total revenue | |||||||||||||||
Cost of revenue, excluding depreciation and amortization(1): | |||||||||||||||
Technology | |||||||||||||||
Professional services | |||||||||||||||
Total cost of revenue, excluding depreciation and amortization | |||||||||||||||
Operating expenses(1): | |||||||||||||||
Sales and marketing | |||||||||||||||
Research and development | |||||||||||||||
General and administrative | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Total operating expenses | |||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss on extinguishment of debt | ( | ) | |||||||||||||
Interest and other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Income tax provision (benefit) | ( | ) | |||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Less: accretion (reversal of accretion) of redeemable convertible preferred stock | ( | ) | |||||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted | |||||||||||||||
__________________
(1) | Includes amounts attributable to related party transactions. See Note 17 for further details. |
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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Other comprehensive loss: | |||||||||||||||
Unrealized gain (loss) on investments | ( | ) | ( | ) | |||||||||||
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 Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)
(unaudited)
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Accretion of redeemable convertible preferred stock | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
Conversion of redeemable convertible preferred stock | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||
Initial public offering, net of underwriters’ discounts and commissions and offering costs | — | — | — | — | ||||||||||||||||||||||||||
Exercise of common stock warrants | — | — | — | — | — | — | — | |||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Balance as of September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Issuance of Series F redeemable convertible preferred stock, net of issuance costs of $115 | — | — | — | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Accretion of redeemable convertible preferred stock | — | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||||||
Conversion of redeemable convertible preferred stock | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||
Initial public offering, net of underwriters’ discounts and commissions and offering costs | — | — | — | — | ||||||||||||||||||||||||||
Exercise of common stock warrants | — | — | — | — | — | — | — | |||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Balance as of September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit
(in thousands, except share data)
(unaudited)
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive gain | — | — | — | — | — | — | ||||||||||||||||||||||||
Accretion of redeemable convertible preferred stock | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||
Balance as of September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of December 31, 2017 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
Issuance of Series E redeemable convertible preferred stock, net of issuance costs of $13 | — | — | — | — | — | — | ||||||||||||||||||||||||
Repurchase of common stock | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Exercise of stock options | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive gain | — | — | — | — | — | — | ||||||||||||||||||||||||
Reversal of accretion of redeemable convertible preferred stock | — | ( | ) | — | — | — | — | |||||||||||||||||||||||
Balance as of September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities | |||||||
Net loss | $ | ( | ) | $ | ( | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | |||||||
Loss on extinguishment of debt | |||||||
Amortization of debt discount and issuance costs | |||||||
Investment discount and premium amortization | ( | ) | ( | ) | |||
Change in fair value of warrant liability | ( | ) | |||||
Gain on sale of property and equipment | ( | ) | ( | ) | |||
Stock-based compensation expense | |||||||
Change in operating assets and liabilities: | |||||||
Accounts receivable, net | ( | ) | ( | ) | |||
Deferred costs | ( | ) | |||||
Prepaid expenses and other assets | ( | ) | ( | ) | |||
Operating lease right-of-use assets | ( | ) | |||||
Accounts payable, accrued liabilities, and other liabilities | |||||||
Deferred revenue | |||||||
Operating lease liabilities | ( | ) | |||||
Net cash used in operating activities | ( | ) | ( | ) | |||
Cash flows from investing activities | |||||||
Purchases of property and equipment | ( | ) | ( | ) | |||
Proceeds from the sale of property and equipment | |||||||
Purchase of short-term investments | ( | ) | ( | ) | |||
Proceeds from the sale and maturity of short-term investments | |||||||
Purchase of intangible assets | ( | ) | ( | ) | |||
Net cash (used in) provided by investing activities | ( | ) | |||||
Cash flows from financing activities | |||||||
Proceeds from initial public offering, net of underwriters’ discounts and commissions | — | ||||||
Proceeds from the issuance of redeemable convertible preferred stock, net of issuance costs | |||||||
Proceeds from exercise of stock options | |||||||
Proceeds from employee stock purchase plan | — | ||||||
Repurchase of common stock | ( | ) | |||||
Payment of SVB line of credit and mezzanine loan | ( | ) | |||||
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Proceeds from credit facilities, net of debt issuance costs | |||||||
Payments of acquisition-related consideration | ( | ) | ( | ) | |||
Payments of deferred offering costs | ( | ) | |||||
Net cash provided by financing activities | |||||||
Net increase 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 | |||||||
Redeemable convertible preferred stock accretion (reversal of accretion) | $ | $ | ( | ) | |||
Deferred offering costs included in accounts payable and accrued liabilities | |||||||
Series E redeemable convertible preferred stock allocated to business combination | |||||||
