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       .
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
Or
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-38993
HEALTH CATALYST, INC.
(Exact name of registrant as specified in its charter)
________________
Delaware45-3337483
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
3165 Millrock Drive #400
Salt Lake City, UT 84121
(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 classTrading Symbol(s)Name of exchange on which registered
Common Stock, par value $0.001 per shareHCATThe Nasdaq Global Select Market
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 FilerEmerging growth company
Non-accelerated FilerSmaller 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, 2020, the Registrant had 42,498,469 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;
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;

1


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 key 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 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 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, 2019, included in our Annual Report on Form 10-K.

2


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,
20202019
(unaudited)
Assets
Current assets:
Cash and cash equivalents$111,239 $18,032 
Short-term investments163,898 210,245 
Accounts receivable, net(1)
36,339 27,570 
Prepaid expenses and other assets11,290 8,392 
Total current assets322,766 264,239 
Property and equipment, net5,319 4,295 
Intangible assets, net105,926 25,535 
Operating lease right-of-use assets25,833 3,787 
Goodwill107,822 3,694 
Other assets2,997 810 
Total assets$570,663 $302,360 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$5,189 $3,622 
Accrued liabilities14,061 8,944 
Acquisition-related consideration payable(1)
3,214 2,192 
Deferred revenue(1)
35,090 30,653 
Operating lease liabilities2,425 2,806 
Contingent consideration liabilities5,893  
Total current liabilities65,872 48,217 
Long-term debt166,200 48,200 
Acquisition-related consideration payable, net of current portion(1)
 1,860 
Deferred revenue, net of current portion1,635 1,459 
Operating lease liabilities, net of current portion24,245 1,654 
Contingent consideration liabilities, net of current portion10,279  
Other liabilities2,817 326 
Total liabilities271,048 101,716 
Commitments and contingencies (Note 14)

3


Stockholders’ equity:
Preferred stock, $0.001 par value per share; 25,000,000 shares authorized and no shares issued and outstanding as of as of September 30, 2020 and December 31, 2019
  
Common stock, $0.001 par value per share; 500,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 42,239,922 and 36,678,854 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
42 37 
Additional paid-in capital982,139 811,049 
Accumulated deficit(682,632)(610,514)
Accumulated other comprehensive income66 72 
Total stockholders’ equity299,615 200,644 
Total liabilities and stockholders’ equity
$570,663 $302,360 
____________________
(1)Includes amounts attributable to related party transactions. See Note 16 for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements

4


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,
2020201920202019
Revenue(1):
Technology$27,964 $21,160 $78,150 $61,393 
Professional services19,227 18,263 57,416 50,047 
Total revenue47,191 39,423 135,566 111,440 
Cost of revenue, excluding depreciation and amortization:
Technology9,045 6,740 25,148 20,536 
Professional services15,307 11,892 46,401 33,132 
Total cost of revenue, excluding depreciation and amortization
24,352 18,632 71,549 53,668 
Operating expenses:
Sales and marketing14,629 14,721 40,618 35,579 
Research and development13,390 13,477 38,539 33,209 
General and administrative13,297 11,013 31,111 23,333 
Depreciation and amortization4,981 2,316 10,952 6,844 
Total operating expenses46,297 41,527 121,220 98,965 
Loss from operations(23,458)(20,736)(57,203)(41,193)
Loss on extinguishment of debt  (8,514)(1,670)
Interest and other expense, net(3,854)(659)(7,500)(2,924)
Loss before income taxes(27,312)(21,395)(73,217)(45,787)
Income tax (benefit) provision14 21 (1,218)43 
Net loss$(27,326)$(21,416)$(71,999)$(45,830)
Less: accretion of redeemable convertible preferred stock
 18,170  180,826 
Net loss attributable to common stockholders$(27,326)$(39,586)$(71,999)$(226,656)
Net loss per share attributable to common stockholders, basic and diluted
$(0.68)$(1.40)$(1.87)$(17.78)
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted
40,292 28,223 38,517 12,750 
__________________
(1)Includes amounts attributable to related party transactions. See Note 16 for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements

5


HEALTH CATALYST, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net Loss$(27,326)$(21,416)$(71,999)$(45,830)
Other comprehensive income (loss):
Change in unrealized gain on investments(128)(21)(18)(11)
Change in foreign currency translation adjustment19  12 
Comprehensive loss$(27,435)$(21,437)$(72,005)$(45,841)

