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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, 2021
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)
10897 South River Front Parkway #300
South Jordan UT 84095
(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 filerAccelerated 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 29, 2021, the Registrant had 52,055,293 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;
ability to compete successfully in competitive markets;

1


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, 2020, 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,
20212020
(unaudited)
Assets
Current assets:
Cash and cash equivalents$275,765 $91,954 
Short-term investments179,420 178,917 
Accounts receivable, net(1)
47,681 48,296 
Prepaid expenses and other assets12,471 10,632 
Total current assets515,337 329,799 
Property and equipment, net20,999 12,863 
Intangible assets, net113,590 98,921 
Operating lease right-of-use assets21,649 24,729 
Goodwill169,659 107,822 
Other assets4,279 3,606 
Total assets$845,513 $577,740 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$4,771 $5,332 
Accrued liabilities20,523 16,510 
Deferred revenue(1)
55,332 47,145 
Operating lease liabilities2,299 2,622 
Contingent consideration liabilities2,601 14,427 
Acquisition-related consideration payable 2,000 
Convertible senior notes, net177,837  
Total current liabilities263,363 88,036 
Convertible senior notes, net 168,994 
Deferred revenue, net of current portion1,131 1,878 
Operating lease liabilities, net of current portion21,947 23,669 
Contingent consideration liabilities, net of current portion7,632 16,837 
Other liabilities2,234 2,227 
Total liabilities296,307 301,641 
Commitments and contingencies (Note 14)

3


Stockholders’ equity:
Preferred stock, $0.001 par value per share; 25,000,000 shares authorized as of September 30, 2021 and December 31, 2020; no shares issued and outstanding as of September 30, 2021 and December 31, 2020
  
Common stock, $0.001 par value per share; 500,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 51,863,870 and 43,376,848 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
52 43 
Additional paid-in capital1,379,032 1,001,645 
Accumulated deficit(829,868)(725,650)
Accumulated other comprehensive (loss) income(10)61 
Total stockholders’ equity549,206 276,099 
Total liabilities and stockholders’ equity
$845,513 $577,740 
____________________
(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,
2021202020212020
Revenue(1):
Technology$38,262 $27,964 $107,630 $78,150 
Professional services23,475 19,227 69,580 57,416 
Total revenue61,737 47,191 177,210 135,566 
Cost of revenue, excluding depreciation and amortization:
Technology12,094 9,045 34,766 25,148 
Professional services20,992 15,307 55,711 46,401 
Total cost of revenue, excluding depreciation and amortization
33,086 24,352 90,477 71,549 
Operating expenses:
Sales and marketing20,808 14,629 53,164 40,618 
Research and development16,385 13,390 45,254 38,539 
General and administrative23,056 13,297 60,596 31,111 
Depreciation and amortization10,651 4,981 26,604 10,952 
Total operating expenses70,900 46,297 185,618 121,220 
Loss from operations(42,249)(23,458)(98,885)(57,203)
Loss on extinguishment of debt   (8,514)
Interest and other expense, net(4,423)(3,854)(12,082)(7,500)
Loss before income taxes(46,672)(27,312)(110,967)(73,217)
Income tax provision (benefit)(6,658)14 (6,749)(1,218)
Net loss$(40,014)$(27,326)$(104,218)$(71,999)
Net loss per share, basic and diluted$(0.82)$(0.68)$(2.27)$(1.87)
Weighted-average shares outstanding used in calculating net loss per share, basic and diluted48,999 40,292 45,937 38,517 
__________________
(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,
2021202020212020
Net Loss$(40,014)$(27,326)$(104,218)$(71,999)
Other comprehensive income (loss):
Change in net unrealized gains (losses) on available for sale investments32 (128)47 (18)
Change in foreign currency translation adjustment(74)19 (118)12 
Comprehensive loss$(40,056)$(27,435)$(104,289)$(72,005)