Purchase of intangible assets included in accounts payable and accrued liabilities | |||||||
Purchase of property and equipment included in accounts payable and accrued liabilities | |||||||
Supplemental disclosures of cash flow information related to leases | |||||||
Cash paid for operating lease liabilities in operating cash flows | $ | $ | |||||
Operating lease right-of-use assets obtained in exchange for operating lease obligations | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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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 a cloud-based data platform, analytics software, and professional services expertise. Our customers, 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 accounting principles generally accepted in the United States (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 U.S. GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2018 included in the Prospectus.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated balance sheet as of September 30, 2019, the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018, the interim condensed consolidated statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the three and nine months ended September 30, 2019, and the interim condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. The condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by GAAP. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the 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, 2019 are not necessarily indicative of the results to be expected for the full year or any other period.
Initial Public Offering
On July 29, 2019, we closed our initial public offering of common stock (IPO) in which we issued and sold 8,050,000 shares (inclusive of the underwriters’ over-allotment option to purchase 1,050,000 shares, which was exercised on July 25, 2019) of common stock at $26.00 per share. We received net proceeds of $194.6 million after deducting underwriting discounts and commissions and before deducting offering costs of $4.6 million. Upon the closing of our IPO, all shares of our outstanding redeemable convertible preferred stock converted into 23,151,481 shares of common stock on a one-for-one basis.
Stock Split
On July 10, 2019, we effected a 1-for-2 reverse stock split of our capital stock. We have adjusted all references to share and per share amounts in the accompanying condensed consolidated financial statements and notes to reflect the reverse stock split.
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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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 accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, provisions for doubtful accounts, useful lives of property and equipment, capitalization and estimated useful life of internal-use software and other intangible assets, fair value of financial instruments, deferred tax assets, common stock warrants, redeemable convertible preferred stock accretion, stock-based compensation, and tax uncertainties. Actual results could differ from those estimates.
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 (the CODM) in assessing performance and making decisions regarding resource allocation. We operate our business in two operating segments that also represent our reportable segments. Our segments are (1) technology and (2) professional services. The CODM uses Adjusted Gross Profit (defined as revenue less cost of revenue that excludes depreciation, amortization, stock-based compensation expense, and certain other operating expenses) as the measure of our profit.
Net loss per share
Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. Net loss attributable to common stockholders is computed as net loss less accretion (reversal of accretion) of redeemable convertible preferred stock. Diluted net loss per share attributable to common stockholders is calculated by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, stock options, restricted stock units (RSUs), purchase rights committed under the employee stock purchase plan, and warrants to purchase common stock 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 antidilutive.
Prior to our IPO, we computed basic and diluted net loss per share in conformity with the two-class method required for participating securities. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to holders of common stock. Redeemable convertible preferred stock and common stock were considered participating securities for purposes of this calculation. However, the two-class method did not impact the net loss per common share attributable to common stockholders as we were in a loss position for each of the periods presented and the redeemable convertible preferred stockholders did not have a contractual obligation to participate in losses.
Revenue recognition
We recognize revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606). We derive our revenues primarily from technology subscriptions and professional services. We determine revenue recognition by applying the following steps:
• | Identification of the contract, or contracts, with a customer; |
• | Identification of the performance obligations in the contract; |
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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
• | 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 customers and subsequently remitted to governmental authorities.
Technology revenue
Technology revenue primarily consists of subscription fees charged to customers for access to use our technology. We provide customers 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 customers the right to take possession of the technology or contain a significant penalty if the customer 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 customer. Most of our subscription contracts have up to a three-year term, of which the vast majority are terminable after one year upon 90 days’ notice.
