HEALTH CATALYST, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in "Risk Factors" and "Special Note Regarding Forward-looking Statements."
Overview
We are a leading provider of data and analytics technology and services to healthcare organizations and we currently employ more than 1,000 team members. 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. We envision a future where all healthcare decisions are data informed. Highlights from the three and nine months endedSeptember 30, 2020 : •We recognized total revenue of$47.2 million and$39.4 million for the three months endedSeptember 30, 2020 and 2019, respectively, and$135.6 million and$111.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The growth in revenue was primarily due to revenue from new customers, including customers of our recent acquired entities, and existing customers paying higher technology access fees from contractual, annual escalators. •We incurred net losses of$(27.3) million and$(21.4) million for the three months endedSeptember 30, 2020 and 2019, respectively, and$(72.0) million and$(45.8) million for the nine months endedSeptember 30, 2020 and 2019, respectively. •Our Adjusted EBITDA was$(6.4) million and$(8.4) million for the three months endedSeptember 30, 2020 and 2019, respectively, and$(16.6) million and$(20.9) million for the nine months endedSeptember 30, 2020 and 2019, respectively. See "Key Financial Metrics-Reconciliation of Non-GAAP Financial Measures" for more information about this financial measure, including the limitations of such measure and a reconciliation to the most directly comparable measure calculated in accordance with GAAP. See "Key Factors Affecting Our Performance" for more information about important opportunities and challenges related to our business. 43 -------------------------------------------------------------------------------- COVID-19 Impact InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. This pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, governments, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. COVID-19 has disrupted and we believe will continue to disrupt the normal operations of our customers, which are primarily healthcare providers. Given the unknown timeline and the near-term uncertainty of COVID-19 on our business, there continues to be uncertainty as to the extent to which the global COVID-19 pandemic may adversely impact our business operations, financial performance, and results of operations at this time. COVID-19 has also disrupted and we believe will continue to disrupt the normal operations of our customers, which are primarily healthcare providers. The current COVID-19 surge likely indicates that our country and national healthcare system will be under some amount of continued strain over the coming months. That said, we continue to be highly encouraged as we witness meaningful evidence that the healthcare provider ecosystem is significantly better equipped and prepared to respond to the ongoing pandemic, including through its treatment efficacy, supply chain logistics, capacity planning, and broader operational optimization. Likewise, we have observed that the vast majority of our customers and prospects are focusing meaningful mindshare beyond their COVID-19 response, as they've effectively adjusted financially and operationally and are refocusing on broader clinical, financial and operational improvement work once again. We are fortunate to have a highly recurring revenue model in which greater than 90% of our revenue is recurring in nature. As such, we expect that the near-term impact of COVID-19 on our total revenue will be relatively muted, as evidenced by our revenue performance for the nine months endedSeptember 30, 2020 . Additionally, we benefit from a high level of technology revenue predictability, especially our all-access DOS subscription customers that have built-in, contractual technology revenue escalators. We also have developed a number of technology and services solutions designed specifically to support healthcare providers during the COVID-19 pandemic. Importantly, since the onset of the COVID-19 pandemic, our customers' overall usage of our data platform has never been higher. Additionally, we have seen usage of our COVID-19-specific products meaningfully shift from those focused on COVID-19 preparedness to those focused on financial recovery and planning analytics in areas such as elective procedures, ambulatory care and revenue cycle. Given these factors, we would anticipate minimal impact on our technology dollar-based retention as a result of COVID-19. Regarding our professional services, we continue to see high levels of engagement of our team member base, which remain engaged on both COVID-19-recovery work as well as focusing on more general clinical, financial, and operational improvement work. That said, the financial strain imposed by COVID-19 on a number of our customers has led to a lower year-to-date professional services dollar-based retention and we would expect to have considerably lower full year 2020 professional services dollar based retention than we have achieved historically. The primary drivers for the decrease in our Adjusted Professional Services Gross Margin from 37% for the three months endedSeptember 30, 2019 to 25% for the three months endedSeptember 30, 2020 include the lower professional services dollar-based retention mentioned above, spillover from temporary professional services discounts provided to support our customers through the near-term financial strain they have experienced related to COVID-19, as well as some shift in the mix of professional services delivered. We signed multiple new DOS subscription customers during the nine months endedSeptember 30, 2020 . However, as a result of the financial and operational strain and procurement distraction realized by the majority of health systems during the nine months endedSeptember 30, 2020 due to the COVID-19 pandemic, our year-to-date 2020 number of net new DOS subscription customer additions was lower than we originally anticipated entering the year. Any negative impact to 2020 total revenue caused by the COVID-19 pandemic has resulted and may continue to result in a negative impact to our 2020 Adjusted EBITDA. We have and continue to plan to partially offset any negative total revenue impact through cost containment efforts, resulting in less of a negative Adjusted EBITDA impact compared to the negative total revenue impact. 44 -------------------------------------------------------------------------------- Importantly, in our response to the COVID-19 pandemic, we remain centrally committed to our team members, ensuring they stay at the center of the Health Catalyst Flywheel. As such, any cost containment efforts implemented will have a bias towards non-headcount related items. Over the long run, we cannot think of any event in recent history that has galvanized the awareness and importance of data and analytics more than COVID-19, and thus we believe it will serve as a meaningful tailwind in the industry's adoption of data and analytics. At the health system level, we are seeing meaningful evidence that COVID-19 is highlighting the need for a commercial grade data and analytics solution to replace patchwork homegrown systems. Key Financial Metrics We regularly review a number of metrics, including the following key financial metrics, to manage our business and evaluate our operating performance compared to that of other companies in our industry: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands, except percentages) (in thousands, except percentages) Total revenue$ 47,191 $ 39,423 $ 135,566 $ 111,440 Adjusted Technology Gross Profit$ 19,115 $ 14,484 $ 53,577 $ 40,986 Adjusted Technology Gross Margin 68 % 68 % 69 % 67 % Adjusted Professional Services Gross Profit $ 4,823$ 6,677 $ 13,624 $ 17,616 Adjusted Professional Services Gross Margin 25 % 37 % 24 % 35 % Total Adjusted Gross Profit$ 23,938 $ 21,161 $ 67,201 $ 58,602 Total Adjusted Gross Margin 51 % 54 % 50 % 53 % Adjusted EBITDA$ (6,434) $
(8,446)
We monitor the key metrics set forth in the preceding table to help us evaluate
trends, establish budgets, measure the effectiveness and efficiency of our
operations, and determine employee incentives. Adjusted Gross Profit, Adjusted
Gross Margin, and Adjusted EBITDA are non-GAAP financial measures, which we
discuss in more detail below.
Reconciliation of Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe
certain non-GAAP measures, including Adjusted Gross Profit, Adjusted Gross
Margin, and Adjusted EBITDA, are useful in evaluating our operating performance.
