The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, the accompanying notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" and "Special Note Regarding Forward-looking Statements."
Overview
We are a leading provider of data and analytics technology and services to healthcare organizations. Our Solution comprises a cloud-based data platform, analytics software, and professional services expertise. Our customers, which are primarily healthcare providers, use our Solution to manage their data, derive analytical insights to operate their organization, and produce measurable clinical, financial, and operational improvements. We envision a future where all healthcare decisions are data informed.
Highlights from the three and nine months ended
•We recognized total revenue of$68.4 million and$61.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$207.1 million and$177.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The growth in revenue was primarily due to revenue from new customers, including customers of our recent acquired entities, and existing customers paying higher technology access fees from contractual, annual escalators. •We incurred net losses of$(45.7) million and$(40.0) million for the three months endedSeptember 30, 2022 and 2021, respectively, and$(101.6) million and$(104.2) million for the nine months endedSeptember 30, 2022 and 2021, respectively. •Our Adjusted EBITDA was$(4.6) million and$(5.8) million for the three months endedSeptember 30, 2022 and 2021, respectively, and$(1.9) million and$(5.0) million for the nine months endedSeptember 30, 2022 and 2021, respectively. See the section titled "Key Financial Metrics-Reconciliation of Non-GAAP Financial Measures" below 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 the section titled “Key Factors Affecting Our Performance” for more
information about important opportunities and challenges related to our
business.
42 --------------------------------------------------------------------------------
Challenging Macroeconomic Environment
Recent high levels of inflation, the ongoing COVID-19 pandemic, the tight labor market, and other challenging macroeconomic factors continue to adversely affect workforces, organizations, governments, customers, economies, and financial markets globally. These factors have disrupted the normal operations of many businesses, including ours. These factors have also placed the national healthcare system under significant operational and budgetary strain, and will likely continue to do so in the near-term. The health system end market, in particular, is experiencing meaningful financial strain, in which it has realized significant increases in labor and supply costs without a commensurate increase in revenue, leading to a deterioration in operating margins across many of our customers and prospective customers. We anticipate this dynamic to persist for at least the next few quarters. Though we continue to have a robust pipeline and have not seen a material negative impact to our win-rates, many healthcare organizations have delayed near-term purchasing decisions and reduced their costs as they reevaluate budgets given their financial situations. This dynamic elongated our sales cycle, negatively impacted our bookings achievement, and led to lower than anticipated dollar-based retention metric in the nine months endedSeptember 30, 2022 . Although there will likely continue to be some strain on our near-term conversion rates given the ongoing end-market financial pressure, we anticipate bookings improvement in the second half of 2022 as compared to the first half as there is a strong acknowledgement that our Solution is part of health systems' financial pressure solution, especially related to the segments of our Solution that have a clear, near-term financial return on investment (ROI), such as our Financial Empowerment suite, ourPopulation Health suite, and tech-enabled outsourcing. We benefit from a highly recurring revenue model, in which greater than 90% of our revenue is recurring in nature, and a high level of technology revenue predictability, especially within our DOS Subscription Customers whose contracts typically have built-in, contractual technology revenue escalators. During the first half of the year, however, in a few instances, we experienced customers trimming back their near-term spend with us in an effort to meet short-term budget requirements. This included the loss of a large enterprise DOS Subscription Customer. Our historical gross customer retention has been very high, especially amongst our enterprise DOS customer base, and we believe the loss of this enterprise DOS customer was an isolated, customer-specific event. Within our professional services segment, a subset of customers have modestly reduced the number of FTEs engaged in their initiatives, while in the technology segment, a small subset of modular customers have lowered their application and analytics spend. As a result of the loss of a large enterprise DOS customer and other customers trimming back certain professional services and technology spend, which occurred primarily during the first half of 2022, we experienced a sequential decline in our total revenue and Adjusted EBITDA in the third quarter compared to the second quarter of 2022. We expect revenue and Adjusted EBITDA to stabilize moving forward and over the long-term, though quarterly trends can vary and may decline sequentially in the fourth quarter compared to the third quarter of 2022. We are proactively responding to the challenging macroeconomic environment with a strategic operating plan that we believe will enable us to move forward in a position of continued strength. We are continuing to make several strategic research and development investments in order to maintain our position as a market-leading data platform over the long term, with a focus on providing our customers with a strong ROI over time. Additionally, our operating focus includes cost reduction initiatives that we believe will enable greater operating leverage in certain development and support functions, as well as professional services offerings, including through the use of offshore and nearshore labor and strategic partners. 43 --------------------------------------------------------------------------------
Key Financial Metrics
We regularly review a number of metrics, including the following key financial
metrics, to manage our business and evaluate our operating performance compared
to that of other companies in our industry:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands, except percentages) (in thousands, except percentages)
Total revenue $ 68,354 $ 61,737 $ 207,074 $ 177,210
Adjusted Technology Gross Profit $ 29,993 $ 26,731 $ 91,559 $ 74,375
Adjusted Technology Gross Margin 68 % 70 % 70 % 69 %
Adjusted Professional Services Gross
Profit $ 4,970 $ 4,696 $ 19,240 $ 19,799
Adjusted Professional Services Gross
Margin 20 % 20 % 26 % 28 %
Total Adjusted Gross Profit $ 34,963 $ 31,427 $ 110,799 $ 94,174
Total Adjusted Gross Margin 51 % 51 % 54 % 53 %
Adjusted EBITDA $ (4,554) $
(5,794)
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 team member incentives. We discuss Adjusted Gross
Profit, Adjusted Gross Margin, and Adjusted EBITDA in more detail below.
