.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
For the quarterly period ended June 30, 2022
Or
For the transition period from _____ to _____
Commission File Number: 001-38993
(Exact name of registrant as specified in its charter)
________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices, including zip code)
(801 ) 708-6800
(Registrant’s telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | Emerging growth company | ||||||||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 28, 2022, the Registrant had 54,723,376 shares of common stock outstanding.
HEALTH CATALYST, INC.
Table of Contents
| Page | ||||||||
Special Note Regarding Forward-looking Statements
As used in this Quarterly Report on Form 10-Q, unless expressly indicated or the context otherwise requires, references to “Health Catalyst,” “we,” “us,” “our,” “the Company,” and similar references refer to Health Catalyst, Inc. and its consolidated subsidiaries. This Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (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;
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•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, macroeconomic challenges (including inflation) 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, 2021, included in our Annual Report on Form 10-K.
Summary of Risk Factors
•We operate in a highly competitive industry, and if we are not able to compete effectively, our business and results of operations will be harmed.
•We may be unable to successfully execute on our growth initiatives, business strategies, or operating plans.
•If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.
•The ongoing global coronavirus (COVID-19) pandemic and recently high inflationary environment could harm our business, results of operations, and financial condition.
•If we do not continue to innovate and provide services that are useful to customers and users, we may not remain competitive, and our revenue and results of operations could suffer.
•Our business could be adversely affected if our customers are not satisfied with our Solution.
•If our existing customers do not continue or renew their contracts with us, renew at lower fee levels or decline to purchase additional technology and services from us, it could have a material adverse effect on our business, financial condition, and results of operations.
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•Our Solution is dependent on our ability to source data from third parties, and such third parties could take steps to block our access to data, which could impair our ability to provide our Solution or limit the effectiveness of our Solution.
•Failure by our customers to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could harm our business.
•If our security measures are breached or unauthorized access to customer data is otherwise obtained or we cannot comply with evolving federal and state healthcare regulatory and data privacy laws and regulations, our Solution may be perceived as not being secure, customers may reduce the use of or stop using our Solution, and/or we may incur significant liabilities.
•Our results of operations have in the past fluctuated and may continue to fluctuate significantly, and if we fail to meet the expectations of analysts or investors, our stock price and the value of an investment in our common stock could decline substantially.
•Our pricing may change over time and our ability to efficiently price our Solution will affect our results of operations and our ability to attract or retain customers.
•If our Solution fails to provide accurate and timely information, or if our content or any other element of our Solution is associated with faulty clinical decisions or treatment, we could have liability to customers, members, clinicians, or patients, which could adversely affect our results of operations.
•We rely on third-party providers, including Microsoft Azure, for computing infrastructure, network connectivity, and other technology-related services needed to deliver our Solution. Any disruption in the services provided by such third-party providers could adversely affect our business and subject us to liability.
•We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties, and our own systems for providing services to our users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, potentially require us to issue credits to our customers, and negatively impact our relationships with users or customers, adversely affecting our brand and our business.