We use this non-GAAP financial information to evaluate our ongoing operations,
as a component in determining employee bonus compensation, and for internal
planning and forecasting purposes. We believe that non-GAAP financial
information, when taken collectively, may be helpful to investors because it
provides consistency and comparability with past financial performance. However,
non-GAAP financial information is presented for supplemental informational
purposes only, has limitations as an analytical tool and should not be
considered in isolation or as a substitute for financial information presented
in accordance with GAAP. In addition, other companies, including companies in
our industry, may calculate similarly-titled non-GAAP measures differently or
may use other measures to evaluate their performance, all of which could reduce
the usefulness of our non-GAAP financial measures as tools for comparison. A
reconciliation is provided below for each non-GAAP financial measure to the most
directly comparable financial measure stated in accordance with GAAP. Investors
are encouraged to review the related GAAP financial measures and the
reconciliation of these non-GAAP financial measures to their most directly
comparable GAAP financial measures, and not to rely on any single financial
measure to evaluate our business.
45
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Adjusted Gross Profit and Adjusted Gross Margin
Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue
less cost of revenue, excluding depreciation and amortization and excluding
stock-based compensation, and post-acquisition restructuring costs, as
applicable. We define Adjusted Gross Margin as our Adjusted Gross Profit divided
by our revenue. We believe Adjusted Gross Profit and Adjusted Gross Margin are
useful to investors as they eliminate the impact of certain non-cash expenses
and allow a direct comparison of these measures between periods without the
impact of non-cash expenses and certain other non-recurring operating expenses.
We believe these non-GAAP measures are useful in evaluating our operating
performance compared to that of other companies in our industry, as these
metrics generally eliminate the effects of certain items that may vary from
company to company for reasons unrelated to overall profitability.
See above for information regarding the limitations of using our Adjusted Gross
Profit and Adjusted Gross Margin as financial measures. The following is a
reconciliation of our Adjusted Gross Profit to revenue, the most directly
comparable financial measure calculated in accordance with GAAP, for the three
months ended September 30, 2020 and 2019.
Three Months
Ended
(in thousands, except percentages)
Professional
Technology Services Total
Revenue $ 27,964 $ 19,227 $ 47,191
Cost of revenue, excluding depreciation and
amortization (9,045) (15,307) (24,352)
Gross profit, excluding depreciation and
amortization 18,919 3,920 22,839
Add:
Stock-based compensation 196 903 1,099 Adjusted Gross Profit$ 19,115 $ 4,823 $ 23,938 Gross margin, excluding depreciation and amortization 68 % 20 % 48 % Adjusted Gross Margin 68 % 25 % 51 % Three Months Ended September 30, 2019 (in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 21,160 $ 18,263 $ 39,423
Cost of revenue, excluding depreciation and
amortization (6,740) (11,892) (18,632)
Gross profit, excluding depreciation and
amortization 14,420 6,371 20,791
Add:
Stock-based compensation 64 306 370 Adjusted Gross Profit$ 14,484 $ 6,677 $ 21,161 Gross margin, excluding depreciation and amortization 68 % 35 % 53 % Adjusted Gross Margin 68 % 37 % 54 % Adjusted Technology Gross Margin remained consistent at 68% for both the three months endedSeptember 30, 2019 and 2020. We expect Adjusted Technology Gross Margin to fluctuate and potentially decline in the near term, primarily due to additional costs associated with transitioning customers from on-premise and our managed data centers to third-party hosted data centers with Microsoft Azure. 46 -------------------------------------------------------------------------------- Adjusted Professional Services Gross Margin decreased from 37% for the three months endedSeptember 30, 2019 to 25% for the three months endedSeptember 30, 2020 . The decrease was primarily from lower professional services dollar-based retention achieved year-to-date relative to historical performance due to COVID-19, a spillover from temporary professional services discounts provided to support our customers through the near-term financial strain they have experienced related to COVID-19, as well as some shift in the mix of professional services delivered. Our professional services are comprised of data and analytics services, domain expertise services, outsourcing services, and implementation services. While the majority of our professional services revenue is generated from data and analytic services and domain expertise services, the delivery mix between these services in a given quarter can lead to fluctuations in our Adjusted Professional Services Gross Margin. Adjusted Professional Services Gross Margin may fluctuate and potentially decline in the near term due to changes in the mix of services we provide. We anticipate Adjusted Gross Margin will generally increase over the long term though it may fluctuate period to period. The following is a reconciliation of our Adjusted Gross Profit to revenue, the most directly comparable financial measure calculated in accordance with GAAP, for the nine months endedSeptember 30, 2020 and 2019. Nine Months
Ended
(in thousands, except percentages)
Professional
Technology Services Total
Revenue $ 78,150 $ 57,416 $ 135,566
Cost of revenue, excluding depreciation and
amortization (25,148) (46,401) (71,549)
Gross profit, excluding depreciation and
amortization 53,002 11,015 64,017
Add:
Stock-based compensation 575 2,609 3,184 Adjusted Gross Profit$ 53,577 $ 13,624 $ 67,201 Gross margin, excluding depreciation and amortization 68 % 19 % 47 % Adjusted Gross Margin 69 % 24 % 50 % Nine Months Ended September 30, 2019 (in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 61,393 $ 50,047 $ 111,440
Cost of revenue, excluding depreciation and
amortization (20,536) (33,132) (53,668)
Gross profit, excluding depreciation and
amortization 40,857 16,915 57,772
Add:
Stock-based compensation 129 593 722
Post-acquisition restructuring costs(1) - 108 108
Adjusted Gross Profit $ 40,986 $ 17,616 $ 58,602
Gross margin, excluding depreciation and
amortization 67 % 34 % 52 %
Adjusted Gross Margin 67 % 35 % 53 %
__________________
(1)Post-acquisition restructuring costs included in the Adjusted Gross Profit
reconciliation above relate to severance charges following the 2018 acquisition
of Medicity .