Subscriptions that allow the customer 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 customer. 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 customer.
We also have certain perpetual license arrangements. Revenue from these arrangements is recognized at a point in time upon delivery of the software.
Technology revenue also includes maintenance and support revenue which generally includes bug fixes, updates, and support services. Revenue related to maintenance and support is recognized over the contract term beginning on the date that the service is made available to the customer.
Professional services revenue
Professional services revenue primarily includes data and analytics services, domain expertise services, outsourcing services, and implementation services. Professional services arrangements typically include a fee for making full-time equivalent (FTE) services available to our customers 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 customer. 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.
13
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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 customer 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 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 customers whereby we receive variable consideration based on the achievement of measurable improvements which 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 customers are recorded as unbilled accounts receivable and are presented on the 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, 2019 and December 31, 2018, the unbilled accounts receivable included in accounts receivable on our condensed consolidated balance sheets was $3.5 million and $3.4 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 customer. As of September 30, 2019 and December 31, 2018, the total of current and non-current deferred revenue on our condensed consolidated balance sheets was $39.6 million and $32.0 million, respectively.
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, 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.
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. As of September 30, 2019 and December 31, 2018, we had deferred contract fulfillment costs of $1.0 million and $0.6 million, respectively.
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.
14
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Short-term investments
Our investment policy limits investments to highly-rated instruments that mature in less than 12 months. We classify our short-term investments as available for sale.
Accounts receivable
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 | 2-3 years |
Furniture and fixtures | |
Leasehold improvements | Lesser of lease term or estimated useful life |
Computer software | 2-3 years |
Capitalized internal-use software costs | |
Intangible assets
Intangible assets include developed technologies, customer relationships, customer 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 | 2-10 years |
Customer relationships and contracts | |
Computer software licenses | 2-5 years |
Trademarks | |
15
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Goodwill
Deferred offering costs
Common stock warrants
We account for freestanding warrants to purchase shares of our common stock that are not considered indexed to our own stock as warrant liabilities on our condensed consolidated balance sheets until the point in time that they qualify for equity classification. We record liability-classified common stock warrants at their estimated fair value because they are free standing and the number of shares exercisable increases as we make advances on our credit facility.
At the end of each reporting period, we record the change in the estimated fair value of the warrants to purchase common stock as a change in fair value of warrant liability within interest and other expense, net in our condensed consolidated statements of operations. We reclassify the warrants from liability-classified to equity-classified as exercise contingencies related to the warrants become resolved.
Business combinations
Advertising costs
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.
16
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
We capitalize certain development costs incurred in connection with our internal-use software. These capitalized costs are primarily related to the software platforms that are hosted by us and accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred as research and development costs. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use.
We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life.
Stock-based compensation
Stock-based awards, including stock options and RSUs, are measured and recognized in the condensed consolidated financial statements based on the fair value of the award on the grant date. For awards subject to performance conditions, we record expense when the performance condition becomes probable. We record forfeitures of stock-based awards as the actual forfeitures occur.
We estimate the fair value of stock option awards on the grant date using the Black-Scholes option pricing model. We have issued two types of employee stock-based awards, standard and two-tier. Our standard stock-based awards vest solely on a service-based condition. For these awards, we recognize stock-based compensation expense on a straight-line basis over the vesting period. Two-tier employee stock-based awards, contain both a service-based condition and performance condition, defined as the earlier of (i) an acquisition or change in control of the company or (ii) upon the occurrence of an initial public offering by the Company. A change in control event and effective registration event are not deemed probable until consummated; accordingly, no expense is recorded related to two-tier stock-based awards until the performance condition becomes probable of occurring. Awards which contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring. The service-based condition is generally a service period of four years . Upon closing our IPO, we recorded cumulative share-based compensation expense of approximately $6.0 million using the accumulated attribution method for two-tier employee stock-based awards for which the service condition had been satisfied at that date.
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.