Reconciliation of non-GAAP financial measures
In addition to our results determined in accordance with GAAP, we believe
certain non-GAAP measures, including Adjusted Gross Profit measures, Adjusted
Gross Margin measures, and Adjusted EBITDA, are useful in evaluating our
operating performance. For example, we exclude stock-based compensation expense
because it is non-cash in nature and excluding this expense provides meaningful
supplemental information regarding our operational performance and allows
investors the ability to make more meaningful comparisons between our operating
results and those of other companies. We use this non-GAAP financial information
to evaluate our ongoing operations, as a component in determining employee bonus
compensation, and for internal planning and forecasting purposes.
We believe that non-GAAP financial information, when taken collectively, may be
helpful to investors because it provides consistency and comparability with past
financial performance. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP. In addition, other companies,
including companies in our industry, may calculate similarly-titled non-GAAP
measures differently or may use other measures to evaluate their performance,
all of which could reduce the usefulness of our non-GAAP financial measures as
tools for comparison. A reconciliation is provided below for each non-GAAP
financial measure to the most directly comparable financial measure stated in
accordance with GAAP. Investors are encouraged to review the related GAAP
financial measures and the reconciliation of these non-GAAP financial measures
to their most directly comparable GAAP financial measures, and not to rely on
any single financial measure to evaluate our business.
44
--------------------------------------------------------------------------------
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, adding back stock-based compensation, acquisition-related costs, net, and restructuring costs as applicable. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other non-recurring operating expenses. We present both of these measures for our technology and professional services business. 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. The following is a reconciliation of our Adjusted Gross Profit to revenue, the most directly comparable financial measure calculated in accordance with GAAP, for the three months endedSeptember 30, 2022 and 2021. Three
Months Ended
(in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 43,997 $ 24,357 $ 68,354
Cost of revenue, excluding depreciation and amortization (14,572) (21,768) (36,340)
Gross profit, excluding depreciation and amortization 29,425
2,589 32,014
Add:
Stock-based compensation 494 1,991 2,485 Acquisition-related costs, net(1) 74 143 217 Restructuring costs(2) - 247 247 Adjusted Gross Profit$ 29,993 $ 4,970 $ 34,963 Gross margin, excluding depreciation and amortization 67 % 11 % 47 % Adjusted Gross Margin 68 % 20 % 51 % ___________________ (1)Acquisition-related costs, net include deferred retention expenses following the ARMUS, KPI Ninja, and Twistle acquisitions. (2)Restructuring costs include severance and other team member costs from workforce reductions. Three
Months Ended
(in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 38,262 $ 23,475 $ 61,737
Cost of revenue, excluding depreciation and amortization (12,094) (20,992) (33,086)
Gross profit, excluding depreciation and amortization 26,168
2,483 28,651
Add:
Stock-based compensation 533 2,149 2,682 Acquisition-related costs, net(1) 30 64 94 Adjusted Gross Profit$ 26,731 $ 4,696 $ 31,427 Gross margin, excluding depreciation and amortization 68 % 11 % 46 % Adjusted Gross Margin 70 % 20 % 51 % ___________________
(1)Acquisition-related costs, net includes deferred retention expenses and
post-acquisition restructuring costs incurred as part of business combinations.