47-------------------------------------------------------------------------------- Adjusted Technology Gross Margin increased from 67% for the nine months endedSeptember 30, 2019 to 69% for the nine months endedSeptember 30, 2020 . Adjusted Professional Services Gross Margin decreased from 35% for the nine months endedSeptember 30, 2019 to 24% for the nine months endedSeptember 30, 2020 , due primarily to temporary professional services discounts provided to support our customers through the near-term financial strain they have experienced related to COVID-19 as well as some shift in the mix of professional services delivered. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest and other expense, net, loss on debt extinguishment, income tax provision (benefit), depreciation and amortization, stock-based compensation, acquisition transaction costs, change in fair value of contingent consideration liabilities, duplicate headquarters rent expense, and post-acquisition restructuring costs when they are incurred. We believe Adjusted EBITDA provides investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial performance. We believe Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. See above for information regarding the limitations of using our Adjusted EBITDA as a financial measure. The following is a reconciliation of our Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP, for the three and nine months endedSeptember 30, 2020 and 2019. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) (in thousands) Net loss$ (27,326) $ (21,416) $ (71,999) $ (45,830) Add: Interest and other expense, net 3,854 659 7,500 2,924 Loss on extinguishment of debt - - 8,514 1,670 Income tax provision (benefit) 14 21 (1,218) 43 Depreciation and amortization 4,981 2,316 10,952 6,844 Stock-based compensation 9,496 9,974 27,283 13,028 Acquisition transaction costs(1) 1,399 - 2,670 - Change in fair value of contingent consideration liabilities(2) 564 - (1,004) - Duplicate headquarters rent expense(3) 584 - 709 - Post-acquisition restructuring costs(4) - - - 446 Adjusted EBITDA$ (6,434) $ (8,446) $ (16,593) $ (20,875) __________________ (1)Acquisition transaction costs relate to legal, diligence, valuation, and other third-party fees incurred as part of the acquisitions ofAble Health , Healthfinch, and Vitalware. For additional details refer to Note 2 in our condensed consolidated financial statements. (2)The change in fair value of contingent consideration liabilities relates to changes in the estimated fair value of shares of our common stock that will be issued if certain performance targets forAble Health , Healthfinch, and Vitalware are met during the respective earn-out periods. For additional details refer to Note 7 in our condensed consolidated financial statements. (3)Duplicate rent expense for our corporate headquarters relocation. For additional details refer to Note 14 in our condensed consolidated financial statements. (4)Post-acquisition restructuring costs relate to severance charges following the 2018 acquisition ofMedicity . 48 -------------------------------------------------------------------------------- Key Factors Affecting Our Performance We believe that our future growth, success, and performance are dependent on many factors, including those set forth below. While these factors present significant opportunities for us, they also represent the challenges that we must successfully address in order to grow our business and improve our results of operations. •Impact of COVID-19 pandemic. The COVID-19 pandemic has adversely affected workforces, organizations, governments, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. This outbreak, as well as intensified measures undertaken to contain the spread of COVID-19, could decrease healthcare industry spending, adversely affect demand for our technology and services, cause one or more of our customers to file for bankruptcy protection or go out of business, cause one or more of our customers to fail to renew, terminate, or renegotiate their contracts, affect the ability of our sales team to travel to potential customers and the ability of our professional services teams to conduct in-person services and trainings, impact expected spending from new customers, negatively impact collections of accounts receivable, and harm our business, results of operations, and financial condition. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations, or financial condition at this time. •Add new customers. While we anticipate that the COVID-19 pandemic may impact the rate at which we add new customers for the rest of the fiscal year, we have rapidly developed a number of technology and services solutions designed specifically to support healthcare providers during the COVID-19 pandemic, and we believe this, along with our core offering, will enable us to acquire some level of new customers during the COVID-19 pandemic. Our potential customer base is generally in the early stages of data and analytics adoption and maturity. We expect to further penetrate the market over time as potential customers invest in commercial data and analytics solutions. As one of the first data platform and analytics vendors focused specifically on healthcare organizations, we have an early-mover advantage and strong brand awareness. Our customers are large, complex organizationswho typically have long procurement cycles which may lead to declines in the pace of our new customer additions. •Leverage recent product and services offerings to drive expansion. We believe that our ability to expand within our customer base will enable us to drive growth. Over the last three years, we have developed and deployed several new analytics applications including CORUS, Touchstone, Patient Safety Monitor, Population Builder, and others. Because we are in the early stages of certain of our applications' lifecycles and maturity, we do not have enough information to know the impact on revenue growth by upselling these applications and associated services to current and new customers. •Changing revenue mix. Our technology and professional services offerings have materially different gross margin profiles. While our professional services offerings help our customers achieve measurable improvements and make them stickier, they have lower gross margins than our technology revenue. For the nine months endedSeptember 30, 2020 , our technology revenue and professional services revenue represented 58% and 42% of total revenue, respectively. Changes in our revenue mix between the two offerings would impact future Total Adjusted Gross Margin. Furthermore, changes within the types of professional services we offer over time can have a material impact on our Adjusted Professional Services Gross Margin, impacting our future Total Adjusted Gross Margin. See "Key Financial Metrics-Reconciliation of Non-GAAP Financial Measures" for more information. •Transitions to Microsoft Azure as DOS hosting provider. We incur hosting fees related to providing DOS through a cloud-based environment hosted by Microsoft Azure. We also operate a private data center where we host DOS for certain customers and we maintain a small number of customers that have deployed DOS on-premise. We are in the process of transitioning customers we host in our private data center andwho deployed DOS on-premise to Azure-hosted environments. The Azure cloud provides customers with more advanced DOS product functionality and a more seamless customer experience; however, hosting customers in Azure is more costly than our private data center on a per-customer basis. This transition will 49 -------------------------------------------------------------------------------- result in higher cost of technology revenue and provide a headwind against increases in Adjusted Technology Gross Margin. •Impact of acquisitions on growth. We have acquired multiple companies over the last few years, including theMedicity acquisition inJune 2018 , theAble Health acquisition inFebruary 2020 , the Healthfinch acquisition inJuly 2020 , and the Vitalware acquisition inSeptember 2020 . The historical and go-forward revenue growth profiles of these businesses may vary from our core DOS Subscription Customers, thus impacting our overall growth rate. Specifically,Medicity customers have generated a lower Dollar-based Retention Rate than DOS Subscription Customers and we expect flat to declining revenue fromMedicity customers in the foreseeable future. If our cross-sell efforts and technology integration strategies are successful related to the recent acquisitions, this could offset revenue declines fromMedicity customers. Components of Our Results of Operations Revenue We derive our revenue from sales of technology and professional services. For the three months endedSeptember 30, 2020 and 2019, technology represented 59% and 54% of total revenue, respectively, and professional services represented 41% and 46%, of total revenue, respectively. For the nine months endedSeptember 30, 2020 and 2019, technology represented 58% and 55% of total revenue, respectively, and professional services represented 42% and 45%, of total revenue, respectively. Technology revenue. Technology revenue primarily consists of subscription fees charged to customers for access to use our data platform and analytics applications. We provide customers access to our technology through either an all-access or limited-access, modular subscription. Most of our subscription contracts are cloud-based and have up to a three-year term, of which the vast majority are terminable after one year upon 90 days' notice. A majority of our DOS Subscription Customers access our technology through all-access subscriptions, which in the vast majority of cases have built-in annual escalators for technology access fees. Also included in technology revenue is the maintenance and support we provide, which generally includes updates and support services. Professional services revenue. Professional services revenue primarily includes 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. Deferred revenue Deferred revenue consists of customer billings in advance of revenue being recognized from our technology and professional services arrangements. We primarily invoice our customers for technology arrangements annually or quarterly in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue and the remaining portion is recorded as deferred revenue, net of current portion on our condensed consolidated balance sheets. Cost of revenue, excluding depreciation and amortization Cost of technology revenue. 