HEALTH CATALYST : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes included elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. 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 the sections titled "Risk Factors" and "Special Note
Regarding Forward-Looking Statements" included elsewhere in this Annual Report
on Form 10-K.
A discussion regarding our financial condition and results of operations for the
year ended December 31, 2020 compared to the year ended December 31, 2019 is
presented below. A discussion regarding our financial condition and results of
operations for the year ended December 31, 2019 compared to the year ended
December 31, 2018 is included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our prior year Form 10-K filed
on February 28, 2020.
Overview
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 organizations, and produce
measurable clinical, financial, and operational improvements. We envision a
future where all healthcare decisions are data informed.
Health Catalyst was founded in 2008 by healthcare analytics industry pioneers.
Our founders and team developed the initial version of our Solution, consisting
of an early version of our data platform, select analytics accelerators, and
professional services expertise. From the beginning, our Solution has been
focused on enabling our mission: to be the catalyst for massive, measurable,
data-informed healthcare improvement. We currently employ more than 1,000 team
members.
Highlights from the years ended December 31, 2020, 2019, and 2018 include:
•For the years ended December 31, 2020, 2019, and 2018, our total revenue was
$188.8 million, $154.9 million, and $112.6 million, 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.
•For the years ended December 31, 2020, 2019, and 2018, we incurred net losses
of $115.0 million, $60.1 million, and $62.0 million, respectively.
•For the years ended December 31, 2020, 2019, and 2018, our Adjusted EBITDA was
$(21.3) million, $(27.4) million, and $(38.1) million, respectively.
See "Selected Consolidated Financial and Other Data-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.
On July 29, 2019, we closed our IPO in which we issued and sold 8,050,000 shares
of common stock at a price to the public of $26.00 per share for aggregate net
proceeds of $190.0 million after deducting underwriting discounts and
commissions and offering expenses payable by us.
                                       61
--------------------------------------------------------------------------------
  Table of Contents
COVID-19 Impact

In March 2020, the World 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. The ongoing COVID-19 surge,
coupled alongside vaccine rollout logistics, likely indicate 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 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. Lastly, we see additional reasons for optimism
over the near-to-medium term, as we begin to witness early signs of progress on
vaccine rollout logistics.
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 year ended December 31, 2020. Additionally,
we benefit from a high level of technology revenue predictability, especially
our DOS subscription customers that typically 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 increased meaningfully.
Additionally, we have seen usage of our COVID-19-specific products 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 have seen minimal impact on our
technology dollar-based retention as a result of COVID-19 and would anticipate
similar dynamics moving forward.
Regarding our professional services, we continue to see high levels of
engagement of our team member base, who 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 meaningfully lower professional services
dollar-based retention than we have achieved historically. The primary drivers
for the decrease in our Adjusted Professional Services Gross Margin from 35% for
the year ended December 31, 2019 to 25% for the year ended December 31, 2020
include the lower professional services dollar-based retention mentioned above,
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 added nine net new DOS subscription customers during the year ended December
31, 2020. In the first half of 2020, given the significant impact of COVID-19 on
our healthcare provider end market, the number of first half new customer
additions was meaningfully lower than we originally anticipated entering the
year. As we entered the second half of 2020, we were pleased to see healthcare
organizations adjusting well to the "new normal" operating environment, with
COVID-19 highlighting the need for a more robust, commercial-grade data and
analytics solution. Likewise, given the financial strain imposed by the
pandemic, prospective customers have shown an increased focus on revenue and
cost optimization analytics, from which we believe we are well positioned to
benefit. On the other hand, the COVID-19 pandemic continued to create some
near-term financial uncertainty, making some health systems more cautious in
their near-term purchasing decisions. Given these operating dynamics, in the
second half of 2020 we experienced similar overall pipeline conversion rates to
the second half of 2019.
Any negative impact to 2020 total revenue caused by the COVID-19 pandemic has
also resulted 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.
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, as we get through the COVID-19 pandemic and healthcare
organizations' operations begin to normalize, we continue to be optimistic that
the pandemic will serve as an overall 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.
                                       62
--------------------------------------------------------------------------------
  Table of Contents
Our Business Model
We offer our Solution to a variety of healthcare organizations, primarily in the
United States, including academic medical centers, integrated delivery networks,
community hospitals, large physician practices, ACOs, health information
exchanges, health insurers, and other risk-bearing entities. We categorize our
customer count into two primary categories: DOS Subscription Customers and Other
Customers. DOS Subscription Customers are defined as customers who access our
DOS platform via a technology subscription contract. Other Customers generally
include DOS non-subscription customers and other customers from historical
acquisitions. As of December 31, 2020, 2019, and 2018, we had 74, 65, and 50 DOS
Subscription Customers with active subscriptions, respectively. As of
December 31, 2020, we served over 300 Other Customers compared to 65 as of
December 31, 2019. The significant increase in Other Customers from 2019 to 2020
was primarily due to our acquisitions of Able Health, Healthfinch, and
Vitalware.
We derive substantially all of our revenue through subscriptions for use of our
technology and professional services on a recurring basis. In 2020, greater than
90% of our total revenue was recurring in nature. Customers pay for our
technology primarily on a subscription basis for our entire technology suite or
for pieces of our technology (e.g., DOS-only). We generally provide access to
our technology and deliver professional services to customers on a recurring
basis, with our technology invoiced upfront annually or quarterly and our
professional services invoiced monthly. Most of our technology and professional
services contracts have up to a three-year term, of which the vast majority are
terminable after one year upon 90 days' notice. As we increase the use cases we
address at a given customer, we have the opportunity to upsell incremental
technology and services. We have demonstrated an ability to upsell technology
and services to our customer base over time as evidenced by a Dollar-based
Retention Rate of 102%, 109%, and 107% for the years ended December 31, 2020,
2019, and 2018, respectively.
The primary costs incurred to deliver our technology are hosting fees and
headcount-related costs associated with our cloud services and support teams.
Hosting fees are related to providing our technology through a cloud-based
environment hosted primarily by Microsoft Azure. However, we also operate a
private data center where certain customers are hosted and have deployed DOS
on-premise to a small number of customers. Over time, we plan to migrate our
on-premise and private data center customers to Azure-hosted environments,
increasing our technology cost of revenue. We have experienced and expect to
continue to experience operational inefficiencies associated with managing
multiple hosting providers, resulting in a headwind against Adjusted Technology
Gross Margin. The primary costs incurred to deliver our professional services
are the salaries, benefits, and other headcount-related costs of our team
members.
We delineate our sales organization by new customer acquisition and existing
customer retention and expansion. Selling efforts to new customers vary. Many of
our new customers engage with us broadly for multiple use cases, requiring
buy-in during the sales cycle across the C-suite. Alternatively, in some
instances, we engage with a customer in a single-use case. After we demonstrate
measurable improvements, we work with our customers to expand the utilization of
our Solution to other use cases or enterprise-wide. The average sales cycle for
a new customer is approximately one year, and that timeline can vary materially.
Because of our vertical focus on the healthcare industry, we believe our sales
and marketing resources can be deployed more efficiently than at
horizontally-focused companies that provide technology and services to multiple
industries. Over the past few years, we have invested in growth infrastructure
by adding to our sales operations and marketing teams, which are built to help
us scale over the long term.
We have demonstrated a consistent track record of innovation through research
and development over time as evidenced by our new product features and new
product offerings. This innovation is driven by feedback we glean from our
customers, professional services teams, and the market generally. Our
investments in product development have been focused on increasing the
capabilities of our Solution and expanding the number of use cases we address
for our customers.