Prior to the adoption of ASU No. 2018-07, Compensation — Stock Compensation (ASU 2018-17), which simplifies the accounting for non-employee share-based payment transactions and is discussed below under “Accounting pronouncements adopted,” the fair value measurement date for non-employee awards was the date the performance of services was completed. Upon adoption of ASU 2018-07 on January 1, 2019, the measurement date for non-employee awards is the date of grant. The compensation expense for non-employees is recognized, without changes in the fair value of the award, in the same period and in the same manner as though we had paid cash for the services, which is typically the vesting period of the respective award.
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 credit carryforwards.
17
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (Tax Act) was enacted into law and the new legislation contains several key tax provisions that affect us, including the reduction of the corporate income tax rate to 21%, effective January 1, 2018. We were required to recognize the effect of the tax law changes in the period of enactment. As such, we remeasured our consolidated deferred tax assets and liabilities as of December 31, 2017 to reflect the lower rate and also reassessed the net realizability of those deferred tax assets and liabilities.
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 accrue interest and penalties related to unrecognized tax benefits within the provision for income taxes because we have NOLs. 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, such as the Tax Act, 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 the 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 acquisition-related consideration payable, operating lease liabilities, and long-term debt approximate fair value based on interest rates available for debt with similar terms at September 30, 2019 and December 31, 2018. Money market funds and short-term investments are measured at fair value on a recurring basis.
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. |
18
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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 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 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.
Accounting pronouncement adopted
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. We adopted ASU 2018-07 as of January 1, 2019 and applied the standard prospectively. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
Recent accounting pronouncements
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), that changes how companies will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, we will be required to record allowances rather than reduce the carrying amount. We are required to adopt ASU 2016-13 for annual and interim reporting periods beginning after December 15, 2019. Based on our preliminary assessment, we do not anticipate that the adoption of this ASU will have a material impact on our condensed consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, Intangibles-Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350), that simplifies how an entity is required to test goodwill for impairment by modifying the second step of the impairment test. The second step measures a goodwill impairment loss by comparing the fair value of a reporting unit to the carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the carrying amount of goodwill is reduced by the excess reporting unit carrying amount up to the carrying amount of the goodwill. Public business entities must adopt ASU 2017-04 for annual or interim goodwill impairment tests in reporting periods beginning after December 15, 2019. The guidance will apply to our reporting requirements in performing goodwill impairment testing; however, we do not anticipate the adoption of this guidance will have a material impact on our condensed consolidated financial statements.
19
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information prospectively, including the ranges used to develop significant unobservable inputs for Level 3 fair value measurements, and modifies some disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. We do not anticipate that the disclosure changes that result from this ASU will be material to our condensed consolidated financial statements.
2. Business Combinations
On June 29, 2018, we completed the purchase of Medicity LLC (Medicity) for consideration in the form of shares of Series E redeemable convertible preferred stock with an estimated fair value of $2.3 million from Aetna, Inc. The purchase of Medicity was consummated as part of an integrated transaction that included two components: (1) a $15 million Series E redeemable convertible preferred stock capital raise by us and (2) a business combination where we acquired 100 % of the membership interests in Medicity. The acquisition was accounted for as a business combination as specified under ASC 805, Business Combinations. In the integrated transaction, the consideration transferred was allocated between the business combination and the capital raise based on relative values as of June 29, 2018 of the $15 million cash received in the capital raise and the fair value of net identifiable assets received in the business combination.
The fair values of Medicity’s assets and liabilities were determined based on estimates and assumptions that are judgmental in nature, including the timing and amount of projected future cash flows and market-participant discount rates reflecting risks inherent in the future cash flows.
The following table summarizes the acquisition-date fair value of consideration transferred and the assets received and liabilities assumed as part of our acquisition of Medicity (in thousands):
Assets acquired: | |||
Accounts receivable | $ | ||
Prepaid expenses | |||
Property and equipment | |||
Computer software licenses | |||
Developed technologies | |||
Customer relationships and contracts | |||
Trademarks | |||
Total assets acquired | |||
Less liabilities assumed: | |||
Accounts payable and other current liabilities | |||
Deferred revenue | |||
Total liabilities assumed | |||
Total assets acquired, net | $ | ||
The intangibles assets acquired were valued utilizing the income approach and include customer relationships, developed technology, and trademarks with estimated useful lives of