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

6


HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
Three Months Ended September 30, 2021
Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 202145,611,225 $46 $1,065,680 $(789,854)$32 $275,904 
Public offering, net of underwriters' discounts and commissions and offering costs4,882,075 5 245,175 — — 245,180 
Issuance of common stock as consideration for acquisitions762,765 1 43,103 — — 43,104 
Issuance of common stock for settlement of contingent consideration78,243 — 4,202 — — 4,202 
Vesting of restricted stock units and restricted shares257,504 — — — — — 
Exercise of stock options272,058 — 3,227 — — 3,227 
Stock-based compensation— — 17,645 — — 17,645 
Net loss— — — (40,014)— (40,014)
Other comprehensive loss— — — — (42)(42)
Balance as of September 30, 202151,863,870 $52 $1,379,032 $(829,868)$(10)$549,206 
Three Months Ended September 30, 2020
Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive IncomeTotal Stockholders’ Equity
SharesAmount
Balance as of June 30, 202038,729,662 $39 $889,054 $(655,306)$175 $233,962 
Issuance of common stock as consideration for acquisitions2,079,567 2 69,123 — — 69,125 
Vesting of restricted stock units82,641 — — — — — 
Exercise of stock options1,348,052 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, 202042,239,922 $42 $982,139 $(682,632)$66 $299,615 
The accompanying notes are an integral part of these condensed consolidated financial statements



7


HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
Nine Months Ended September 30, 2021
Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 202043,376,848 $43 $1,001,645 $(725,650)$61 $276,099 
Public offering, net of underwriters' discounts and commissions and offering costs4,882,075 5 245,175 — — 245,180 
Issuance of common stock as consideration for acquisitions762,765 1 43,103 — — 43,104 
Issuance of common stock for settlement of contingent consideration409,029  – 20,083  –  – 20,083 
Vesting of restricted stock units and restricted shares878,262 1  –  –  – 1 
Issuance of common stock under employee stock purchase plan70,239  – 2,609  –  – 2,609 
Exercise of stock options1,484,652 2 17,301  –  – 17,303 
Stock-based compensation –  – 49,116  –  – 49,116 
Net loss –  –  – (104,218) – (104,218)
Other comprehensive loss –  –  –  – (71)(71)
Balance as of September 30, 202151,863,870 $52 $1,379,032 $(829,868)$(10)$549,206 
Nine Months Ended September 30, 2020
Common StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive IncomeTotal Stockholders’ Equity
SharesAmount
Balance as of December 31, 201936,678,854 $37 $811,049 $(610,514)$72 $200,644 
Impact of adopting the current expected credit loss standard
— — — (119)— (119)
Issuance of common stock for acquisition consideration
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 related to 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
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, 202042,239,922 $42 $982,139 $(682,632)$66 $299,615 
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,
20212020
Cash flows from operating activities
Net loss$(104,218)$(71,999)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization26,604 10,952 
Loss on extinguishment of debt 8,514 
Amortization of debt discount and issuance costs8,843 5,260 
Impairment of lease-related assets1,800  
Non-cash operating lease expense3,165 2,865 
Investment discount and premium amortization678 854 
Provision for expected credit losses698 822 
Stock-based compensation expense48,724 27,283 
Deferred tax benefit(6,823)(1,280)
Change in fair value of contingent consideration liabilities13,655 (1,004)
Payment of acquisition-related contingent consideration(11,766) 
Other(17)85 
Change in operating assets and liabilities:
Accounts receivable, net1,021 (4,450)
Prepaid expenses and other assets(2,131)(2,937)
Accounts payable, accrued liabilities, and other liabilities
3,281 6,567 
Deferred revenue6,540 (838)
Operating lease liabilities(3,402)(2,701)
Net cash used in operating activities(13,348)(22,007)
Cash flows from investing activities
Purchases of property and equipment(9,827)(1,320)
Capitalization of internal-use software(3,641)(751)
Proceeds from the sale of property and equipment19 10 
Purchase of short-term investments(188,407)(163,346)
Proceeds from the sale and maturity of short-term investments
186,893 208,467 
Purchase of intangible assets(1,269)(1,249)
Acquisition of business, net of cash acquired(46,763)(102,471)
Net cash used in investing activities(62,995)(60,660)