                                       63
--------------------------------------------------------------------------------
  Table of Contents
Key Business 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:
                                                            Year Ended December 31,
                                                      2020              2019            2018
                                                       (in thousands, except percentages)
Total revenue                                   $    188,845        $ 154,941       $ 112,574
Adjusted Technology Gross Profit                      75,666           56,378          37,901
Adjusted Technology Gross Margin                          68   %           67  %           66  %

Adjusted Professional Services Gross Profit $ 19,358 $ 24,494 $ 16,028 Adjusted Professional Services Gross Margin

               25   %           35  %           29  %
Total Adjusted Gross Profit                     $     95,024        $  80,872       $  53,929
Total Adjusted Gross Margin                               50   %           52  %           48  %
Adjusted EBITDA                                 $    (21,287)       $ (27,363)      $ (38,053)


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. We discuss Adjusted Gross Profit,
Adjusted Gross Margin, and Adjusted EBITDA in more detail below.
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, tender offer payments deemed compensation, and
post-acquisition restructuring costs. 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 and for a reconciliation
of revenue to our Adjusted Gross Profit, the most directly comparable financial
measure calculated in accordance with GAAP.
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, duplicate headquarters rent expense, tender offer payments deemed
compensation, 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 "Selected Consolidated Financial and Other Data - Reconciliation of Non-GAAP
Financial Measures" for information regarding the limitations of using our
Adjusted EBITDA as a financial measure and for a reconciliation of our net loss
to Adjusted EBITDA, the most directly comparable financial measure calculated in
accordance with GAAP.
                                       64
--------------------------------------------------------------------------------
  Table of Contents
Other Key Metrics
We also regularly monitor and review the number of DOS Subscription Customers
and Dollar-based Retention Rate as shown in the following tables:
                                       As of December 31,
                                2020              2019       2018
DOS Subscription Customers      74                65          50


DOS Subscription Customers
Since 2016, our primary contracting model is a subscription-based contract to
our DOS platform, analytics applications, and professional services. Given how
fundamental DOS is to our Solution and because the vast majority of our total
revenue is derived from DOS Subscription Customers, we believe our DOS
Subscription Customer count, which represents customers with active
subscriptions at period end, is the best representation of our market
penetration and the growth of our business. Our 2020 DOS Subscription Customer
additions of nine was lower than the historical annual number of additions due
to the impact of COVID-19 on our sales achievement during the first half of
2020.
                                         Year Ended December 31,
                                       2020               2019       2018
Dollar-based Retention Rate                    102  %     109  %     107  %


Dollar-based Retention Rate
We calculate our Dollar-based Retention Rate as of a period end by starting with
the sum of the Annual Recurring Revenue (ARR) from customers as of the date 12
months prior to such period end (prior period ARR). We then calculate the sum of
the ARR from these same customers as of the current period end (current period
ARR). Current period ARR includes any upsells and also reflects contraction or
attrition over the trailing twelve months but excludes revenue from new
customers added in the current period. We then divide the current period ARR by
the prior period ARR to arrive at our Dollar-based Retention Rate. We calculate
ARR for each customer as the expected monthly recurring revenue of our customers
as of the last day of a period multiplied by 12. Because our primary business
model is to contract for our DOS platform, analytics applications, and
professional services, acquired customers that have not subscribed to DOS are
not included in the Dollar-based Retention Rate metrics.
Given our high level of technology revenue predictability, we would anticipate
minimal impact on our technology dollar-based retention as a result of COVID-19,
however, the financial strain imposed by COVID-19 on a number of our customers
has led to a meaningfully lower professional services dollar-based retention in
2020, and thus a lower total Dollar-based Retention Rate, compared to what we
have achieved historically. Given that our customer base will be under some
amount of continued pandemic-related financial and operational uncertainty over
the coming months, we anticipate that there will be continued strain on our
professional services dollar-based retention in the near-term.