The accompanying notes are an integral part of these condensed consolidated financial statements

6


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, 2020
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive IncomeTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance as of June 30, 2020 $ 38,729,662 $39 $889,054 $(655,306)$175 $233,962 
Issuance of common stock as consideration for acquisitions— — 2,079,567 2 69,123 — — 69,125 
Vesting of restricted stock units and restricted shares— — 82,641 — — — — — 
Exercise of stock options— — 1,348,052 1 14,382 — — 14,383 
Stock-based compensation— — — — 9,580 — — 9,580 
Net loss— — — — — (27,326)— (27,326)
Other comprehensive loss— — — — — — (109)(109)
Balance as of September 30, 2020 $ 42,239,922 $42 $982,139 $(682,632)$66 $299,615 

Three Months Ended September 30, 2019
Redeemable Convertible Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance as of June 30, 201923,151,481 $584,574 5,002,426 $5 $ $(557,163)$9 $(557,149)
Exercise of stock options— — 78,357 — 552 — — 552 
Stock-based compensation— — — — 9,974 — — 9,974 
Accretion of redeemable convertible preferred stock— 18,170 — — (501)(17,669)— (18,170)
Conversion of redeemable convertible preferred stock(23,151,481)(602,744)23,151,481 23 602,721 — — 602,744 
Initial public offering, net of underwriters’ discounts, commissions, and offering costs— — 8,050,000 8 190,031 — — 190,039 
Exercise of common stock warrants— — 189,959 — — — — — 
Net loss— — — — — (21,416)— (21,416)
Other comprehensive loss— — — — — — (21)(21)
Balance as of September 30, 2019 $ 36,472,223 $36 $802,777 $(596,248)$(12)$206,553 

The accompanying notes are an integral part of these condensed consolidated financial statements



7


HEALTH CATALYST, INC.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share data)(unaudited)
Nine Months Ended September 30, 2020
Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive IncomeTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance as of December 31, 2019 $ 36,678,854 $37 $811,049 $(610,514)$72 $200,644 
Adoption of the current expected credit loss standard— — — — — (119)— (119)
Issuance of common stock as consideration for acquisitions— — 2,190,229 2 72,455 — — 72,457 
Equity component of convertible senior notes, net of issuance costs
— — — — 61,213 — — 61,213 
Purchase of Capped Calls concurrent with issuance of convertible senior notes— — — — (21,743)— — (21,743)
Issuance of common stock under employee stock purchase plan
— — 97,113 — 2,408 — — 2,408 
Vesting of restricted stock units and restricted shares— — 157,333 — — — — — 
Exercise of stock options
— — 3,116,393 3 29,390 — — 29,393 
Stock-based compensation
— — — — 27,367 — — 27,367 
Net loss— — — — — (71,999)— (71,999)
Other comprehensive loss— — — — — — (6)(6)
Balance as of September 30, 2020 $ 42,239,922 $42 $982,139 $(682,632)$66 $299,615 

Nine Months Ended September 30, 2019
Redeemable Convertible Preferred StockCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance as of December 31, 201822,713,694 $409,845 4,779,356 $5 $ $(374,772)$(1)$(374,768)
Issuance of Series F redeemable convertible preferred stock, net of issuance costs of $115
437,787 12,073 — — — — — — 
Exercise of stock options— — 301,427 — 2,177 — — 2,177 
Stock-based compensation— — — — 13,028 — — 13,028 
Accretion of redeemable convertible preferred stock— 180,826 — — (5,180)(175,646)— (180,826)
Conversion of redeemable convertible preferred stock(23,151,481)(602,744)23,151,481 23 602,721 — — 602,744 
Initial public offering, net of underwriters’ discounts, commissions, and offering costs— — 8,050,000 8 190,031 — — 190,039 
Exercise of common stock warrants— — 189,959 — — — — — 
Net loss— — — — — (45,830)— (45,830)
Other comprehensive loss— — — — — — (11)(11)
Balance as of September 30, 2019 $ 36,472,223 $36 $802,777 $(596,248)$(12)$206,553 

The accompanying notes are an integral part of these condensed consolidated financial statements