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. Although we expect cost of technology revenue to increase in absolute dollars as we transition customers to third-party hosted data centers with Microsoft Azure and increase headcount to accommodate growth, we anticipate cost of technology revenue as a percentage of technology revenue will generally decrease over the long term. 50 -------------------------------------------------------------------------------- We expect cost of technology revenue as a percentage of technology revenue to fluctuate and potentially increase in the near term, primarily due to additional costs associated with transitioning customers from on-premise and our managed data centers to Microsoft Azure. Cost of professional services revenue. Cost of professional services revenue consists primarily of costs related to delivering our team's expertise in analytics, strategic advisory, improvement, and implementation services. These costs primarily include salary and related personnel costs, travel-related costs, and outside contractor costs. We expect cost of professional services revenue to increase in absolute dollars as we increase headcount to accommodate growth. Operating expense Sales and marketing. Sales and marketing expenses primarily include salary and related personnel costs for our sales, marketing, and account management teams, lead generation, marketing events, including our Healthcare Analytics Summit (HAS), marketing programs, and outside contractor costs associated with the sale and marketing of our offerings. We plan to continue to invest in sales and marketing to grow our customer base, expand in new markets, and increase our brand awareness. The trend and timing of sales and marketing expenses will depend in part on the timing of our expansion into new markets and marketing campaigns. We expect that sales and marketing expenses will increase in absolute dollars in future periods, but decrease as a percentage of our revenue over the long term. Our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Research and development. Research and development expenses primarily include salary and related personnel costs for our data platform and analytics applications teams, subscriptions, and outside contractor costs associated with the development of products. We have developed an open, flexible, and scalable data platform. We plan to continue to invest in research and development to develop new solutions and enhance our applications library. We expect that research and development expenses will increase in absolute dollars in future periods, but decrease as a percentage of our revenue over the long term. Our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. General and administrative. General and administrative expenses primarily include salary and related personnel costs for our legal, finance, people operations, IT, and other administrative teams, including certain executives. General and administrative expenses also include facilities, subscriptions, corporate insurance, outside legal, accounting, directors' fees, and the change in fair value of contingent consideration liabilities. Due to the closing of our IPO onJuly 29, 2019 , we expect to incur additional costs as a result of operating as a public company, including costs related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations, and corporate governance. As a result, we expect our general and administrative expenses to increase in absolute dollars for the foreseeable future, but decrease as a percentage of our revenue over the long term. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Depreciation and amortization. Depreciation and amortization expenses are primarily attributable to our capital investment and consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs. 51 -------------------------------------------------------------------------------- Interest and other expense, net Interest and other expense, net primarily consists of interest income from our investment holdings and interest expense. Interest expense is primarily attributable to the Notes, our now extinguished term loan, and imputed interest on acquisition-related consideration payable. It also includes the amortization of discounts on debt and amortization of deferred financing costs related to our various debt arrangements. Income tax provision (benefit) Income tax provision (benefit) consists ofU.S. federal, state, and foreign income taxes. Because of the uncertainty of the realization of the deferred tax assets, we have a full valuation allowance for our net deferred tax assets, including net operating loss carryforwards (NOLs) and tax credits related primarily to research and development. As ofDecember 31, 2019 , we had federal and state NOLs of$269.1 million and$215.2 million , respectively, which will begin to expire for federal and state tax purposes in 2032 and 2024, respectively. Our existing NOLs may be subject to limitations arising from ownership changes and, if we undergo an ownership change in the future, our ability to utilize our NOLs and tax credits could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs and tax credits may also be limited under similar provisions of state law. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed intoU.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. We are continuing to analyze these legislative developments and believe that the income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. The CARES Act also provides for the deferral of an employer's portion of social security payroll taxes for the remainder of 2020. Under the CARES Act, half of the deferred amount will have to be paid in each ofDecember 2021 andDecember 2022 . We began deferring the social security payroll tax match inApril 2020 . 52 -------------------------------------------------------------------------------- Results of Operations The following tables set forth our consolidated results of operations data and such data as a percentage of total revenue for each of the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (in thousands) (in thousands) Revenue: Technology$ 27,964 $ 21,160 $ 78,150 $ 61,393 Professional services 19,227 18,263 57,416 50,047 Total revenue 47,191 39,423 135,566 111,440 Cost of revenue, excluding depreciation and amortization shown below: Technology(1) 9,045 6,740 25,148 20,536 Professional services(1)(3) 15,307 11,892 46,401 33,132 Total cost of revenue, excluding depreciation and amortization 24,352 18,632 71,549 53,668 Operating expenses: Sales and marketing(1)(3) 14,629 14,721 40,618 35,579 Research and development(1)(3) 13,390 13,477 38,539 33,209 General and administrative(1)(2)(4)(5) 13,297 11,013 31,111 23,333 Depreciation and amortization 4,981 2,316 10,952 6,844 Total operating expenses 46,297 41,527 121,220 98,965 Loss from operations (23,458) (20,736) (57,203) (41,193) Loss on extinguishment of debt - - (8,514) (1,670) Interest and other expense, net (3,854) (659) (7,500) (2,924) Loss before income taxes (27,312) (21,395) (73,217) (45,787) Income tax (benefit) provision 14 21 (1,218) 43 Net loss$ (27,326) $ (21,416) $ (71,999) $ (45,830) __________________
(1)Includes stock-based compensation expense, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Stock-Based Compensation Expense: (in thousands) (in thousands)
Cost of revenue, excluding depreciation
and amortization:
Technology $ 196 $ 64 $ 575 $ 129
Professional services 903 306 2,609 593
Sales and marketing 3,233 1,358 9,724 2,639
Research and development 2,025 3,067 5,987 3,502
General and administrative 3,139 5,179 8,388 6,165
Total $ 9,496 $ 9,974 $ 27,283 $ 13,028
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(2)Includes acquisition transaction costs, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Acquisition transaction costs: (in thousands) (in thousands)
General and administrative $ 1,399 $ - $ 2,670 $ -
Total $ 1,399 $ - $ 2,670 $ -
(3)Includes post-acquisition restructuring costs, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Post-Acquisition Restructuring Costs: (in thousands) (in thousands)
Cost of revenue, excluding depreciation
and amortization:
Professional services $ - $ - $ - $ 108
Sales and marketing - - - 306
Research and development - - - 32
Total $ - $ - $ - $ 446
(4)Includes the change in fair value of contingent consideration liabilities, as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Change in fair value of contingent
consideration: (in thousands) (in thousands)
General and administrative $ 564 $ - $ (1,004) $ -
Total $ 564 $ - $ (1,004) $ -
(5) Includes duplicate headquarters rent expense, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Duplicate Headquarters Rent Expense: (in thousands) (in thousands)
General and administrative $ 584 $ - $ 709 $ -
Total $ 584 $ - $ 709 $ -
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Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue:
Technology 59 % 54 % 58 % 55 %
Professional services 41 46 42 45
Total revenue 100 100 100 100
Cost of revenue, excluding depreciation
and amortization shown below:
Technology 19 17 19 18
Professional service 33 30 34 30
Total cost of revenue, excluding
depreciation and amortization 52 47 53 48
Operating expenses
Sales and marketing 31 37 30 32
Research and development 28 34 28 30
General and administrative 28 28 23 21
Depreciation and amortization 11 6 8 6
Total operating expenses 98 105 89 89
Loss from operations (50) (52) (42) (37)
Loss on extinguishment of debt - - (6) (1)
Interest and other expense, net (8) (2) (6) (3)
Loss before income taxes (58) (54) (54) (41)
Income tax (benefit) provision - - (1) -
Net loss (58) % (54) % (53) % (41) %
Discussion of the Three Months Ended September 30, 2020 and 2019
Revenue
Three Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Revenue:
Technology $ 27,964 $ 21,160 $ 6,804 32 %
Professional services 19,227 18,263 964 5 %
Total revenue $ 47,191 $ 39,423 $ 7,768 20 %
Percentage of revenue:
Technology 59 % 54 %
Professional services 41 46
Total 100 % 100 %
Total revenue was
55
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Technology revenue was $28.0 million , or 59% of total revenue, for the three
months ended September 30, 2020 , compared to $21.2 million , or 54% of total
revenue, for the three months ended September 30, 2019 . The revenue growth was
primarily from new DOS Subscription Customers, current year acquisitions, and
existing customers paying higher technology access fees from contractual, annual
escalators, or from the purchase of expanded technology or support services.