                                       65
--------------------------------------------------------------------------------
  Table of Contents
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. We believe that our ability to increase our customer base
will enable us to drive growth. 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
organizations who 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 few 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.
•Impact of acquisitions. We have acquired multiple companies over the last few
years, including the Medicity acquisition in June 2018, the Able Health
acquisition in February 2020, the Healthfinch acquisition in July 2020, and the
Vitalware acquisition in September 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 from Medicity
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 from Medicity customers. As we integrate the teams
acquired via our recent acquisitions, we have also incurred integration-related
costs and duplicative costs that could impact our operating cost profile in the
near-term.
•Changing revenue mix. Our technology and professional services offerings have
materially different gross margin profiles. While our professional services help
our customers achieve measurable improvements and make them stickier, they have
lower gross margins than technology revenue. In 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 "Selected Consolidated Financial and Other Data-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 and who 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 and on-premise
deployments on a per-customer basis. This transition will result in higher cost
of technology revenue and provide a headwind against increases in Adjusted
Technology Gross Margin.
                                       66
--------------------------------------------------------------------------------
  Table of Contents
Recent Acquisitions
Able Health, Inc.

On February 21, 2020, we acquired Able Health, Inc. (Able Health), a leading
software-as-a-service provider of quality and regulatory measurement tracking
and reporting to healthcare providers and risk-bearing entities, in a
transaction accounted for as a business combination. We believe this acquisition
will strengthen Health Catalyst's Quality and Regulatory Measures capabilities.
The acquisition consideration transferred was $21.5 million and was comprised of
net cash consideration of $15.2 million, Health Catalyst common shares with a
fair value of $3.3 million, and contingent consideration based on achievement of
Able Health specified incremental customer billings for the year ending December
31, 2020. The purchase resulted in Health Catalyst acquiring 100% ownership in
Able Health.

Healthfinch, Inc.

On July 31, 2020, we acquired Healthfinch, Inc. (Healthfinch), which provides a
workflow integration engine delivering insights and analytics into EMR workflows
to automate physicians' ability to close patient care gaps in real-time, in a
transaction accounted for as a business combination. We believe this acquisition
will strengthen our existing population health capabilities. The acquisition
consideration transferred was $50.5 million and was comprised of net cash
consideration of $16.9 million, Health Catalyst common shares with a fair value
of $27.8 million, and contingent consideration based on certain earn-out
performance targets for Healthfinch during an earn-out period that ends on
July 31, 2021. The purchase resulted in Health Catalyst acquiring 100% ownership
in Healthfinch.

Vitalware, LLC

On September 1, 2020, we acquired Vitalware, LLC (Vitalware), a provider of
revenue workflow optimization and analytics SaaS technology solutions to
healthcare organizations, in a transaction accounted for as a business
combination. Vitalware's flagship offering is a chargemaster management solution
that delivers analytics for the complex regulatory and compliance functions
needed by healthcare provider systems. Additionally, Vitalware brings to bear
newer product suites to help health systems capture lost revenue and to support
compliance with expanding pricing transparency regulation. The acquisition
consideration transferred was $119.2 million and was comprised of net cash
consideration of $69.6 million, Health Catalyst common shares with a fair value
of $41.3 million, and contingent consideration based on certain earn-out
performance targets for Vitalware during an earn-out period that ends on
March 31, 2021. The purchase resulted in Health Catalyst acquiring 100%
ownership in Vitalware.

Components of Our Results of Operations
Revenue
We derive our revenue from sales of technology and professional services. For
the years ended December 31, 2020, 2019, and 2018, technology revenue
represented 58%, 54%, and 51% of total revenue, respectively, and professional
services revenue represented 42%, 46%, and 49% 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. DOS Subscription
Customers that access our technology through an all-access or limited access,
modular subscription generally have agreements with 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.

                                       67
--------------------------------------------------------------------------------
  Table of Contents
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 the
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. 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, and directors' fees.
Due to the closing of our IPO on July 29, 2019, we incurred and expect to
continue 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.
                                       68
--------------------------------------------------------------------------------
  Table of Contents
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 of U.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 deferred tax assets, including
net operating loss carryforwards (NOLs) and tax credits related primarily to
research and development.
As of December 31, 2020, we had federal and state NOLs of $419.6 million and
$334.6 million, respectively, which will begin to expire for federal and state
tax purposes in 2032 and 2023, respectively. Our existing NOLs may be subject to
limitations arising from ownership changes and, if we undergo an ownership
change, 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.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the
CARES Act) was enacted and signed into U.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 of December 2021 and
December 2022. We began deferring the social security payroll tax match in April
2020.