8


HEALTH CATALYST, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20202019
Cash flows from operating activities
Net loss$(71,999)$(45,830)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization10,952 6,844 
Loss on extinguishment of debt8,514 1,670 
Amortization of debt discount and issuance costs5,260 797 
Non-cash operating lease expense2,865 2,696 
Investment discount and premium amortization854 (443)
Provision for expected credit losses822  
Stock-based compensation expense27,283 13,028 
Deferred tax benefit(1,280) 
Change in fair value of contingent consideration liabilities(1,004) 
Other85 (36)
Change in operating assets and liabilities:
Accounts receivable, net(4,450)(3,323)
Prepaid expenses and other assets(2,937)(1,362)
Accounts payable, accrued liabilities, and other liabilities
6,567 1,661 
Deferred revenue(838)7,601 
Operating lease liabilities(2,701)(2,426)
Net cash used in operating activities(22,007)(19,123)
Cash flows from investing activities
Purchase of short-term investments(163,346)(221,444)
Proceeds from the sale and maturity of short-term investments
208,467 37,277 
Acquisition of businesses, net of cash acquired(102,471) 
Purchases of property and equipment(2,071)(1,658)
Purchase of intangible assets(1,249)(1,747)
Proceeds from the sale of property and equipment10 40 
Net cash used in investing activities(60,660)(187,532)
Cash flows from financing activities
Proceeds from convertible senior notes, net of issuance costs222,482  
Purchase of capped calls concurrent with issuance of convertible senior notes(21,743) 
Proceeds from credit facilities, net of debt issuance costs 47,169 
Repayment of credit facilities(57,043)(21,821)
Proceeds from initial public offering, net of underwriters’ discounts and commissions 194,649 

9


Proceeds from the issuance of redeemable convertible preferred stock, net of issuance costs
 12,073 
Proceeds from exercise of stock options29,393 2,177 
Proceeds from employee stock purchase plan3,528 1,216 
Payments of acquisition-related consideration(748)(773)
Payments of deferred offering costs (4,407)
Net cash provided by financing activities175,869 230,283 
Effect of exchange rate changes5  
Net increase in cash and cash equivalents93,207 23,628 
Cash and cash equivalents at beginning of period18,032 28,431 
Cash and cash equivalents at end of period$111,239 $52,059 
Supplemental disclosures of non-cash investing and financing information
Redeemable convertible preferred stock accretion
$ $180,826 
Deferred offering costs included in accounts payable and accrued liabilities
 203 
Purchase of intangible assets included in accounts payable and accrued liabilities
 1,304 
Purchase of property and equipment included in accounts payable and accrued liabilities
1,364 155 
Operating lease right-of-use assets obtained in exchange for operating lease obligations
24,456 581 

The accompanying notes are an integral part of these condensed consolidated financial statements

10

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
Our 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 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, 2019 included in our Annual Report on Form 10-K.
Reclassifications
Certain prior year amounts on the condensed consolidated statements of cash flows have been reclassified to conform to the current year presentation. A reclassification was made to separately present the non-cash operating lease expense as a non-cash reconciling adjustment from net loss and the change in the operating lease liabilities due to cash payments as a change in operating assets and liabilities. This net change is not material and does not affect previously reported net cash used in operating activities in the condensed consolidated statements of cash flows. This reclassification had no effect on our other condensed consolidated financial statements for the nine months ended September 30, 2020 and 2019.
Interim Unaudited Condensed Consolidated Financial Statements
Our accompanying interim condensed consolidated balance sheet as of September 30, 2020, the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019, our interim condensed consolidated statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the three and nine months ended September 30, 2020 and 2019, and our interim condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited. Our condensed consolidated balance sheet as of December 31, 2019 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, 2020 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.

11

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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.
Principles of consolidation
Our 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 expected credit losses, 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, 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 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 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), 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 antidilutive.
Since we have the intent and ability to settle the principal amount of our convertible senior notes in cash and any excess in shares of our common stock, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on net income (loss) per share, if applicable. The conversion spread has a potentially dilutive impact when the average market price of our common stock for a given period exceeds $30.60 per share. The capped calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.



12

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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;
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 DOS 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.

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, 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. 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 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, 2020 and December 31, 2019, the unbilled accounts receivable included in accounts receivable on our condensed consolidated balance sheets was $1.9 million and $2.9 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 customer. As of September 30, 2020 and December 31, 2019, the total of current and non-current deferred revenue on our condensed consolidated balance sheets was $36.7 million and $32.1 million, respectively.