9


Cash flows from financing activities
Proceeds from public offering, net of discounts, commissions, and offering costs 245,180  
Proceeds from convertible senior notes, net of issuance costs 222,482 
Purchase of capped calls related to issuance of convertible senior notes (21,743)
Proceeds from exercise of stock options17,303 29,393 
Proceeds from employee stock purchase plan3,975 3,528 
Repayment of credit facilities (57,043)
Payments of acquisition-related consideration(6,290)(748)
Net cash provided by financing activities260,168 175,869 
Effect of exchange rate changes on cash and cash equivalents(14)5 
Net increase in cash and cash equivalents183,811 93,207 
Cash and cash equivalents at beginning of period91,954 18,032 
Cash and cash equivalents at end of period$275,765 $111,239 
Supplemental disclosures of non-cash investing and financing information
Purchase of property and equipment included in accounts payable and accrued liabilities
$535 $1,364 
Common stock issued for settlement of contingent consideration20,083  
Common stock issued in connection with acquisitions43,104 72,457 
Stock-based compensation capitalized as internal-use software392 85 
Purchase of intangible assets included in accounts payable and accrued liabilities
500  
Operating lease right-of-use assets obtained in exchange for operating lease obligations
 24,456 

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, 2020 included in our Annual Report on Form 10-K.
Interim Unaudited Condensed Consolidated Financial Statements
Our accompanying interim condensed consolidated balance sheet as of September 30, 2021, the interim condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020, our interim condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and our interim condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited. Our condensed consolidated balance sheet as of December 31, 2020 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, 2021 are not necessarily indicative of the results to be expected for the full year or any other period.
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.

11

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Segment reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker (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 acquisition-related costs, net) as the measure of our profit.
Net loss per share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share is calculated by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, stock options, restricted stock units (RSUs), performance-based restricted stock units (PRSUs), convertible senior notes, restricted shares, shares issuable as acquisition-related contingent consideration, 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 as the effect is antidilutive.
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 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.

12

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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. 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, 2021 and December 31, 2020, the unbilled accounts receivable included in accounts receivable on our condensed consolidated balance sheets was $0.8 million and $1.6 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, 2021 and December 31, 2020, the total of current and non-current deferred revenue on our condensed consolidated balance sheets was $56.5 million and $49.0 million, respectively.

13

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Deferred Costs
We capitalize sales commissions and associated fringe costs, such as benefits and payroll taxes, paid to direct sales personnel and other incremental costs of obtaining contracts with 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, 2021 and December 31, 2020, $1.2 million and $0.5 million, respectively, of deferred contract acquisition costs are expected to be amortized within the next 12 months and were included in prepaid expenses and other assets on the condensed consolidated balance sheets. As of September 30, 2021 and December 31, 2020, the remaining $2.7 million and $1.4 million, respectively, of deferred contract acquisition costs were 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, 2021 and December 31, 2020, $0.1 million and $0.5 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. We classify and account for our short-term investments as available for sale securities as we may sell these securities at any time for use in our current operations or for other purposes, even prior to maturity. As a result, we classify our short-term investments, including securities with contractual maturities beyond twelve months, within current assets in the condensed consolidated balance sheets.

14

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. Our 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 ongoing 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
(unaudited)
Balance at January 1, 2021
$1,200 
Current period provision for expected credit losses698 
Less: Write-offs, net of recoveries(98)
Balance at September 30, 2021
$1,800 
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.
In September 2021, we subleased one floor of our corporate headquarters. We classified it as an operating lease. The initial sublease has a lease term of two years with the option of the sublessee to extend for an additional two years. We performed a recoverability test of the relevant asset group, comprised of operating lease right-of-use and other related assets, and determined that the carrying value of this asset group was not fully recoverable. As a result, we measured and recognized a $1.8 million impairment charge representing the amount by which the carrying value exceeded the estimated fair value of this asset group. The impairment charge was recorded as part of general and administrative expense in our condensed consolidated statements of operations. $1.3 million of the impairment charge was allocated to the ROU asset and the remaining $0.5 million was allocated to leasehold improvements and furniture and fixtures.