                                       69
--------------------------------------------------------------------------------
  Table of Contents
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:
                                                                                   Year Ended December 31,
                                                                         2020                2019               2018

                                                                                       (in thousands)
Revenue:
Technology                                                           $  110,467          $  83,975          $  57,224
Professional services                                                    78,378             70,966             55,350
Total revenue                                                           188,845            154,941            112,574

Cost of revenue, excluding depreciation and amortization shown below: Technology(1)(2)

                                                         35,604             27,797             19,429
Professional services(1)(2)(3)                                           62,473             47,548             40,423

Total cost of revenue, excluding depreciation and amortization 98,077

             75,345             59,852
Operating expenses:
Sales and marketing(1)(2)(3)                                             55,411             47,284             44,123
Research and development(1)(2)(3)                                        53,517             46,252             38,592
General and administrative(1)(2)(3)(4)(5)(6)                             59,240             31,713             22,690
Depreciation and amortization                                            18,725              9,212              7,412
Total operating expenses                                                186,893            134,461            112,817
Loss from operations                                                    (96,125)           (54,865)           (60,095)
Loss on extinguishment of debt                                           (8,514)            (1,670)                 -
Interest and other expense, net                                         (11,572)            (3,419)            (2,024)
Loss before income taxes                                               (116,211)           (59,954)           (62,119)
Income tax provision (benefit)                                           (1,194)               142               (135)
Net loss                                                             $ (115,017)         $ (60,096)         $ (61,984)


__________________

(1)Includes stock-based compensation expense, as follows:

                                                                      Year 

Ended December 31,

                                                             2020              2019              2018
Stock-Based Compensation Expense:                                         (in thousands)
Cost of revenue, excluding depreciation and amortization:
Technology                                                $    803          $    200          $     78
Professional services                                        3,453               968               480
Sales and marketing                                         13,093             3,811             1,514
Research and development                                     8,069             4,841               787
General and administrative                                  12,539             8,024             1,339
Total                                                     $ 37,957          $ 17,844          $  4,198




                                       70

--------------------------------------------------------------------------------
  Table of Contents
(2)Includes tender offer payments deemed compensation expense, as follows:
                                                                       Year 

Ended December 31,

                                                              2020               2019              2018
Tender Offer Payments Deemed Compensation Expense:                         (in thousands)
Cost of revenue, excluding depreciation and amortization:
Technology                                                $       -          $       -          $     28
Professional services                                             -          $       -               284
Sales and marketing                                               -          $       -             3,967
Research and development                                          -          $       -               906
General and administrative                                        -          $       -             3,133
Total                                                     $       -          $       -          $  8,318

(3) Includes post-acquisition restructuring costs, as follows:

Year Ended December 31,

                                                                2020              2019              2018
Post-Acquisition Restructuring Costs:                                        (in thousands)
Cost of revenue, excluding depreciation and amortization:

Professional services                                       $       -          $    108          $    337
Sales and marketing                                                 -               306               780
Research and development                                            -                32               513
General and administrative                                          -                 -               484
Total                                                       $       -          $    446          $  2,114

(4) Includes acquisition transaction costs, as follows:

                                            Year Ended December 31,
                                           2020                2019      

2018

Acquisition Transaction Costs:                  (in thousands)
General and administrative       $       2,670                $  -      $  -



(5) Includes the change in fair value of contingent consideration liabilities,
as follows:
                                                                          Year Ended December 31,
                                                                2020                  2019               2018
Change in Fair Value of Contingent Consideration:                             (in thousands)
General and administrative                                $       14,088          $       -          $       -

(6) Includes duplicate headquarters rent expense, as follows:

                                                  Year Ended December 31,
                                                 2020                2019   

2018

Duplicate Headquarters Rent Expense:                  (in thousands)
General and administrative             $       1,398                $  -      $  -



                                       71

--------------------------------------------------------------------------------

  Table of Contents
                                                                          Year Ended December 31,
                                                              2020                  2019                 2018
Revenue:
Technology                                                         58  %                54  %                51  %
Professional services                                              42                   46                   49
Total revenue                                                     100                  100                  100
Cost of revenue, excluding depreciation and amortization
shown below:
Technology                                                         19                   18                   17
Professional service                                               33                   31                   36
Total cost of revenue, excluding depreciation and
amortization                                                       52                   49                   53
Operating expenses:
Sales and marketing                                                29                   31                   39
Research and development                                           28                   30                   34
General and administrative                                         31                   20                   20
Depreciation and amortization                                      10                    6                    7
Total operating expenses                                           98                   87                  100
Loss from operations                                              (50)                 (36)                 (53)
Loss on extinguishment of debt                                     (5)                  (1)                   -
Interest and other expense, net                                    (6)                  (2)                  (2)
Loss before income taxes                                          (61)                 (39)                 (55)
Income tax provision (benefit)                                     (1)                   -                    -
Net loss                                                          (60) %               (39) %               (55) %



Discussion of the Years Ended December 31, 2020 and 2019
Revenue
                              Year Ended December 31,
                               2020              2019         $ Change      % Change

                                      (in thousands, except percentages)
Revenue:
Technology                $    110,467       $  83,975       $ 26,492           32  %
Professional services           78,378          70,966          7,412           10  %
Total revenue             $    188,845       $ 154,941       $ 33,904           22  %
Percentage of revenue:
Technology                          58  %           54  %
Professional services               42              46
Total                              100  %          100  %


Total revenue was $188.8 million for the year ended December 31, 2020, compared
to $154.9 million for the year ended December 31, 2019, an increase of $33.9
million, or 22%.
Technology revenue was $110.5 million, or 58% of total revenue, for the year
ended December 31, 2020, compared to $84.0 million, or 54% of total revenue, for
the year ended December 31, 2019. The revenue growth was primarily from new DOS
Subscription Customers, acquired technology customers, and revenue from existing
customers paying higher technology access fees from contractual, annual
escalators, and new offerings of expanded support services.
Professional services revenue was $78.4 million, or 42% of total revenue, for
the year ended December 31, 2020, compared to $71.0 million, or 46% of total
revenue, for the year ended December 31, 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.
                                       72
--------------------------------------------------------------------------------
  Table of Contents
Cost of revenue, excluding depreciation and amortization
                                                       Year Ended December 31,
                                                     2020                    2019            $ Change             % Change