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Part I. Financial Information
Item 1. Financial Statements
HEALTH CATALYST, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| As of June 30, | As of December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | |||||||||||
| Contingent consideration liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Contingent consideration liabilities, net of current portion | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 14) | |||||||||||
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| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Revenue(1): | |||||||||||||||||||||||
| Technology | $ | $ | $ | $ | |||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
Cost of revenue, excluding depreciation and amortization: | |||||||||||||||||||||||
| Technology | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
Total cost of revenue, excluding depreciation and amortization | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest and other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares outstanding used in calculating net loss per share, basic | |||||||||||||||||||||||
| Weighted-average shares outstanding used in calculating net loss per share, diluted | |||||||||||||||||||||||
(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
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Change in net unrealized gains (losses) on available for sale investments | ( | ( | |||||||||||||||||||||
| Change in foreign currency translation adjustment | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock related to acquisitions | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of contingent consideration | — | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
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HEALTH CATALYST, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| – | – | ( | – | ( | |||||||||||||||||||||||||||||||
| Vesting of restricted stock units | – | – | – | ||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | – | – | – | ||||||||||||||||||||||||||||||||
| Exercise of stock options | – | – | – | ||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | |||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of contingent consideration | – | – | – | ||||||||||||||||||||||||||||||||
| Issuance of common stock related to acquisitions | – | – | – | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | ( | – | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | – | – | – | – | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Vesting of restricted stock units and restricted shares | – | – | – | ||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan | – | – | – | ||||||||||||||||||||||||||||||||
| Exercise of stock options | – | – | |||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | |||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of contingent consideration | – | – | – | ||||||||||||||||||||||||||||||||
| Net loss | – | – | – | ( | – | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | – | – | – | – | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
9
HEALTH CATALYST, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash operating lease expense | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Amortization of investment discount and premium | |||||||||||
| Provision for expected credit losses | |||||||||||
| Deferred tax provision (benefit) | ( | ||||||||||
| Change in fair value of contingent consideration liabilities | ( | ||||||||||
| Other | ( | ( | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
Accounts payable, accrued liabilities, and other liabilities | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Contingent consideration liabilities | ( | ( | |||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
Proceeds from the sale and maturity of short-term investments | |||||||||||
| Purchase of short-term investments | ( | ( | |||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Capitalization of internal-use software | ( | ( | |||||||||
| Purchase of intangible assets | ( | ( | |||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
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| Cash flows from financing activities | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Payments of acquisition-related consideration | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosures of non-cash investing and financing information | |||||||||||
| Common stock issued in connection with acquisitions | $ | $ | |||||||||
| Common stock issued for settlement of contingent consideration | |||||||||||
Purchase of intangible assets included in accounts payable and accrued liabilities | |||||||||||
| Stock-based compensation capitalized as internal-use software | |||||||||||
| Purchase of property and equipment included in accounts payable and accrued liabilities | |||||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease obligations | |||||||||||
| Capitalized internal-use software included in accounts payable and accrued liabilities | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
11
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Nature of operations
Health Catalyst, Inc. (Health Catalyst) was incorporated under the laws of Delaware in September 2011. We are a leading provider of data and analytics technology and services to healthcare organizations. Our Solution comprises a cloud-based data platform, analytics software, and professional services expertise. Our customers, which are primarily healthcare providers, use our Solution to manage their data, derive analytical insights to operate their organization, and produce measurable clinical, financial, and operational improvements.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the applicable regulations of the U.S. Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021 included in our Annual Report on Form 10-K.
Interim unaudited condensed consolidated financial statements
The accompanying interim condensed consolidated balance sheet as of June 30, 2022, the interim condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021, our interim condensed consolidated statements of stockholders' equity for the three and six months ended June 30, 2022 and 2021, and our interim condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 are unaudited. Our condensed consolidated balance sheet as of December 31, 2021 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 six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other period.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Health Catalyst and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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 significantly differ from those estimates.
12
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
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, including shares issuable as acquisition-related contingent consideration when dilutive. For purposes of this calculation, stock options, restricted stock units (RSUs), performance-based restricted stock units (PRSUs), convertible senior notes, restricted shares, and purchase rights committed under the employee stock purchase plan are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is 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. Our subscription contracts generally have a or five-year term, of which many are terminable after one year upon 90 days’ notice.
Subscriptions that allow the 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.
13
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 customers. 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 generally use the residual estimation method due to a limited number of standalone transactions and/or prices that are highly variable.
Variable consideration
We have also entered into at-risk and shared savings arrangements with certain 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 June 30, 2022 and December 31, 2021, the unbilled accounts receivable included in accounts receivable on our condensed consolidated balance sheets was $0.5 million and $0.8 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 June 30, 2022 and December 31, 2021, the total of current and non-current deferred revenue on our condensed consolidated balance sheets was $61.4 million and $57.6 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 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 June 30, 2022 and December 31, 2021, $1.2 million and $1.4 million, respectively, of deferred contract acquisition costs are expected to be amortized within the next 12 months and are included in prepaid expenses and other assets on the consolidated balance sheets. As of June 30, 2022 and December 31, 2021, the remaining $2.2 million and $3.0 million, respectively, of deferred contract acquisition costs are included in non-current other assets.