15

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation. Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of each asset category is as follows:
Computer equipment
2-3 years
Furniture and fixtures
3-5 years
Leasehold improvementsLesser of lease term or estimated useful life
Computer software
2-5 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 useful life of the primary asset in the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized based on the amount by which the carrying value of the long-lived assets exceeds the fair value of the assets. Other than the lease-related impairment described in the Leases paragraph above, we did not incur any long-lived impairment charges for the three and nine months ended September 30, 2021 and 2020.
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
3-10 years
Customer relationships and contracts
2-7 years
Computer software licenses
2-5 years
Trademarks
1-5 years
Goodwill
We record goodwill as the difference between the aggregate consideration paid for a business combination and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, 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. Goodwill is assessed for impairment annually or more frequently if indicators of impairment are present or circumstances suggest that impairment may exist.
Our first step in the goodwill impairment test is a qualitative analysis of factors that could be indicators of potential impairment. Next, if a quantitative analysis is necessary, we compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. 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. There was no impairment of goodwill for the three and nine months ended September 30, 2021 and 2020. 

16

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Business combinations
The results of businesses acquired in a business combination are included in our condensed consolidated financial statements from the date of acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair value on the acquisition date. Any excess consideration over the fair value of the identifiable assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. Significant estimation is required in determining the fair value of the customer-related intangible assets and technology-related intangible assets. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We typically use the income approach or cost approach to measure the fair value of intangible assets. The significant assumptions used to form the basis of the estimates included the number of engineer hours required to develop technology, expected revenue including revenue growth rates, rate and timing of obsolescence, royalty rates and earnings before interest, taxes, depreciation and amortization (EBITDA) margin used in the estimate for customer relationships, and backlog. Many of these significant assumptions were forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
We expensed $0.1 million and $1.4 million of transaction costs associated with business combinations during the three months ended September 30, 2021 and 2020, respectively, and $1.3 million and $2.7 million for the nine months ended September 30, 2021 and 2020, respectively. The costs were expensed as incurred and are included in general and administrative expense in our condensed consolidated statements of operations.
Contingent consideration liabilities
Our acquisition consideration in business combinations may include an estimate for contingent consideration that will be paid if certain earn-out performance targets are met. The resulting contingent consideration liabilities are categorized as a Level 3 fair value measurement because we estimate projections during the earn-out period utilizing unobservable inputs, including various potential pay-out scenarios based on billings and revenue-related earn-out targets. Changes to the unobservable inputs could have a material impact on our condensed consolidated financial statements. We generally value the expected contingent consideration and the corresponding liabilities using a probability model such as the Monte Carlo method based on estimates of potential 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, projected payment dates, and volatility in the fair value of our common stock. The fair value of the contingent consideration is remeasured each reporting period.
The portion of the contingent consideration liabilities that will be settled in shares of our common stock is classified as a component of non-current liabilities in our condensed consolidated balance sheets, while the portion to be paid in cash is classified as a component of current liabilities. Changes to the contingent consideration liabilities are reflected as part of general and administrative expense in our condensed consolidated statements of operations.




17

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Advertising costs
All advertising costs are expensed as incurred. We recorded advertising costs of $2.3 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively, and $3.0 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively. Advertising costs are included in sales and marketing expense in our condensed consolidated statements of operations.

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.
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 with the amortization included in depreciation and amortization expense in our condensed consolidated statements of operations.
Stock-based compensation
Stock-based awards, including stock options, restricted stock units, performance-based restricted stock units, and restricted shares are measured and recognized in our condensed consolidated financial statements based on the fair value of the award on the grant date. We record forfeitures of stock-based awards as the actual forfeitures occur. For awards subject to performance conditions, we record expense when the performance condition becomes probable. Each reporting period, we evaluate the probability of achieving the performance criteria, estimate the number of shares that are expected to vest, and adjust the related compensation expense accordingly.
We estimate the fair value of stock option awards on the grant date using the Black-Scholes option pricing model. 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. Awards that contain both service-based and performance conditions are recognized using the accelerated attribution method once the performance condition is probable of occurring. 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.