                                                                      (in thousands, except percentages)
Cost of revenue, excluding depreciation and
amortization:
Technology                                      $    35,604               $ 27,797          $  7,807                      28  %
Professional services                                62,473                 47,548            14,925                      31  %
Total cost of revenue, excluding depreciation
and amortization                                $    98,077               $ 75,345          $ 22,732                      30  %
Percentage of total revenue                              52   %                 49  %


Cost of technology revenue, excluding depreciation and amortization, was $35.6
million for the year ended December 31, 2020, compared to $27.8 million for the
year ended December 31, 2019, an increase of $7.8 million, or 28%. The increase
in cost of technology revenue was primarily due to $4.2 million in increased
cloud computing and hosting costs largely from the current year acquisitions and
the expanded use of Microsoft Azure to serve existing and new customers, and an
increase of $2.3 million in salary and related personnel costs from an increase
in cloud services and support headcount.
Cost of professional services revenue was $62.5 million for the year ended
December 31, 2020, compared to $47.5 million for the year ended December 31,
2019, an increase of $14.9 million, or 31%. This increase was primarily due to a
$13.4 million increase in salary and related personnel costs from additional
professional services headcount and additional stock-based compensation of $2.5
million, which were partially offset by a decrease in travel-related expenses of
$1.8 million.
Operating Expenses
Sales and marketing
                                    Year Ended December 31,
                                   2020                  2019         $ Change      % Change

                                            (in thousands, except percentages)
Sales and marketing           $    55,411             $ 47,284       $  8,127           17  %
Percentage of total revenue            29   %               31  %


Sales and marketing expenses were $55.4 million for the year ended December 31,
2020, compared to $47.3 million for the year ended December 31, 2019, an
increase of $8.1 million, or 17%. The increase was primarily due to a $9.3
million increase in stock-based compensation and a $0.9 million increase in the
provision for credit losses, which were partially offset by a decrease in
travel-related expenses of $3.0 million.
Sales and marketing expense as a percentage of total revenue decreased from 31%
in the year ended December 31, 2019 to 29% in the year ended December 31, 2020.
Research and development
                                    Year Ended December 31,
                                   2020                  2019         $ Change      % Change

                                            (in thousands, except percentages)
Research and development      $    53,517             $ 46,252       $  7,265           16  %
Percentage of total revenue            28   %               30  %


Research and development expenses were $53.5 million for the year ended
December 31, 2020, compared to $46.3 million for the year ended December 31,
2019, an increase of $7.3 million, or 16%. The increase was primarily due to an
increase of $3.4 million in stock-based compensation and an increase of $4.0
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 year ended December 31, 2019 to 28% in the year ended December 31, 2020.

                                       73
--------------------------------------------------------------------------------

  Table of Contents
General and administrative
                                    Year Ended December 31,
                                   2020                  2019         $ Change      % Change

                                            (in thousands, except percentages)
General and administrative    $    59,240             $ 31,713       $ 27,527           87  %
Percentage of total revenue            31   %               20  %


General and administrative expenses were $59.2 million for the year
ended December 31, 2020, compared to $31.7 million for the year
ended December 31, 2019, an increase of $27.5 million, or 87%. The increase was
primarily due to increases of $14.1 million in change in fair value of
contingent consideration liabilities, $4.5 million in stock-based compensation,
$2.7 million in acquisition-related transaction costs, $2.6 million in salary
and related personnel costs from additional headcount, $1.4 million in duplicate
rent expense, and $1.4 million in corporate insurance costs.
General and administrative expense as a percentage of revenue increased from 20%
in the year ended December 31, 2019 to 31% in the year ended December 31, 2020.
Depreciation and amortization
                                       Year Ended December 31,
                                       2020                   2019        $ Change      % Change

                                                (in thousands, except percentages)
Depreciation and amortization    $     18,725              $ 9,212       $  9,513          103  %
Percentage of total revenue                10   %                6  %


Depreciation and amortization expenses were $18.7 million for the year
ended December 31, 2020, compared to $9.2 million for the year
ended December 31, 2019, an increase of $9.5 million, or 103%. 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 year ended December 31, 2019 to 10% in the year ended December 31,
2020.
Loss on extinguishment of debt
                                       Year Ended December 31,
                                          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.
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 and terminate the Credit Agreement. We recorded a
loss on extinguishment of debt of approximately $8.5 million during the year
ended December 31, 2020, including approximately $7.0 million of repayment fees
and $1.5 million unamortized debt discounts and issuance costs related to the
OrbiMed term loan.
On February 6, 2019, we entered into the OrbiMed Credit Facility that
established a senior term loan facility of up to $80.0 million under certain
conditions and we 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.