Professional services revenue was $19.2 million , or 41% of total revenue, for
the three months ended September 30, 2020 , compared to $18.3 million , or 46% of
total revenue, for the three months ended September 30, 2019 . The professional
services revenue growth is primarily due to implementation, analytics,
outsourcing, and other improvement services being provided to new DOS
Subscription Customers and expanded deployment of services with existing
customers. This growth was largely offset by lower professional services
dollar-based retention achieved year-to-date relative to historical performance
due to COVID-19 and spillover from temporary professional services discounts
provided to support our customers through the near-term financial strain they
have experienced related to COVID-19.
Cost of revenue, excluding depreciation and amortization
Three Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Cost of revenue, excluding depreciation
and amortization:
Technology $ 9,045 $ 6,740 $ 2,305 34 %
Professional services 15,307 11,892 3,415 29 %
Total cost of revenue, excluding
depreciation and amortization $ 24,352 $ 18,632 $ 5,720 31 %
Percentage of total revenue 52 % 47 %
Cost of technology revenue, excluding depreciation and amortization, was $9.0
million for the three months ended September 30, 2020 , compared to $6.7 million
for the three months ended September 30, 2019 , an increase of $2.3 million , or
34%. The increase in cost of technology revenue was primarily due to $1.0
million in increased cloud computing and hosting costs largely from the expanded
use of Microsoft Azure to serve existing and new customers and an increase of
$0.6 million in salary and related personnel costs from an increase in cloud
services and support headcount.
Cost of professional services revenue was $15.3 million for the three months
ended September 30, 2020 , compared to $11.9 million for the three months ended
September 30, 2019 , an increase of $3.4 million , or 29%. This increase was
primarily due to a $3.2 million increase in salary and related personnel costs
from additional professional services headcount and additional stock-based
compensation of $0.6 million , which were partially offset by a decrease in
travel-related expenses of $0.7 million .
Operating Expenses
Sales and marketing
Three Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 14,629 $ 14,721 $ (92) (1) %
Percentage of total revenue 31 % 37 %
Sales and marketing expenses were
56
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The decrease was primarily due to a $1.2 million decrease in travel-related
expenses and a $1.1 million decrease in external advertising and marketing
costs, which were partially offset by a $1.9 million increase in stock-based
compensation.
Sales and marketing expense as a percentage of total revenue decreased from 37%
for the three months ended September 30, 2019 to 31% for the three months ended
September 30, 2020 .
Research and development
Three Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Research and development $ 13,390 $ 13,477 $ (87) (1) %
Percentage of total revenue 28 % 34 %
Research and development expenses were$13.4 million for the three months endedSeptember 30, 2020 , compared to$13.5 million for the three months endedSeptember 30, 2019 , a decrease of$0.1 million , or 1%. The decrease was primarily due to a decrease of$1.0 million in stock-based compensation and a$0.2 million decrease in travel-related expenses, which were offset by an increase of$1.1 million in salary and related personnel costs from additional development team headcount. Research and development expense as a percentage of revenue increased from 34% in the three months endedSeptember 30, 2019 to 28% in the three months endedSeptember 30, 2020 . General and administrative Three Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) General and administrative$ 13,297 $ 11,013 $ 2,284 21 % Percentage of total revenue 28 % 28 % General and administrative expenses were$13.3 million for the three months endedSeptember 30, 2020 , compared to$11.0 million for the three months endedSeptember 30, 2019 , an increase of$2.3 million , or 21%. The increase was primarily due to increases of$1.4 million in acquisition-related transaction costs,$1.1 million in salary and related personnel costs from additional headcount,$0.6 million in duplicate rent expense,$0.6 million in change in fair value of the estimated contingent consideration liabilities, and insurance costs of$0.5 million , which were offset by a$2.0 million decrease in stock-based compensation.