18

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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, 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 and operating lease liabilities approximate fair value based on interest rates available for debt with similar terms at September 30, 2021 and December 31, 2020. 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.
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.




19

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Foreign Currency
The functional currency of our international subsidiaries is generally their local currency. We translate these subsidiaries’ financial statements into U.S. dollars using month-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. We record translation gains and losses in accumulated other comprehensive loss in stockholders’ equity. We record foreign exchange gains and losses in interest and other expense, net. Our net foreign exchange gains and losses were not material for the periods presented.
Accounting pronouncements 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, 2020. 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 adopted ASU 2019-12 as of January 1, 2021 on a prospective basis. 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 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 also simplifies the diluted net income per share calculation, including a requirement to apply the if-converted method when calculating the potentially dilutive impact of convertible instruments. ASU 2020-06 is effective for annual and interim periods beginning after December 15, 2021 and we intend to adopt this standard using the modified retrospective method during the first quarter of 2022. Among other potential impacts, the adoption of this standard is expected to reduce our reported interest expense and result in a reclassification of certain conversion feature-related balance sheet amounts from stockholders’ equity to liabilities as it relates to our convertible senior notes. We are currently evaluating the full impact this standard will have on our condensed consolidated financial statements and related disclosures.

Accounting for business combinations

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 will require companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the full impact this standard will have on our condensed consolidated financial statements and related disclosures.


20

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
2. Business Combinations
The business acquisitions discussed below are included in our results of operations from their respective dates of acquisition.
2021 Acquisition
Twistle, Inc.
On July 1, 2021, we acquired Twistle, Inc. (Twistle), a healthcare patient engagement SaaS technology company that automates patient-centered, HIPAA-compliant communication between care teams and patients that aims to transform the patient experience, drive better care outcomes, and reduce healthcare costs, in a transaction accounted for as a business combination. The acquisition consideration transferred was $91.9 million and was comprised of net cash consideration of $46.7 million, Health Catalyst common shares with a fair value of $43.1 million, and contingent consideration based on certain earn-out performance targets for Twistle during an earn-out period that ends on June 30, 2022, with an initial fair value of $2.1 million. The purchase resulted in Health Catalyst acquiring 100% ownership in Twistle.
An additional 67,939 shares of our common stock subject to a restriction agreement, or restricted shares, were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
In connection with the acquisition, we also agreed to make deferred cash retention payments to continuing Twistle team members related to their unvested options previously granted or promised to be granted. The retention payments are subject to quarterly or cliff vesting based on continued employment over a required service period of between 12 and 18 months post-closing. Such amounts are not considered part of the purchase consideration and are being recorded as post-combination compensation expense on a straight-line basis over the relevant vesting terms. During the three and nine months ended September 30, 2021, we recognized compensation expense of $1.8 million related to these retention payments. As of September 30, 2021, there was an additional $8.4 million of unrecognized compensation expense related to these retention payments expected to be recognized over a weighted-average period of 1.2 years.
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 Twistle (in thousands):
Assets acquired:
Accounts receivable$1,106 
Prepaid expenses and other assets98 
Property and equipment, net57 
Developed technologies13,000 
Customer relationships23,700 
Trademarks20 
Total assets acquired37,981 
Less liabilities assumed:
Accounts payable and other current liabilities161 
Deferred revenue900 
Net deferred tax liabilities6,829 
Total liabilities assumed7,890 
Total assets acquired, net30,091 
Goodwill61,837 
Total consideration transferred, net of cash acquired$91,928 


21

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include customer relationships, developed technology, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of seven years, three years, and one year, respectively. The resulting goodwill from the Twistle acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.

The preliminary allocation of the consideration transferred is based on a preliminary valuation and is subject to potential adjustments. Balances subject to adjustment are primarily tax-related matters, including the 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 months ended September 30, 2021.