                                       74
--------------------------------------------------------------------------------
  Table of Contents
Interest and other expense, net
                                                    Year Ended December 31,
                                                    2020                   2019            $ Change             % Change

                                                                   (in thousands, except percentages)
Interest income                             $       2,094               $  2,810          $   (716)                    (25) %
Interest expense                                  (13,716)                (6,261)           (7,455)                    119  %
Other income (expense)                                 50                     32                18                      56  %
Total interest and other expense, net       $     (11,572)              $ (3,419)         $ (8,153)                    238  %



Interest and other expense, net increased $8.2 million, or 238%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019. This
increase is primarily due to an increase in interest expense of $7.5 million due
to the increase in net borrowings resulting from the Notes Offering that
occurred in April 2020.
Income tax provision (benefit)
                                        Year Ended December 31,
                                            2020                 2019       $ Change      % Change

                                                 (in thousands, except percentages)
Income tax provision (benefit)   $        (1,194)               $ 142      $ (1,336)          n/m(1)


__________________
(1)Not meaningful.
Income tax provision (benefit) consists of current and deferred taxes for U.S.
federal, state, and foreign income taxes. On December 22, 2017, federal tax
legislation was enacted that included lowering the U.S. corporate income tax
rate to 21% effective in 2018. We remeasured certain deferred tax assets and
liabilities based on the tax rates at which they are expected to reverse in the
future, which is generally 21%. As we had a full valuation allowance on deferred
tax assets, the allowance was adjusted accordingly based on the remeasured
deferred tax asset and liability position. As a result, the federal tax
legislation had a limited impact on our income tax provision (benefit).
                                       75
--------------------------------------------------------------------------------
  Table of Contents
Liquidity and Capital Resources
As of December 31, 2020, we had cash, cash equivalents, and short-term
investments of $270.9 million, which were held primarily for working capital
purposes. 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, and our recent IPO. 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.
We believe our existing cash, cash equivalents and marketable securities and
amounts available under our credit facilities 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.
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 11 of our 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.

                                       76
--------------------------------------------------------------------------------
  Table of Contents
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.

Cash Flows
The following table summarizes our cash flows for the years ended December 31,
2020, 2019, and 2018:
                                                                     Year Ended December 31,
                                                            2020               2019               2018

                                                                          (in thousands)
Net cash used in operating activities                   $ (26,148)

$ (32,184) $ (40,296) Net cash (used in) provided by investing activities (82,565) (209,602)

            21,403
Net cash provided by financing activities                 182,609            231,381             24,346
Effect of exchange rate changes on cash and cash
equivalents                                                    26                  6                  -

Net increase (decrease) in cash and cash equivalents $ 73,922 $ (10,399) $ 5,453

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 year ended December 31, 2020, net cash used in operating activities
was $26.1 million, which included a net loss of $115.0 million. Non-cash charges
primarily consisted of $18.7 million in depreciation and amortization of
property, equipment, and intangible assets, $38.0 million in stock-based
compensation, $14.1 million in change in fair value of contingent consideration
liabilities, $8.5 million of loss from the extinguishment of debt, and $8.1
million in amortization of debt discount and issuance costs.
For the year ended December 31, 2019, net cash used in operating activities was
$32.2 million, which included a net loss of $60.1 million. Non-cash charges
primarily consisted of $9.2 million in depreciation and amortization of
property, equipment, and intangible assets, $17.8 million in stock-based
compensation, $1.7 million of loss from the extinguishment of debt, and $1.1
million in amortization of debt discount and issuance costs.
                                       77
--------------------------------------------------------------------------------
  Table of Contents
For the year ended December 31, 2018, net cash used in operating activities was
$40.3 million, which included a net loss of $62.0 million. Non-cash charges
primarily consisted of $4.2 million in stock-based compensation and $7.4 million
in depreciation and amortization of property, equipment, and intangible assets.
The 2018 net loss also included an $8.3 million charge that was paid in
association with the repurchase of common stock at a price in excess of its
estimated fair value as part of the 2018 tender offer that is further described
in Note 13 to the audited consolidated financial statements. The tender offer
cash payments are not expected to be recurring in future periods.
Investing Activities

Net cash used in investing activities for the year ended December 31, 2020 of $82.6 million was primarily due to $189.5 million in purchases of short-term investments, $101.7 million used in current year business acquisitions, and $9.0 million in purchases of property, equipment, and intangible assets, reduced by the $219.1 million sale and maturity of short-term investments.

Net cash used in investing activities for the year ended December 31, 2019 of
$209.6 million was primarily due to $256.0 million in purchases of short-term
investments and $4.3 million in purchases of property, equipment, and intangible
assets, reduced by the $50.7 million sale and maturity of short-term
investments.
Net cash provided by investing activities for the year ended December 31, 2018
of $21.4 million was primarily due to $37.9 million provided from the sale and
maturity of short-term investments, reduced by $14.0 million used to purchase
short-term investments and $2.5 million in purchases of property, equipment, and
intangible assets.
Financing Activities

Net cash provided by financing activities for the year ended December 31,
2020 of $182.6 million was primarily the result of $222.5 million in net
proceeds from the private offering of the Notes, $36.3 million in stock option
exercise proceeds, and $4.3 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 $1.6 million in
payments of acquisition-related obligations.