14

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Deferred Costs
We capitalize sales commissions, and associated fringe costs, such as payroll taxes, paid to direct sales personnel and other incremental costs of obtaining contracts with customers, 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 customer contract. As of September 30, 2020, $0.4 million of deferred commissions are expected to be amortized within the next 12 months and are included in prepaid expenses and other assets on the consolidated balance sheets. The remaining $1.1 million of deferred commissions 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 customer life, the rate of technological change in our subscription service, and the impact of competition in our industry. As our average customer 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 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. As of September 30, 2020 and December 31, 2019, $0.3 million and $0.9 million, respectively, of deferred fulfillment costs were included in prepaid expenses and other assets on the condensed consolidated balance sheets. 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, 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.
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.


15

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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. We adopted ASU 2016-13 effective January 1, 2020. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates, which results in earlier recognition of credit losses. The allowance is based on our estimate of expected credit losses for outstanding trade accounts receivables and unbilled receivables. We determine expected credit losses based on historical write-off experience, an analysis of the aging of outstanding receivables, customer payment patterns, the establishment of specific reserves for customers in an adverse financial condition, and our expectations of changes in macro-economic conditions, including the current COVID-19 pandemic, that may impact the collectability of outstanding receivables. We reassess the adequacy of the allowance for credit losses each reporting period. The following table presents a rollforward of the allowance for credit losses (in thousands):
Allowance for Credit Losses on Accounts Receivable
Balance at January 1, 2020
$534 
Current period provision for expected credit losses822 
Less: Write-offs, net of recoveries(170)
Balance at September 30, 2020
$1,186 
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 and amortization 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 fixtures3 years
Leasehold improvementsLesser of lease term or estimated useful life
Computer software
2-3 years
Capitalized internal-use software costs
2-3 years
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 life of the primary long-lived asset in that group plus any residual value. If the carrying amount of the asset group exceeds its estimated undiscounted future net cash flows plus residual value, an impairment charge is recognized based on the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets. We did not incur any long-lived impairment charges for the three and nine months ended September 30, 2020 and 2019.


16

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Intangible assets
Intangible assets include developed technologies, customer relationships, customer contract backlog, 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 contract backlog
2-7 years
Computer software licenses
2-5 years
Trademarks
2-5 years
Goodwill
We continually evaluate potential acquisitions that either strategically fit within our existing portfolio or expand our portfolio into new product lines or adjacent markets. We have completed a number of acquisitions that have been accounted for as business combinations under ASC 805, Business Combinations, and have resulted in the recognition of goodwill in our condensed consolidated financial statements. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, customer 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. 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 is assessed for impairment annually or more frequently if indicators of impairment are present or circumstances suggest that impairment may exist.
As of January 1, 2020, we adopted ASU 2017-04, which simplifies the goodwill impairment test by eliminating the second step from the goodwill impairment test. The first step of the goodwill impairment test compares 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. If the carrying amount of the reporting unit exceeds its fair value, we would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Business combinations
We account for an acquisition as a business combination if we obtain control of a business. Assets and liabilities acquired in a business combination generally are recorded at fair value and any associated acquisition costs are expensed as incurred in general and administrative expenses. Fair value estimates related to business combinations are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. Significant estimation is required by management in determining the fair value of the customer relationship 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. Significant inputs include the amount of cash flows, the expected period of the cash flows, and the discount rates. The significant assumptions used to estimate the fair value of the intangible assets included revenue growth rates, customer attrition rates, amount and expected period of cash flows, replacement costs, and discount rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
During the three and nine months ended September 30, 2020, we expensed $1.4 million and $2.7 million, respectively, of acquisition transaction costs related to acquisitions as incurred that are included in general and administrative expense in our condensed consolidated statements of operations.

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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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. Changes to the unobservable inputs could have a material impact on our condensed consolidated financial statements. We value the expected contingent consideration and the corresponding liabilities using the Monte Carlo method based on estimates of potential pay-out 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, and volatility in the fair value of our common stock.
The portion of the contingent consideration liabilities that will be settled in shares of our common stock are classified as a component of non-current liabilities in our consolidated balance sheets, while the portion to paid in cash are classified as a component of current liabilities. Changes to the contingent consideration liabilities are reflected as part of general and administrative expense in our consolidated statements of operations.
Advertising costs
All advertising costs are expensed as incurred. We recorded advertising costs of $2.2 million and $3.4 million for the three months ended September 30, 2020 and 2019, respectively, and $3.2 million and $4.5 million for the nine months ended September 30, 2020 and 2019, respectively.
Development costs and internal-use software
For technology products that are developed to be licensed 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. 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 our 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 was recorded related to two-tier stock-based awards until the performance condition became probable of occurring.