45 -------------------------------------------------------------------------------- Adjusted Technology Gross Margin decreased from 70% for the three months endedSeptember 30, 2021 to 68% for the three months endedSeptember 30, 2022 . This year-over-year decrease was mainly driven by additional costs associated with transitioning a portion of our customer base to Azure hosted environments as well as increased support costs without a commensurate increase in revenue. The decrease was partially offset by existing customers paying higher technology access fees from contractual, built-in escalators without a commensurate increase in hosting costs. Adjusted Professional Services Gross Margin remained consistent at 20% for both the three months endedSeptember 30, 2022 and 2021. Our professional services are comprised of data and analytics services, domain expertise services, outsourcing services, and implementation services. The majority of our professional services revenue is generated from data and analytic services and domain expertise services, which are the highest gross margin professional services we provide. The delivery mix among all of our services in a given period can lead to fluctuations in our Adjusted Professional Services Gross Margin, and which may decline in the near-term as compared to prior quarters in 2022. The following is a reconciliation of our Adjusted Gross Profit to revenue, the most directly comparable financial measure calculated in accordance with GAAP, for the nine months endedSeptember 30, 2022 and 2021. Nine
Months Ended
(in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 131,624 $ 75,450 $ 207,074
Cost of revenue, excluding depreciation and amortization (41,895) (63,048) (104,943)
Gross profit, excluding depreciation and amortization 89,729
12,402 102,131
Add:
Stock-based compensation 1,563 6,082 7,645 Acquisition-related costs, net(1) 267 509 776 Restructuring charges(2) - 247 247 Adjusted Gross Profit$ 91,559 $ 19,240 $ 110,799 Gross margin, excluding depreciation and amortization 68 % 16 % 49 % Adjusted Gross Margin 70 % 26 % 54 % ___________________ (1)Acquisition-related costs, net include deferred retention expenses following the ARMUS, KPI Ninja, and Twistle acquisitions. (2)Restructuring charges include severance and other team member costs from workforce reductions. Nine
Months Ended
(in
thousands, except percentages)
Professional
Technology Services Total
Revenue $ 107,630 $ 69,580 $ 177,210
Cost of revenue, excluding depreciation and amortization (34,766) (55,711) (90,477)
Gross profit, excluding depreciation and amortization 72,864
13,869 86,733
Add:
Stock-based compensation 1,481 5,866 7,347 Acquisition-related costs, net(1) 30 64 94 Adjusted Gross Profit$ 74,375 $ 19,799 $ 94,174 Gross margin, excluding depreciation and amortization 68 % 20 % 49 % Adjusted Gross Margin 69 % 28 % 53 % ___________________ 46
--------------------------------------------------------------------------------
(1)Acquisition-related costs, net includes deferred retention expenses and
post-acquisition restructuring costs incurred as part of business combinations.
Adjusted Technology Gross Margin increased slightly from 69% for the nine months endedSeptember 30, 2021 to 70% for the nine months endedSeptember 30, 2022 . This year-over-year performance was mainly driven by existing customers paying higher technology access fees from contractual, built-in escalators, without a commensurate increase in hosting costs, offset partially by headwinds due to the continued costs associated with transitioning a portion of our customer base to Azure hosted environments. We expect Adjusted Technology Gross Margin to fluctuate and potentially decline in the near term, primarily due to additional costs associated with the ongoing transition of a small number of customers from on-premise and our managed data centers to third-party hosted data centers with Microsoft Azure as well as a small subset of modular customers trimming their application spend. Adjusted Professional Services Gross Margin decreased from 28% for the nine months endedSeptember 30, 2021 to 26% for the nine months endedSeptember 30, 2022 , due primarily to a change in the mix of professional services we provided and lower utilization rates. Our professional services are comprised of data and analytics services, domain expertise services, outsourcing services, and implementation services. The majority of our professional services revenue is generated from data and analytic services and domain expertise services, which are the highest gross margin professional services we provide. The delivery mix among all of our services in a given period can lead to fluctuations in our Adjusted Professional Services Gross Margin. We expect Adjusted Professional Services Gross Margin to fluctuate on a quarterly basis and potentially decline in the near term due to changes in the mix of services we provide, the amount of operational overhead required to deliver our services, and customers delaying or reducing services due to the uncertain and challenging macroeconomic environment. Total Adjusted Gross Margin increased slightly from 53% for the nine months endedSeptember 30, 2021 to 54% for the nine months endedSeptember 30, 2022 . We expect total Adjusted Gross Margin to fluctuate and potentially decline in the near term, primarily due to anticipated growth in professional services, including tech-enabled outsourcing. Our professional services provide meaningful value to meet the near term needs of our customers, but may result in lower overall margins if professional services revenue become a larger percentage of our total revenue compared to recent periods. 47 --------------------------------------------------------------------------------