Net cash provided by financing activities for the year ended December 31, 2019
of $231.4 million was primarily the result of $194.6 million in IPO proceeds,
net of underwriters' discounts and commissions, $47.2 million in net proceeds
drawn under the OrbiMed Credit Facility, $12.1 million in net proceeds from the
sale and issuance of Series F redeemable convertible preferred stock, $2.7
million in stock option exercise proceeds, and $3.0 million in proceeds from our
ESPP, reduced by the $21.8 million payoff of the SVB debt, $4.6 million in
payments of deferred offering costs, and $1.7 million in payments of
acquisition-related obligations.
Net cash provided by financing activities for the year ended December 31, 2018
of $24.3 million was primarily the result of $34.0 million in proceeds from the
issuance of Series E redeemable convertible preferred stock, $10.0 million in
proceeds drawn under the SVB Debt Agreements and $3.0 million in stock option
exercise proceeds, reduced by an $8.7 million repurchase of our common stock,
and $13.9 million in payments of acquisition-related obligations.
                                       78
--------------------------------------------------------------------------------
  Table of Contents
Contractual Obligations and Commitments
The following table presents a summary of our payments due under contractual
arrangements as of December 31, 2020:
                                                             Payments Due by Period
                                       Total         2021        2022-2023       2024-2025      Thereafter

                                                                 (in thousands)

Convertible senior notes(1) $ 230,000 $ - $ -

$ 230,000      $         -
Operating lease obligations(2)         33,719        3,882           6,789          6,004           17,044
Acquisition-related consideration       2,000        2,000               -              -                -
Total                               $ 265,719      $ 5,882      $    6,789      $ 236,004      $    17,044


__________________
(1)On April 14, 2020, we issued $230.0 million in aggregate principal amount of
2.50% Convertible Senior Notes due 2025, 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.
(2)We lease our facilities under long-term operating leases, which expire at
various dates through 2031.

The contractual commitment amounts in the table above are associated with
agreements that are enforceable and legally binding and that specify all
significant terms, including fixed or minimum services to be used, fixed,
minimum or variable price provisions and the approximate timing of the
transaction.
In the ordinary course of business, we enter into agreements of varying scope
and terms pursuant to which we agree to indemnify customers or business partners
and other parties with respect to certain matters, including, but not limited
to, losses arising out of the breach of such agreements, services to be provided
by us or from data breaches, or intellectual property infringement claims made
by third parties. No demands have been made upon us to provide indemnification
under such agreements and there are no claims that we are aware of that could
have a material effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
As of December 31, 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.
                                       79
--------------------------------------------------------------------------------
  Table of Contents
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP.
The preparation of these consolidated financial statements requires management
to make estimates, assumptions, and judgments 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 revenue and
expenses during the applicable periods. We base our estimates, assumptions, and
judgments on our knowledge and experience about past and current events and on
various other factors that we believe to be reasonable under the circumstances.
Different assumptions and judgments would change the estimates used in the
preparation of our consolidated financial statements, which, in turn, could
change the results from those reported. We evaluate our estimates, assumptions,
and judgments on an ongoing basis.
The critical accounting estimates, assumptions, and judgments that we believe
have the most significant impact on our consolidated financial statements are
described below.
Revenue Recognition
We derive our revenues primarily from technology subscriptions and professional
services. We determine revenue recognition by applying the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the
contract; and
•Recognition of revenue when, or as, we satisfy the performance obligation.
We recognize revenue net of any taxes collected from customers and subsequently
remitted to governmental authorities.
Technology Revenue
Technology revenue primarily consists of subscription fees charged to customers
for access to use our technology. We provide customers access to our technology
through either an all-access or limited-access, modular subscription. The
majority of our subscription arrangements are cloud-based and do not provide
customers the right to take possession of the technology or contain a
significant penalty if the customer were to take possession of the technology.
Revenue from cloud-based subscriptions is recognized ratably over the contract
term beginning on the date that the service is made available to the customer.
Most of our subscription contracts have up to a three-year term, of which the
vast majority are terminable after one year upon 90 days notice.
Subscriptions that allow the customer to take software on-premise without
significant penalty are treated as time-based licenses. These arrangements
generally include access to technology, access to unspecified future products
and maintenance and support. Revenue for upfront access to the technology
library is recognized at a point in time when the technology is made available
to the customer. Revenue for access to unspecified future products included in
time-based license subscriptions is recognized ratably over the contract term
beginning on the date that the access is made available to the customer.
We also have certain perpetual license arrangements. Revenue from these
arrangements is recognized at a point in time upon delivery of the software.
Technology revenue also includes maintenance and support revenue which generally
includes bug fixes, updates, and support services. Revenue related to
maintenance and support is recognized over the contract term beginning on the
date that the service is made available to the customer.



                                       80
--------------------------------------------------------------------------------
  Table of Contents
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 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 and
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 the value of contracts, customer demographics, and
the types of users.
Standalone selling prices are not directly observable for our all-access and
limited-access technology arrangements, which are composed of cloud-based
subscriptions, time-based licenses, and perpetual licenses. For these technology
arrangements, we use the residual estimation method due to the 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.
Business Combinations
The results of businesses acquired in a business combination are included in our
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 values on the acquisition date. Any
excess consideration over the fair value of identifiable assets acquired and
liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each
acquisition accounted for as a business combination in order to record the
tangible and intangible assets acquired and liabilities assumed based on our
best estimate of fair value. Determining the fair value of assets acquired and
liabilities assumed requires management to use significant judgment and
estimates including the selection of valuation methodologies, estimates of
future revenue and cash flows, discount rates, and selection of comparable
companies. Significant estimation is required in determining the fair value of
the customer-related intangible assets and technology-related intangible assets.
The significant estimation is primarily due to the judgmental nature of the
inputs to the valuation models used to measure the fair value of these
intangible assets, as well as the sensitivity of the respective fair values to
the underlying significant assumptions. We typically use the income approach or
cost approach to measure the fair value of intangible assets. The significant
assumptions used to form the basis of the estimates included the number of
engineer hours required to develop technology, expected revenue including
revenue growth rates, rate and timing of obsolescence, royalty rates and
earnings before interest, taxes, depreciation and amortization ("EBITDA") margin
used in the estimate for customer relationships, and backlog. Many of these
significant assumptions were forward-looking and could be affected by future
economic and market conditions. We engage the assistance of valuation
specialists in concluding on fair value measurements in connection with
determining fair values of assets acquired and liabilities assumed in a business
combination.
Transaction costs associated with business combinations are expensed as incurred
and are included in general and administrative expense in our consolidated
statements of operations and comprehensive loss.