Commissions paid upon the initial acquisition of a contract are amortized on a straight-line basis over an estimated period of benefit of four years . Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition. The period of benefit was estimated by considering factors such as estimated average 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.
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.
15
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
| Allowance for Credit Losses on Accounts Receivable | |||||
| (unaudited) | |||||
Balance at January 1, 2022 | $ | ||||
| Current period provision for expected credit losses | |||||
Balance at June 30, 2022 | $ | ||||
Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation. Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of each asset category is as follows:
| Computer equipment | |||||
| Furniture and fixtures | |||||
| Leasehold improvements | Lesser of lease term or estimated useful life | ||||
| Computer software | |||||
| Capitalized internal-use software costs | |||||
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 | |||||
| Customer relationships and contract backlog | |||||
| Computer software licenses | |||||
| Trademarks | |||||
16
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
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.
Business combinations
The results of businesses acquired in a business combination are included in our condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair value on the acquisition date. Any excess consideration 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 material assets acquired and liabilities assumed in a business combination.
We expensed $1.2 million and $1.2 million of transaction costs associated with business combinations during the three months ended June 30, 2022 and 2021, respectively, and $2.9 million and $1.2 million for the six months ended June 30, 2022 and 2021, 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.
17
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Development costs and internal-use software
For technology products that are developed to be sold externally, we determined that technological feasibility is reached shortly before the products are ready for general release. Any costs associated with software development between the time technological feasibility is reached and general release are inconsequential.
Stock-based compensation
Stock-based awards, including stock options, restricted stock units, performance-based restricted stock units, and restricted shares are measured and recognized in our condensed consolidated financial statements based on the fair value of the award on the grant date. The grant date fair value of our stock-based awards is typically determined using the market closing price of our common stock on the date of grant; however, we also consider whether any adjustments are required when the market closing price does not reflect certain material non-public information that we know but is unavailable to marketplace participants on the date of grant.
We record forfeitures of stock-based awards as the actual forfeitures occur. For awards subject to performance conditions, we record expense when the performance condition becomes probable. Each reporting period, we evaluate the probability of achieving the performance criteria, estimate the number of shares that are expected to vest, and adjust the related compensation expense accordingly.
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.
18
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Income taxes
Deferred income tax balances are accounted for using the asset and liability method and reflect the effects of temporary differences between the financial reporting and tax bases of our assets and liabilities using enacted tax rates expected to apply when taxes are actually paid or recovered. In addition, deferred tax assets and liabilities are recorded for net operating loss (NOL) and tax credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized based on all available positive and negative evidence. Such evidence includes, but is not limited to, recent cumulative earnings or losses, expectations of future taxable income by taxing jurisdiction, and the carry-forward periods available for the utilization of deferred tax assets.
We use a two-step approach to recognize and measure uncertain income tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained upon audit. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. We do not currently accrue interest and penalties related to unrecognized tax benefits within the provision for income taxes because the impact would be immaterial due to our net operating losses and tax credit carryforwards. Significant judgment is required to evaluate uncertain tax positions.
Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We evaluate our uncertain tax positions on a regular basis and evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Fair value of financial instruments
The carrying amounts reported in our condensed consolidated balance sheets for cash, receivables, accounts payable, and current accrued expenses approximate fair values because of the immediate or short-term maturity of these financial instruments. The carrying value of contingent consideration liabilities, operating lease liabilities, and convertible senior notes approximate fair value based on interest rates available for debt with similar terms at June 30, 2022 and December 31, 2021. 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.
19
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, operating lease liabilities, and operating lease liabilities, net of current portion in our condensed consolidated balance sheets. We have adopted the short-term lease recognition exemption policy. All of our leasing commitments are classified either as operating leases or otherwise qualify as short-term leases with lease terms of 12 months or less.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at their 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.
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 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 are 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 adopted this standard using the modified retrospective approach as of January 1, 2022.
Adoption of the new standard resulted in significant classification changes to our condensed consolidated balance sheet as of January 1, 2022, including a decrease to Accumulated deficit of $17.2 million and a decrease to Additional paid-in capital of $61.2 million related to amounts attributable to the conversion premium that had previously been recorded in equity. We also recorded a net increase to the convertible senior notes balance of $44.0 million due to the reclassification of the conversion premium from equity to debt.