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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Awards that contain both service-based and performance conditions were 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.
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.
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.
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 Cuts and Jobs Act of 2017, 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 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, 2020 and December 31, 2019. 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.

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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.
Leases
We determine if an arrangement is a lease and determine the lease classification as of the lease commencement date. 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 pronouncements adopted
Goodwill impairment
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 eliminating the second step of the impairment test. The first 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. We adopted ASU 2017-04 as of January 1, 2020. The guidance applies to our reporting requirements in performing goodwill impairment testing; however, the adoption of this guidance did not have an impact on our condensed consolidated financial statements and related disclosures.

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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Fair value measurements
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. We adopted ASU 2018-13 as of January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
Credit losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which required the measurement and recognition of expected credit losses for certain financial instruments, which includes our accounts receivable and available-for-sale debt securities. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates, which results in earlier recognition of credit losses. We adopted ASU 2016-13 effective January 1, 2020. The adoption of the standard did not have a material impact on our condensed consolidated financial statements. The adoption adjustment was recorded to our accumulated deficit, as seen in our condensed consolidated statements of redeemable convertible preferred stock and stockholders’ equity.
Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. We prospectively adopted ASU 2018-15 effective January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
Recent accounting pronouncements not yet adopted
Accounting for income taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts the provisions of this standard will have on our condensed consolidated financial statements and related disclosures.
Accounting for convertible instruments
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The new standard simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The new standard removes certain settlement conditions that previously required derivative accounting. Consequently, more equity contracts will be permitted to qualify for the derivative scope exception.

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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
The new standard also simplifies the diluted net income per share calculation in certain areas and is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are currently evaluating the impacts the provisions of this standard will have on our condensed consolidated financial statements and related disclosures.

2. Business Combinations
The business acquisitions discussed below are included in our results of operations from their respective dates of acquisition.
Able Health, Inc.
On February 21, 2020, we acquired Able Health, Inc. (Able Health), a leading software-as-a-service provider of quality and regulatory measurement tracking and reporting to healthcare providers and risk-bearing entities, in a transaction accounted for as a business combination. The acquisition consideration transferred was $21.5 million and was comprised of net cash consideration of $15.2 million, Health Catalyst common shares with a fair value of $3.3 million, and contingent consideration based on achievement of Able Health specified incremental customer billings for the year ending December 31, 2020, with an initial fair value of $3.0 million. The acquisition consideration is subject to certain working capital escrow adjustments. The purchase resulted in Health Catalyst acquiring 100% ownership in Able Health. We believe this acquisition will strengthen Health Catalyst’s Quality and Regulatory Measures capabilities.
An additional 179,392 shares of our common stock subject to restriction agreements, or restricted shares, were issued pursuant to the terms of the acquisition agreement and 60,000 restricted stock units were issued in connection with the acquisition agreement. The value of these restricted shares and restricted stock units will be recognized as post-combination stock-based compensation expense over their respective vesting terms. The vesting of the restricted shares is subject to one year of continuous service by the applicable team members and shall vest on the one-year anniversary of the acquisition closing date and the service-based condition for the restricted stock units issued pursuant to the terms of the acquisition agreement is satisfied over two years with a 50% cliff vesting period of one year and ratable quarterly vesting thereafter. Refer to Note 12 for additional details related to our stock-based compensation.
The preliminary allocation of the consideration transferred is based on a preliminary valuation and is subject to potential adjustments. Balances subject to adjustment primarily include tax-related matters, including tax basis of acquired assets and liabilities. During the measurement period, we may record adjustments to the provisional amounts recognized in our initial accounting for the acquisition. We expect the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date). There were no measurement period adjustments recorded during the three and nine months ended September 30, 2020.

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HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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 Able Health (in thousands):
Assets acquired:
Accounts receivable$633 
Prepaid expenses and other assets57 
Developed technologies7,500 
Customer relationships600 
Trademarks100 
Total assets acquired8,890 
Less liabilities assumed:
Accounts payable and other current liabilities91 
Deferred revenue762 
Net deferred tax liabilities1,280 
Total liabilities assumed2,133 
Total assets acquired, net6,757 
Goodwill14,725 
Total consideration transferred, net of cash acquired$