                                       81
--------------------------------------------------------------------------------
  Table of Contents
Goodwill
We record goodwill as the difference between the aggregate consideration paid
for a business combination and the fair value of the identifiable net tangible
and intangible assets acquired. Goodwill includes the know-how of the assembled
workforce, the ability of the workforce to further improve technology and
product offerings, customer relationships, and the expected cash flows resulting
from these efforts. Goodwill may also include expected synergies resulting from
the complementary strategic fit these businesses bring to existing operations.
Goodwill is assessed for impairment annually or more frequently if indicators of
impairment are present or circumstances suggest that impairment may exist.
Our first step in the goodwill impairment test is a qualitative analysis of
factors that could be indicators of potential impairment. Next, if a
quantitative analysis is necessary, we compare the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, the goodwill of the reporting unit
is not considered impaired. If the carrying amount of the reporting unit exceeds
its fair value, we would recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit's fair value.
Stock-Based Compensation
Stock-based awards, including stock options and RSUs, are measured and
recognized in the consolidated financial statements based on the fair value of
the award on the grant date. For awards subject to performance conditions, we
record expense when the performance condition becomes probable. We record
forfeitures of stock-based awards as the actual forfeitures occur.
We have issued two types of employee stock-based awards, standard and two-tier.
Our standard stock-based awards vest solely on a service-based condition.  For
these awards, we recognize stock-based compensation expense on a straight-line
basis over the vesting period. Two-tier employee stock-based awards contain both
a service-based condition and performance condition, defined as the earlier of
(i) an acquisition or change in control of the company or (ii) upon the
occurrence of an initial public offering by the Company. A change in control
event and effective registration event are not deemed probable until
consummated; accordingly, no expense is recorded related to two-tier stock-based
awards until the performance condition becomes probable of occurring.
Awards that contain both service-based and performance conditions are recognized
using the accelerated attribution method once the performance condition is
probable of occurring. The service-based condition is generally a service period
of four years. Upon closing our IPO, we recorded cumulative share-based
compensation expense of approximately $6.0 million using the accumulated
attribution method for two-tier employee stock-based awards for which the
service condition had been satisfied at that date.
The grant date fair value of RSUs is determined using the market closing price
of our common stock on the date of grant. We estimate the fair value of our
stock option awards on the grant date using the Black-Scholes option-pricing
model. This requires the input of highly subjective assumptions, including the
expected term of stock options, the expected volatility of the price of our
common stock, risk-free interest rates, and the expected dividend yield of our
common stock. The assumptions used in our option-pricing model represent our
best estimates. These estimates involve inherent uncertainties and the
application of management's judgment. If factors change and different
assumptions are used, our stock-based compensation expense could be materially
different in the future. The resulting fair value, net of actual forfeitures, is
recognized on a straight-line basis over the period during which an employee is
required to provide service in exchange for the award.
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.
These assumptions used in the Black-Scholes option-pricing model, other than the
fair value of our common stock, are estimated as follows:
•Expected volatility.  Since a public market for our common stock did not exist
prior to our IPO and, therefore, we did not have a sufficient trading history of
our common stock, we estimated the expected volatility based on the volatility
of similar publicly-held entities (guideline companies) over a period equivalent
to the expected term of the pre-IPO awards. In evaluating the similarity of
guideline companies to us, we considered factors such as industry, stage of life
cycle, size, and financial leverage. We intend to primarily use the volatility
history of the share price of our common stock as it becomes available.
                                       82
--------------------------------------------------------------------------------
  Table of Contents
•Expected term.  We estimate the expected term using the simplified method, as
we do not have sufficient historical exercise activity to develop reasonable
expectations about future exercise patterns and post-vesting employment
termination behavior. The simplified method calculates the average period the
stock options are expected to remain outstanding as the midpoint between the
vesting date and the contractual expiration date of the award.
•Risk-free interest rate.  The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant for maturities corresponding
with the expected term of the award.
•Expected dividend yield.  We have never declared or paid any dividends and do
not presently plan to pay dividends in the foreseeable future. Consequently, we
use an expected dividend yield of zero.
Prior to the adoption of ASU No. 2018-07, Compensation - Stock Compensation (ASU
2018-17), which simplifies the accounting for non-employee share-based payment
transactions, the fair value measurement date for non-employee awards was the
date the performance of services was completed. Upon adoption of ASU 2018-07 on
January 1, 2019, the measurement date for non-employee awards is the date of
grant. The compensation expense for non-employees is recognized, without changes
in the fair value of the award, in the same period and in the same manner as
though we had paid cash for the services, which is typically the vesting period
of the respective award.
We will continue to use judgment in evaluating the assumptions related to our
stock-based compensation on a prospective basis. As we continue to accumulate
additional data related to our common stock, we may have refinements to our
estimates, which could materially impact our future stock-based compensation
expense.
Recent Accounting Pronouncements
See "Description of Business and Summary of Significant Accounting Policies" in
Note 1 to our audited consolidated financial statements included within Item 8
in this Annual Report on Form 10-K for more information.
                                       83

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses