Health Catalyst(HCAT) - 2020 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The unaudited condensed consolidated financial statements show total assets increased to $466.4 million by June 30, 2020, with a 23% revenue increase to $88.4 million but a net loss of $44.7 million for the six months Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $104,185 | $18,032 | | Short-term investments | $248,932 | $210,245 | | Total current assets | $396,953 | $264,239 | | Goodwill | $18,419 | $3,694 | | Total assets | $466,396 | $302,360 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $50,185 | $48,217 | | Long-term debt | $163,480 | $48,200 | | Total liabilities | $232,434 | $101,716 | | Total stockholders' equity | $233,962 | $200,644 | | Total liabilities and stockholders' equity | $466,396 | $302,360 | Condensed Consolidated Statements of Operations Statement of Operations Summary (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $43,259 | $36,804 | $88,375 | $72,017 | | Technology Revenue | $25,487 | $20,085 | $50,186 | $40,233 | | Professional Services Revenue | $17,772 | $16,719 | $38,189 | $31,784 | | Loss from operations | $(15,640) | $(9,363) | $(33,745) | $(20,457) | | Loss on extinguishment of debt | $(8,514) | $— | $(8,514) | $(1,670) | | Net loss | $(27,183) | $(10,694) | $(44,673) | $(24,414) | | Net loss per share, basic and diluted | $(0.71) | $(21.98) | $(1.19) | $(38.29) | Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(17,520) | $(13,641) | | Net cash used in investing activities | $(56,684) | $(30,214) | | Net cash provided by financing activities | $160,366 | $36,243 | | Net increase (decrease) in cash | $86,153 | $(7,612) | - Financing activities in H1 2020 were primarily driven by $222.5 million in net proceeds from convertible senior notes, offset by a $57.0 million repayment of credit facilities and a $21.7 million purchase of capped calls[36][37] Notes to the Condensed Consolidated Financial Statements The notes detail significant accounting policies, recent business combinations, and financial instrument specifics, including the Able Health acquisition, convertible senior notes issuance, and subsequent acquisitions of Healthfinch and Vitalware - On February 21, 2020, the company acquired Able Health, Inc. for total consideration of $21.5 million, comprising $15.2 million in cash, $3.3 million in common stock, and $3.0 million in contingent consideration, resulting in $14.7 million of goodwill[99][103] - In April 2020, the company issued $230.0 million of 2.50% Convertible Senior Notes due 2025, receiving net proceeds of $222.5 million, and purchased capped calls for $21.7 million to reduce potential dilution[117][126] - Proceeds from the new notes were used to prepay the OrbiMed term loan in full, resulting in a loss on debt extinguishment of $8.5 million in Q2 2020[132] - Subsequent to quarter-end, the company acquired Healthfinch, Inc. on July 31, 2020, for approximately $45 million and entered an agreement on August 11, 2020, to acquire Vitalware LLC for approximately $120 million[180][181][183] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 23% revenue increase to $88.4 million for H1 2020, the mixed impact of COVID-19, and strategic financial actions including issuing $230 million in convertible senior notes COVID-19 Impact The COVID-19 pandemic is expected to have a muted impact on total revenue due to the recurring revenue model, but led to temporary discounts and fewer new customer additions - The company's highly recurring revenue model (over 90%) is expected to mute the overall impact of COVID-19 on 2020 total revenue[190] - To support customers, the company provided temporary discounts on Professional Services, which lowered revenue growth and gross margin for that segment in Q2 2020[191] - Net new DOS subscription customer additions in H1 2020 were lower than anticipated due to the pandemic's impact on health systems[192] Results of Operations Revenue Comparison (in thousands) | Period | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | | | | | | Total Revenue | $43,259 | $36,804 | $6,455 | 18% | | Technology | $25,487 | $20,085 | $5,402 | 27% | | Professional Services | $17,772 | $16,719 | $1,053 | 6% | | Six Months Ended June 30 | | | | | | Total Revenue | $88,375 | $72,017 | $16,358 | 23% | | Technology | $50,186 | $40,233 | $9,953 | 25% | | Professional Services | $38,189 | $31,784 | $6,405 | 20% | Operating Expenses Comparison for Six Months Ended June 30 (in thousands) | Expense Category | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $25,989 | $20,858 | $5,131 | 25% | | Research and