20
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
The adoption of this standard reduced our reported non-cash interest expense as we no longer record amortization of the debt discount. As we expect continued net losses in the near term, we do not expect significant changes to our diluted net loss per share calculation presented in our condensed consolidated statements of operations. However, applying the if-converted method instead of the net share settlement or treasury stock method, which was being applied prior to January 1, 2022, resulted in a significant increase in the potentially dilutive securities related to convertible senior notes disclosed in the notes to the condensed consolidated financial statements after adopting the new standard. There was no other significant impact to our condensed consolidated financial statements and related disclosures as a result of the adoption of this standard.
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 requires that an entity (acquirer) recognize and measure contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination in accordance with Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. We early adopted ASU 2021-08 and have applied that ASU prospectively to business combinations occurring on or after January 1, 2022.
Prior to the adoption of the new standard, we recognized 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.
Recent accounting pronouncements not yet adopted
There have been no recent accounting pronouncements issued which are expected to have a material effect on our condensed consolidated financial statements. Management continues to monitor and review recently issued accounting guidance upon issuance.
2. Business Combinations
The business acquisitions discussed below are included in our results of operations from their respective dates of acquisition.
2022 acquisitions
ARMUS Corporation
On April 29, 2022, we acquired ARMUS Corporation (ARMUS), a clinical registry development and data management technology company based in Foster City, California. We accounted for the acquisition of ARMUS as a business combination. ARMUS provides data abstraction, data validation, data management, data submission, and data reporting services to support participation in clinical quality registries for healthcare institutions around the world, including health systems, payers, medical device companies, and premier medical societies. The acquisition consideration transferred was $9.4 million and was comprised of net cash consideration of $9.3 million and Health Catalyst common shares with a fair value of $0.1 million. The purchase resulted in Health Catalyst acquiring 100 % ownership in ARMUS.
An additional 235,330 shares of our common stock subject to a restriction agreement (restricted shares) were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
21
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the preliminary acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of ARMUS (in thousands):
| Assets acquired: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other assets | |||||
| ROU lease asset | |||||
| Developed technologies | |||||
| Customer relationships | |||||
| Trademarks | |||||
| Total assets acquired | |||||
| Less liabilities assumed: | |||||
| Accounts payable | |||||
| Accrued and other current liabilities | |||||
| Deferred revenue | |||||
| Lease liability | |||||
| Net deferred tax liabilities | |||||
| Total liabilities assumed | |||||
| Total assets acquired, net | |||||
| Goodwill | |||||
| Total consideration transferred, net of cash acquired | $ | ||||
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include developed technology, customer relationships, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of four years , six years , and three years , respectively. The resulting goodwill from the ARMUS acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.
The preliminary allocation of the consideration transferred is subject to potential adjustments. Balances subject to adjustment are primarily tax-related matters, including the tax basis of acquired assets and liabilities, and the settlement of net working capital. 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 June 30, 2022.
Pro forma financial information has not been presented for the ARMUS acquisition as the impact to our condensed consolidated financial statements was not material. The amount of revenue attributable to the acquired business of ARMUS was not material to our condensed consolidated statement of operations for the three and six months ended June 30, 2022. Income (loss) information for ARMUS after the acquisition date through June 30, 2022 is not presented as the ARMUS business was integrated into our operations immediately following the acquisition and is impracticable to quantify.
In addition to the purchase price, we agreed to make cash retention payments in an aggregate amount of $5.0 million to continuing ARMUS team members. The retention payments are generally subject to vesting based upon continued employment over a required service period of three years . Any forfeited retention payments are reallocated to remaining ARMUS team members until the aggregate amount of $5.0 million is fully paid. Such amounts are recorded as post-combination compensation expense and recognized on a straight-line basis over the relevant vesting terms. During the three months ended June 30, 2022, we recognized compensation expense of $1.2 million related to these retention payments. As of June 30, 2022, there is an additional $3.8 million of unrecognized compensation expense related to these retention payments expected to be recognized over a weighted-average period of 2.8 years.
22
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
KPI Ninja, Inc.