General and administrative expense as a percentage of revenue remained
consistent at 28% during the three months ended
Three Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Depreciation and amortization $ 4,981 $ 2,316 $ 2,665 115 %
Percentage of total revenue 11 % 6 %
57-------------------------------------------------------------------------------- Depreciation and amortization expenses were$5.0 million for the three months endedSeptember 30, 2020 , compared to$2.3 million for the three months endedSeptember 30, 2019 , an increase of$2.7 million , or 115%. This increase was primarily due to the amortization of acquired intangible assets. Depreciation and amortization expense as a percentage of revenue increased from 6% in the three months endedSeptember 30, 2019 to 11% in the three months endedSeptember 30, 2020 . Interest and other expense, net Three Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Interest income$ 344 $ 988 $ (644) (65) % Interest expense (4,207) (1,645) (2,562) 156 % Other income 9 (2) 11 (550) % Total interest and other expense, net$ (3,854) $ (659) $ (3,195) 485 % Interest and other expense, net decreased$3.2 million , or 485%, for the three months endedSeptember 30, 2020 , compared to the three months endedSeptember 30, 2019 . This decrease is primarily due to an increase in interest expense of$2.6 million due to the increase in net borrowings resulting from the Notes Offering that occurred inApril 2020 and a decrease in interest income of$0.6 million . Income tax provision Three Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Income tax provision $ 14$ 21 $ (7) (33) % Income tax provision consists of current and deferred taxes forU.S. federal, state, and foreign income taxes. As we have a full valuation allowance on deferred tax assets, our income tax provision typically consists primarily of minimal state and foreign income taxes. 58 -------------------------------------------------------------------------------- Discussion of the Nine Months EndedSeptember 30, 2020 and 2019 Revenue Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Revenue: Technology$ 78,150 $ 61,393 $ 16,757 27 % Professional services 57,416 50,047 7,369 15 % Total revenue$ 135,566 $ 111,440 $ 24,126 22 % Percentage of revenue: Technology 58 % 55 % Professional services 42 45 Total 100 % 100 % Total revenue was$135.6 million for the nine months endedSeptember 30, 2020 , compared to$111.4 million for the nine months endedSeptember 30, 2019 , an increase of$24.1 million , or 22%. Technology revenue was$78.2 million , or 58% of total revenue, for the nine months endedSeptember 30, 2020 , compared to$61.4 million , or 55% of total revenue, for the nine months endedSeptember 30, 2019 . The revenue growth was primarily from new DOS Subscription Customers, the current year acquisitions, and additional revenue from existing customers paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services. Professional services revenue was$57.4 million , or 42% of total revenue, for the nine months endedSeptember 30, 2020 , compared to$50.0 million , or 45% of total revenue, for the nine months endedSeptember 30, 2019 . The professional services revenue growth is primarily due to implementation, analytics, outsourcing, and other improvement services being provided to new DOS Subscription Customers and expanded deployment of services with existing customers. This growth was partially offset by temporary professional services discounts provided to support our customers through the near-term financial strain they have experienced related to COVID-19. Cost of revenue, excluding depreciation and amortization Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Cost of revenue, excluding depreciation and amortization: Technology$ 25,148 $ 20,536 $ 4,612 22 % Professional services 46,401 33,132 13,269 40 % Total cost of revenue, excluding depreciation and amortization$ 71,549 $ 53,668 $ 17,881 33 % Percentage of total revenue 53 % 48 % Cost of technology revenue, excluding depreciation and amortization, was$25.1 million for the nine months endedSeptember 30, 2020 , compared to$20.5 million for the nine months endedSeptember 30, 2019 , an increase of$4.6 million , or 22%. The increase in cost of technology revenue was primarily due to$2.5 million in increased cloud computing and hosting costs largely from the expanded use of Microsoft Azure to serve existing and new customers and an increase of$1.2 million in salary and related personnel costs from an increase in cloud services and support headcount. -------------------------------------------------------------------------------- Cost of professional services revenue was$46.4 million for the nine months endedSeptember 30, 2020 , compared to$33.1 million for the nine months endedSeptember 30, 2019 , an increase of$13.3 million , or 40%. This increase was primarily due to an$11.5 million increase in salary and related personnel costs from additional professional services headcount and additional stock-based compensation of$2.0 million , which were partially offset by a decrease in travel-related expenses of$1.1 million . Operating Expenses Sales and marketing Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Sales and marketing$ 40,618 $ 35,579 $ 5,039 14 % Percentage of total revenue 30 %
32 %
Sales and marketing expenses were$40.6 million for the nine months endedSeptember 30, 2020 , compared to$35.6 million for the nine months endedSeptember 30, 2019 , an increase of$5.0 million , or 14%. The increase was primarily due to a$7.1 million increase in stock-based compensation and a$0.8 million increase in the provision for credit losses, which were partially offset by a decrease in travel-related expenses of$1.8 million and a$1.3 million decrease in external advertising and marketing costs. Sales and marketing expense as a percentage of total revenue decreased from 32% for the nine months endedSeptember 30, 2019 to 30% for the nine months endedSeptember 30, 2020 . Research and development Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Research and development$ 38,539 $ 33,209 $ 5,330 16 % Percentage of total revenue 28 %
30 %
Research and development expenses were$38.5 million for the nine months endedSeptember 30, 2020 , compared to$33.2 million for the nine months endedSeptember 30, 2019 , an increase of$5.3 million , or 16%. The increase was primarily due to an increase of$2.6 million in stock-based compensation and an increase of$2.7 million in salary and related personnel costs from additional development team headcount. Research and development expense as a percentage of revenue decreased from 30% in the nine months endedSeptember 30, 2019 to 28% in the nine months endedSeptember 30, 2020 . General and administrative Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) General and administrative$ 31,111 $ 23,333 $ 7,778 33 % Percentage of total revenue 23 %
21 %
General and administrative expenses were
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The increase was primarily due to increases of$2.7 million in acquisition-related transaction costs,$2.2 million in stock-based compensation,$1.5 million in salary and related personnel costs from additional headcount,$0.7 million in duplicate rent expense, and$1.2 million in insurance costs, which were offset by a decrease of$1.0 million in the fair value of contingent consideration liabilities. General and administrative expense as a percentage of revenue increased from 21% in the nine months endedSeptember 30, 2019 to 23% in the nine months endedSeptember 30, 2020 . Depreciation and amortization Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Depreciation and amortization$ 10,952 $ 6,844 $ 4,108 60 % Percentage of total revenue 8 % 6 % Depreciation and amortization expenses were$11.0 million for the nine months endedSeptember 30, 2020 , compared to$6.8 million for the nine months endedSeptember 30, 2019 , an increase of$4.1 million , or 60%. This increase was primarily due to the amortization of acquired intangible assets. Depreciation and amortization expense as a percentage of revenue increased from 6% in the nine months endedSeptember 30, 2019 to 8% in the nine months endedSeptember 30, 2020 . Loss on extinguishment of debt Nine Months Ended September 30, 2020 2019 $ Change % Change (in thousands, except percentages) Loss on extinguishment of debt $ (8,514)$ (1,670) $ (6,844) n/m(1) __________________ (1)Not meaningful. OnApril 14, 2020 , we used$57.0 million of proceeds from the Note Offering to prepay in full all outstanding indebtedness, including prepayment penalties, under the Credit Agreement and terminate the Credit Agreement. We recorded a loss on debt extinguishment of debt of approximately$8.5 million during the nine months endedSeptember 30, 2020 , including approximately$1.5 unamortized debt discounts and issuance costs related to the OrbiMed term loan and$7.0 million of repayment fees. OnFebruary 6, 2019 , we entered into the OrbiMed Credit Facility and simultaneously borrowed$50.0 million . The use of proceeds from the OrbiMed senior term loan included an immediate repayment of our$20.0 million term loan from SVB that required a prepayment premium of$0.5 million and the write-off of deferred debt issuance costs of$1.2 million , resulting in a$1.7 million loss on extinguishment of debt during the nine months endedSeptember 30, 2019 . --------------------------------------------------------------------------------
Interest and other expense, net
Nine Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Interest income $ 1,952 $ 1,676 $ 276 16 %
Interest expense (9,520) (4,627) (4,893) 106 %
Other income 68 27 41 152 %
Total interest and other expense,
net $ (7,500) $ (2,924) $ (4,576) 156 %
Interest and other expense, net decreased $4.6 million , or 156%, for the nine
months ended September 30, 2020 , compared to the nine months ended September 30,
2019 . This decrease is primarily due to an increase in interest expense of $4.9
million due to the increase in net borrowings resulting from the Notes Offering
that occurred in April 2020 , which was partially offset by an increase in
interest income of $0.3 million due to the increase in cash equivalents and
short-term investments from the IPO proceeds received in July 2019 and net
proceeds from the Notes Offering.