Pro forma financial information has not been presented for the Twistle acquisition as the impact to our condensed consolidated financial statements was not material. The amount of revenue attributable to the acquired business of Twistle was not material to our condensed consolidated statement of operations for the three and nine months ended September 30, 2021. Income (loss) information for Twistle after the acquisition date through September 30, 2021 is not presented as the Twistle business was integrated into our operations immediately following the acquisition and is impracticable to quantify.



22

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
2020 Acquisitions

Healthfinch, Inc.
On July 31, 2020, we acquired Healthfinch, Inc. (Healthfinch), which provides a workflow integration engine delivering insights and analytics into electronic medical record (EMR) workflows to automate physicians’ ability to close patient care gaps in real-time, in a transaction accounted for as a business combination. We believe this acquisition will strengthen our existing population health capabilities. The acquisition consideration transferred was $50.5 million and was comprised of net cash consideration of $16.9 million, Health Catalyst common shares with a fair value of $27.8 million, and contingent consideration based on certain earn-out performance targets for Healthfinch during an earn-out period that ended on July 31, 2021, with an initial fair value of $5.8 million. The purchase resulted in Health Catalyst acquiring 100% ownership in Healthfinch. Approximately 50% of the earn-out was settled for $1.7 million in cash and the issuance of 78,243 shares during the three months ended September 30, 2021 and we anticipate the remaining earn-out will be settled during the three months ended March 31, 2022.
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 Healthfinch (in thousands):
Assets acquired:
Accounts receivable$1,408 
Prepaid expenses and other assets347 
Developed technologies8,100 
Customer relationships and contract backlog10,000 
Trademarks200 
Total assets acquired20,055 
Less liabilities assumed:
Accounts payable and other current liabilities408 
Deferred revenue2,100 
Total liabilities assumed2,508 
Total assets acquired, net17,547 
Goodwill32,960 
Total consideration transferred, net of cash acquired$50,507 
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include customer relationships and contract backlog, developed technology, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of seven years, three years, and two years, respectively. The resulting goodwill from the Healthfinch acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.



23

HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Vitalware, LLC

On September 1, 2020, we acquired Vitalware, LLC (Vitalware), a provider of revenue workflow optimization and analytics SaaS technology solutions to healthcare organizations, in a transaction accounted for as a business combination. Vitalware’s flagship offering is a chargemaster management solution that delivers results for the complex regulatory and compliance functions needed by healthcare provider systems. Additionally, Vitalware brings to bear newer product suites to help health systems capture lost revenue and to support compliance with expanding pricing transparency regulation. The acquisition consideration transferred was $119.2 million and was comprised of net cash consideration of $69.6 million, Health Catalyst common shares with a fair value of $41.3 million, and contingent consideration based on certain earn-out performance targets for Vitalware during an earn-out period that ended on March 31, 2021, with an initial fair value of $8.3 million. The purchase resulted in Health Catalyst acquiring 100% ownership in Vitalware. The earn-out contingent consideration liability was settled during the three months ended June 30, 2021.
An additional 203,997 shares of our common stock subject to a restriction agreement, or restricted shares, were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares was recognized as post-combination stock-based compensation expense on a straight-line basis over the 12-month vesting term. 75% of these restricted shares vested on a monthly basis over a term of approximately one year with the remaining 25% vested on the one year anniversary of the acquisition closing date. Refer to Note 12 for additional details related to our stock-based compensation.
The following table summarizes the acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of Vitalware (in thousands):
Assets acquired:
Accounts receivable$3,220 
Prepaid expenses and other assets469 
Developed technologies18,000 
Customer relationships and contract backlog43,000 
Trademarks1,400 
Total assets acquired66,089 
Less liabilities assumed:
Accounts payable and other current liabilities766 
Deferred revenue2,589 
Total liabilities assumed3,355 
Total assets acquired, net62,734 
Goodwill56,443 
Total consideration transferred, net of cash acquired$119,177 
The acquired intangible assets were valued utilizing an income approach, and include customer relationships, contract backlog, developed technology, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of seven years, two years,