On February 24, 2022, we acquired KPI Ninja, Inc. (KPI Ninja), a leading provider of interoperability, enterprise analytics, and value-based care solutions based in Lincoln, Nebraska. We accounted for the acquisition of KPI Ninja as a business combination. KPI Ninja is known for its powerful capabilities, flexible configurations, and comprehensive applications designed to fulfill the promise of data-driven health care. The acquisition consideration transferred was $21.4 million and was comprised of net cash consideration of $18.5 million and Health Catalyst common shares with a fair value of $2.9 million. The purchase resulted in Health Catalyst acquiring 100 % ownership in KPI Ninja.
An additional 356,919 shares of our common stock subject to a restriction agreement (restricted shares) were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
The following table summarizes the preliminary acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of KPI Ninja (in thousands):
| Assets acquired: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other assets | |||||
| Property and equipment, net | |||||
| Developed technologies | |||||
| Customer relationships | |||||
| Trademarks | |||||
| Total assets acquired | |||||
| Less liabilities assumed: | |||||
| Accounts payable and other current liabilities | |||||
| Deferred revenue | |||||
| Net deferred tax liabilities | |||||
| Total liabilities assumed | |||||
| Total assets acquired, net | |||||
| Goodwill | |||||
| Total consideration transferred, net of cash acquired | $ | ||||
The acquired intangible assets were valued utilizing either an income approach or a cost approach as deemed most applicable, and include developed technology, customer relationships, and trademarks that will be amortized on a straight-line basis over their estimated useful lives of four years , six years , and five years , respectively. The resulting goodwill from the KPI Ninja acquisition was fully allocated to the technology reporting unit and is not deductible for income tax purposes.
The preliminary allocation of the consideration transferred 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 and six months ended June 30, 2022.
The amount of revenue attributable to the acquired business of KPI Ninja was not material to our condensed consolidated statement of operations for the three and six months ended June 30, 2022. Income (loss) information for KPI Ninja after the acquisition date through June 30, 2022 is not presented as the KPI Ninja business was integrated into our operations immediately following the acquisition and is impracticable to quantify.
23
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Pro forma financial information has not been presented for the KPI Ninja acquisition as the impact to our condensed consolidated financial statements was not material.
In addition to the purchase price, we agreed to make cash retention payments in an aggregate amount of $3.0 million to continuing KPI Ninja team members. The retention payments are subject to vesting based upon continued employment over a required service period of four years . Any forfeited retention payments are reallocated to remaining KPI Ninja team members until the aggregate amount of $3.0 million is fully paid. Such amounts are recorded as post-combination compensation expense and recognized on a straight-line basis over the relevant vesting terms. During the three and six months ended June 30, 2022, we recognized compensation expense of $0.2 million and $0.6 million, respectively, related to these retention payments. As of June 30, 2022, there was an additional $2.4 million of unrecognized compensation expense related to these retention payments expected to be recognized over a weighted-average period of 3.7 years.
2021 acquisition
Twistle, Inc.
On July 1, 2021, we acquired Twistle, Inc. (Twistle), a healthcare patient engagement SaaS technology company that, among other things, helps automate patient-centered, personalized, multi-channel communication between care teams and patients that aims to transform the patient experience, drive better care outcomes, and reduce healthcare costs. We accounted for the acquisition of Twistle 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 restricted shares were issued pursuant to the terms of the acquisition agreement. The value of these restricted shares is recognized as post-combination stock-based compensation expense on a straight-line basis over the vesting term. Refer to Note 12 for additional details related to our stock-based compensation.
The following table summarizes the acquisition-date fair value of consideration transferred and the identifiable assets purchased and liabilities assumed as part of our acquisition of Twistle (in thousands):
| Assets acquired: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other assets | |||||
| Property and equipment, net | |||||
| Developed technologies | |||||
| Customer relationships | |||||
| Trademarks | |||||
| Total assets acquired | |||||
| Less liabilities assumed: | |||||
| Accounts payable and other current liabilities | |||||
| Deferred revenue | |||||
| Net deferred tax liabilities | |||||
| Total liabilities assumed | |||||
| Total assets acquired, net | |||||
| Goodwill | |||||
| Total consideration transferred, net of cash acquired | $ | ||||
24
HEALTH CATALYST, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)