Income tax provision
Nine Months Ended September 30,
2020 2019 $ Change % Change
(in thousands, except percentages)
Income tax (benefit) provision $ (1,218) $ 43 $ (1,261) n/m(1)
__________________
(1)Not meaningful.
Income tax provision consists of current and deferred taxes for U.S. federal,
state, and foreign income taxes. As we have a full valuation allowance on
deferred tax assets, our income tax provision typically consists primarily of
minimal state and foreign income taxes.
The income tax benefit of $1.2 million recorded for the nine months ended
September 30, 2020 , is primarily related to the discrete deferred tax benefit
attributable to the release of a portion of the valuation allowance during the
quarter. The release of valuation allowance is attributable to the acquisition
of Able Health , which resulted in deferred tax liabilities that, upon
acquisition, allowed us to recognize certain deferred tax assets of
approximately $1.3 million that had previously been offset by a valuation
allowance.
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Liquidity and Capital Resources
As of September 30, 2020 , we had cash, cash equivalents, and short-term
investments of $275.1 million , which were held for working capital and other
general corporate purposes, which may include potential acquisitions and
strategic transactions. Our cash equivalents and short-term investments are
comprised primarily of money market funds, U.S. treasury notes, commercial
paper, corporate bonds, and asset-backed securities.
Since inception, we have financed our operations primarily from the proceeds we
received through private sales of equity securities, payments received from
customers under technology and professional services arrangements, borrowings
under our loan and security agreements, our 2019 IPO, and our recent offering of
convertible senior notes. Our future capital requirements will depend on many
factors, including our pace of new customer growth and expanded customer
relationships, technology and professional services renewal activity, and the
timing and extent of spend to support the expansion of sales, marketing, and
development activities. In the event that additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us, or at
all. If we are unable to raise additional capital when desired, our business,
results of operations, and financial condition would be adversely affected.
Convertible Senior Notes
On April 14, 2020 , we issued $230.0 million in aggregate principal amount of
2.50% Convertible Senior Notes due 2025 (the Notes), pursuant to an Indenture
dated April 14, 2020 , with U.S. Bank National Association , as trustee, in a
private offering to qualified institutional buyers. We received net proceeds
from the sale of the Notes of $222.5 million , after deducting the initial
purchasers' discounts and offering expenses payable by us.
The Notes are senior, unsecured obligations and accrue interest payable
semiannually in arrears on April 15 and October 15 of each year, beginning on
October 15, 2020 , at a rate of 2.50% per year. The Notes will mature on April
15, 2025 , unless earlier converted, redeemed, or repurchased. The Notes are
convertible into cash, shares of our common stock, or a combination of cash and
shares of our common stock, with the form of consideration determined at our
election. The conversion rate is initially 32.6797 shares of our common stock
per $1,000 principal amount of Notes (which is equivalent to an initial
conversion price of approximately $30.60 per share of our common stock).
Capped Calls
On April 8, 2020 , concurrently with the pricing of the Notes, we entered into
privately negotiated capped call transactions (the Base Capped Calls) with
certain financial institutions, or option counterparties. In addition, in
connection with the initial purchasers' exercise in full of their option to
purchase additional Notes, on April 9, 2020 , we entered into additional capped
call transactions (together with the Base Capped Calls, the Capped Calls) with
each of the option counterparties. We used approximately $21.6 million of the
net proceeds from the Note Offering to pay the cost of the Capped Calls. The
Capped Calls have initial cap prices of $42.00 per share, subject to certain
adjustments. The Capped Calls are expected generally to reduce the potential
dilution to our common stock upon any conversion of Notes and/or offset any cash
payments we are required to make in excess of the principal amount of converted
Notes, as the case may be, with such reduction and/or offset subject to the cap
price.
Refer to Note 9 of our condensed consolidated financial statements for
additional details regarding the private offering of the Notes and the Capped
Calls.
Initial public offering
On July 29, 2019 , we closed our IPO in which we issued and sold 8,050,000 shares
(inclusive of the underwriters' over-allotment option to purchase 1,050,000
shares, which was exercised on July 25, 2019 ) of common stock at $26.00 per
share. We received net proceeds of $194.6 million after deducting underwriting
discounts and commissions and before deducting offering costs of $4.6 million .
63
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OrbiMed financings
On February 6, 2019 , we entered into the Credit Agreement with OrbiMed that
established a senior term loan facility of up to $80.0 million under certain
conditions. The contractual interest rate is the higher of LIBOR plus 7.5% and
10.0%. On February 6, 2019 , we borrowed $50.0 million under the Credit Agreement
with principal payments due beginning in 2023, and we simultaneously repaid our
$20.0 million term loan from SVB in full. In addition, we repaid in full the
outstanding balance of $1.3 million under the SVB revolving line of credit.
Additionally, on February 6, 2019 , we sold 437,787 shares of our Series F
redeemable convertible preferred stock for a purchase price of $12.2 million .
The effect of the OrbiMed debt proceeds, the Series F stock issuance, and the
repayment of the SVB term loan resulted in a net increase in cash, cash
equivalents, and short-term investments of $38.7 million , net of fees and debt
prepayment premiums.
On April 14, 2020 , we used $57.0 million of proceeds from the Note Offering to
prepay in full all outstanding indebtedness, including prepayment penalties,
under the Credit Agreement with OrbiMed, dated February 6, 2019 , as amended, and
terminate the Credit Agreement.
SVB revolving line of credit
In June 2016 , we signed a Loan and Security Agreement with SVB which established
a revolving line of credit based on a formula amount. On February 6, 2019 , we
amended the Loan Agreement with SVB which reduced the revolving line of credit
to a current maximum of $5.0 million with an obligation to maintain a minimum of
$5.0 million cash or cash equivalents on deposit with SVB to maintain the
assurance of future credit availability. The line may be increased to $10.0
million upon request and approval by SVB. The maturity date of the revolving
line of credit was amended to be February 6, 2021 .