development | $25,149 | $19,732 | $5,417 | 27% | | General and administrative | $17,814 | $12,320 | $5,494 | 45% | | Total operating expenses | $74,923 | $57,438 | $17,485 | 30% | - The increase in operating expenses for H1 2020 was primarily driven by higher stock-based compensation ($14.7 million increase YoY), acquisition-related costs ($1.3 million), and increased salary costs from higher headcount[260][261][263][265] Liquidity and Capital Resources The company strengthened its liquidity with $353.1 million in cash and investments as of June 30, 2020, primarily from $222.5 million in net proceeds from convertible senior notes used to prepay existing debt - As of June 30, 2020, the company had $353.1 million in cash, cash equivalents, and short-term investments[276] - In April 2020, the company raised $222.5 million in net proceeds from a private offering of $230.0 million in 2.50% Convertible Senior Notes due 2025[278] - The company used $57.0 million of the note proceeds to prepay all outstanding debt under its Credit Agreement with OrbiMed and terminated the agreement[285] Contractual Obligations as of June 30, 2020 (in thousands) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Convertible senior notes | $258,750 | $5,750 | $11,500 | $241,500 | $— | | Operating lease obligations | $37,611 | $3,392 | $6,845 | $6,714 | $20,660 | | Acquisition-related consideration | $3,250 | $3,250 | $— | $— | $— | | Total | $299,611 | $12,392 | $18,345 | $248,214 | $20,660 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations on its $353.1 million in cash and investments, with foreign currency and inflation risks currently deemed immaterial - The company's main market risk is interest rate risk on its $353.1 million portfolio of cash, cash equivalents, and short-term investments[314] - Foreign currency exchange risk is currently limited due to the small size of international operations, with most sales contracts denominated in U.S. dollars[318][319] - Inflation is not believed to have had a material effect on the business[320] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - As of June 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[322] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[323] Part II. Other Information Item 1. Legal Proceedings The company is subject to legal proceedings in the normal course of business but reports no significant outstanding claims as of the reporting date - The company is subject to legal proceedings in the normal course of business, but reports no significant outstanding claims[326] Item 1A. Risk Factors The company faces significant risks from intense competition, the COVID-19 pandemic, data security breaches, regulatory compliance (HIPAA, CCPA, GDPR, FDA), and financial challenges including a history of net losses - The company faces intense competition from industry-agnostic analytics companies, EHR vendors like Epic and Cerner, and large, well-resourced entities such as Optum and IBM[329][330] - The COVID-19 pandemic poses a significant risk, potentially decreasing healthcare spending, lengthening sales cycles, and impacting customer renewals and collections[335] - The business is highly dependent on customer satisfaction and contract renewals; failure to renew or renewing at lower fee levels could materially harm financial results[339] - Security breaches or unauthorized access to customer data, including Protected Health Information (PHI), could lead to significant liabilities, reputational damage, and loss of customers[344] - The company is subject to extensive and evolving healthcare regulations, including HIPAA, anti-kickback laws, and potential FDA regulation of its software as a medical device, which could create significant compliance costs and liabilities[441][442][443] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In April 2020, the company raised $222.5 million in net proceeds from convertible senior notes, used for capped call transactions, debt repayment, and general corporate purposes - In April 2020, the company raised net proceeds of $222.5 million from a private placement of $230.0 million in convertible senior notes[497][498] - The company used $57.0 million of the proceeds to prepay its credit agreement with OrbiMed and $21.6 million for capped call transactions[498] Item 6. Exhibits This section lists key exhibits, including the Indenture for the 2.50% Convertible Senior Notes due 2025 and CEO/CFO certifications - Key exhibits filed include the Indenture and form of Global Note for the 2.50% Convertible Senior Notes due 2025[501] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[501]