On April 8, 2020 , we entered into a Pay-Off Letter Agreement with SVB, pursuant
to which we paid to SVB immaterial termination costs, representing all amounts
due and owing under the Loan Agreement, dated as of October 6, 2017 , with SVB,
in exchange for, among other things, (i) full discharge of all of our
obligations under the Loan Agreement; and (ii) release of security interests and
other liens granted to or held by SVB as a security for our obligations.
We believe our existing cash, cash equivalents and marketable securities and
amounts available under our revolving credit facility will be sufficient to meet
our working capital and capital expenditure needs over at least the next 12
months, though we may require additional capital resources in the future.
Cash Flows
The following table summarizes our cash flows for the nine months ended
September 30, 2020 and 2019:
Nine Months Ended September 30,
2020 2019
(in thousands)
Net cash used in operating activities $ (22,007) $ (19,123)
Net cash used in investing activities (60,660) (187,532)
Net cash provided by financing activities 175,869
230,283
Effect of exchange rate changes 5 - Net increase in cash and cash equivalents $ 93,207$ 23,628 64
-------------------------------------------------------------------------------- Operating Activities Our largest source of operating cash flows is cash collections from our customers for technology and professional services arrangements. Our primary uses of cash from operating activities are for employee-related expenses, marketing expenses, and technology costs. For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$22.0 million , which included a net loss of$72.0 million . Non-cash adjustments primarily consisted of$11.0 million in depreciation and amortization of property, equipment, and intangible assets,$27.3 million in stock-based compensation, the$8.5 million loss on extinguishment of debt, the$5.3 million amortization of debt discount and issuance costs,$2.9 million in non-cash lease expense, the$1.0 million change in fair value of contingent consideration liabilities, and the$1.3 million deferred tax benefit. For the nine months endedSeptember 30, 2019 , net cash used in operating activities was$19.1 million , which included a net loss of$45.8 million . Non-cash charges primarily consisted of$6.8 million in depreciation and amortization of property, equipment, and intangible assets,$13.0 million in stock-based compensation,$2.7 million in non-cash lease expense, and the$1.7 million loss on extinguishment of debt. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2020 of$60.7 million was primarily due to$163.3 million used to purchase short-term investments,$102.5 million used to acquireAble Health , Healthfinch, and Vitalware, and$3.3 million in purchases of property, equipment, and intangible assets, reduced by the$208.5 million provided from the sale and maturity of short-term investments. Net cash used in investing activities for the nine months endedSeptember 30, 2019 of$187.5 million primarily was due to$221.4 million used to purchase short-term investments and$3.4 million in purchases of property, equipment, and intangible assets, reduced by$37.3 million provided from the sale and maturity of short-term investments. Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2020 of$175.9 million was primarily the result of$222.5 million in net proceeds from the private offering of the Notes,$29.4 million in stock option exercise proceeds, and$3.5 million in proceeds from our ESPP, reduced by the$57.0 million payoff of the OrbiMed Credit Facility,$21.7 million used to purchase Capped Calls, including issuance costs, and the$0.7 million in payments of acquisition-related obligations. Net cash provided by financing activities for the nine months endedSeptember 30, 2019 of$230.3 million was primarily the result of$194.6 million in net IPO proceeds,$47.2 million in net proceeds drawn under the OrbiMed Credit Facility,$12.1 million in proceeds from the sale and issuance of Series F redeemable convertible preferred stock,$2.2 million in stock option exercise proceeds, and$1.2 million in proceeds from our ESPP, reduced by the$21.8 million payoff of the SVB debt,$4.4 million in payments of deferred offering costs, and$0.8 million in payments of acquisition-related obligations. 65 -------------------------------------------------------------------------------- Contractual Obligations and Commitments Lease agreement for new headquarters During the nine months endedSeptember 30, 2020 , we entered into a lease for office space inSouth Jordan, Utah , that will become our new company headquarters. This new lease will require future lease payments of approximately$31.7 million with a non-cancelable lease term of 11 years, excluding renewal options. Lease payments will commence beginningJanuary 1, 2021 , however, we took initial possession of the first 64,910 square feet of the new headquarters inJune 2020 and the next 53,297 square feet inAugust 2020 to begin leasehold improvements, resulting in the respective accounting lease commencement dates. According to the terms of this new lease agreement our leased square footage will expand between 2022 and 2023 resulting in approximately$2.8 million of additional required future lease payments. We shall have the right to sublease all, or a portion, of this leased office space provided that certain terms and conditions are met. We also anticipate greater than$10.0 million of capital expenditure for leasehold improvements, computer equipment, and furniture and fixtures for the new headquarters. Refer to Note 14 of our condensed consolidated financial statements for additional details regarding this new lease commitment. Private offering of convertible senior notes OnApril 14, 2020 , we issued$230.0 million in aggregate principal amount of 2.50% Convertible Senior Notes due 2025, pursuant to an Indenture datedApril 14, 2020 , withU.S. Bank National Association , as trustee, in a private offering to qualified institutional buyers. We received net proceeds from the sale of the Notes of$222.5 million , after deducting the initial purchasers' discounts and offering expenses payable by us. We used$57.0 million of proceeds from the Notes Offering to prepay in full all outstanding indebtedness, including prepayment penalties, under the Credit Agreement with OrbiMed, datedFebruary 6, 2019 , as amended, and terminate the Credit Agreement, which had provided us with a term loan of up to$80.0 million due onFebruary 6, 2024 , at an interest rate of the higher of LIBOR plus 7.5% and 10.0%. Refer to Note 9 of our condensed consolidated financial statements for additional details regarding the private offering of the Notes and related events. There have been no other material changes to our contractual obligations sinceDecember 31, 2019 . Off-Balance Sheet Arrangements As ofSeptember 30, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. 66
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Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. We will continue to actively monitor the impact of the COVID-19 pandemic and other factors on expected credit losses. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K, filed with theSEC onFebruary 28, 2020 . See "Note 1-Description of Business and Summary of Significant Accounting Policies" of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding the Company's significant accounting policies. JOBS Act Accounting Election We currently meet the definition of an emerging growth company, as defined in the Jumpstart Our Business Startups Act (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. On the last business day of our second quarter in fiscal year 2020, the aggregate worldwide market value of shares of common stock held by our non-affiliate stockholders exceeded$700 million . As a result, as ofDecember 31, 2020 , we will be considered a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, and we will cease to be an emerging growth company as defined in the JOBS Act. We will no longer be exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and our independent registered public accounting firm will evaluate and report on the effectiveness of internal control over financial reporting. Recent Accounting Pronouncements See "Note 1-Description of Business and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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