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for (i) interest and other expense, net, (ii) income tax provision (benefit), (iii) depreciation and amortization, (iv) stock-based compensation, (v) acquisition-related costs, net, including the change in fair value of contingent consideration liabilities, (vi) restructuring costs, and (vii) non-recurring lease-related charges. We view acquisition-related expenses when applicable, such as transaction costs and changes in the fair value of contingent consideration liabilities that are directly related to business combinations, as costs that are unpredictable, dependent upon factors outside of our control, and are not necessarily reflective of operational performance during a period. We believe Adjusted EBITDA provides investors with useful information on period-to-period performance as evaluated by management and a comparison with our past financial performance, and 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. Our Adjusted EBITDA improved year-over-year as a result of our revenue growth and cost reduction initiatives, and we generally expect Adjusted EBITDA to continue to improve going forward, although it may fluctuate from quarter to quarter as a result of the timing of non-recurring professional services revenue and the seasonality of certain operating costs, including costs related to our Healthcare Analytics Summit (HAS) during the third quarter of each year. The following is a reconciliation of our Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP, for the three and nine months endedSeptember 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net loss$ (45,735) $
(40,014)
Add:
Interest and other expense, net
(142) 4,423 2,700 12,082 Income tax provision (benefit) 156 (6,658) (4,339) (6,749) Depreciation and amortization 12,372 10,651 36,633 26,604 Stock-based compensation 17,304 17,487 53,356 48,724 Acquisition-related costs, net(1) 3,292 6,517 3,188 16,787 Restructuring costs(2) 4,499 - 4,499 - Non-recurring lease-related charges(3) 3,700 1,800 3,700 1,800 Adjusted EBITDA$ (4,554) $ (5,794) $ (1,884)$ (4,970) __________________ (1)Acquisition-related costs, net includes third-party fees associated with due diligence, deferred retention expenses, post-acquisition restructuring costs incurred as part of business combinations, and changes in fair value of contingent consideration liabilities for potential earn-out payments. For additional details refer to Note 2 in our condensed consolidated financial statements. (2)Restructuring costs include severance and other team member costs from workforce reductions, impairment of discontinued capitalized software projects, and other minor miscellaneous charges. For additional details, refer to Note 18 in our condensed consolidated financial statements. (3)Includes the lease-related impairment charge for the subleased portion of our corporate headquarters. 48
--------------------------------------------------------------------------------
Key Factors Affecting Our Performance
We believe that our future growth, success, and performance are dependent on many factors, including those set forth below. While these factors present significant opportunities for us, they also represent the challenges that we must successfully address in order to grow our business and improve our results of operations. •Impact of challenging macroeconomic environment, including high inflation and COVID-19. The current high inflation environment and the COVID-19 pandemic 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. Our health system end market is currently experiencing meaningful financial strain from significant inflation with increases in labor and supply costs without a commensurate increase in revenue, leading to severe margin pressure. This margin pressure along with the ongoing waves of COVID-19 could continue to 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 challenging macroeconomic environment and its effects on our business, results of operations, or financial condition at this time. •Add new customers. We believe 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 three years, we have developed and deployed several new analytics applications including PowerCosting (formerly known as CORUS), Touchstone, MeasureAble, Patient Safety Monitor, Pop Analyzer (formerly known as 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, includingMedicity inJune 2018 ,Able Health inFebruary 2020 , Healthfinch inJuly 2020 , Vitalware inSeptember 2020 , Twistle inJuly 2021 , KPI Ninja inFebruary 2022 , and ARMUS inApril 2022 . 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. DOS Subscription Customers are defined as customers who directly or indirectly access our DOS platform via a technology subscription contract. Specifically,Medicity customers have generated a lower Dollar-based Retention Rate than DOS Subscription Customers and we expect declining revenue fromMedicity customers in the foreseeable future. If our cross-sell efforts and technology integration strategies are successful related to the recent acquisitions, this could offset revenue declines fromMedicity customers. 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
offerings help our customers achieve measurable improvements and make them
stickier, they have lower gross margins than our technology revenue. For the
49 --------------------------------------------------------------------------------
nine months ended
services revenue represented 64% and 36% of total revenue, respectively.
Changes in our percentage of revenue attributable to Technology and Professional Services 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 the section titled "Key Financial Metrics-Reconciliation of Non-GAAP Financial Measures" above 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 maintain a small number of customers that have deployed DOS on-premise. We are in the process of migrating customers 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 on-premise deployments on a per-customer basis. This transition has resulted in higher cost of technology revenue and a reduced Adjusted Technology Gross Margin. Recent acquisitionsARMUS Corporation . OnApril 29, 2022 , we acquired ARMUS, a clinical registry development and data management technology company based inFoster City, California . ARMUS provides data abstraction, data validation, data management, data submission, and data reporting services to support participation in clinical quality registries for healthcare institutions around the world, including health systems, payers, medical device companies, and premier medical societies. The acquisition consideration transferred was$9.4 million and was comprised of net cash consideration of$9.3 million andHealth Catalyst common shares with a fair value of$0.1 million , net of shares subject to revesting that are accounted for as post-acquisition stock-based compensation.
OnFebruary 24, 2022 , we acquired KPI Ninja, a leading provider of interoperability, enterprise analytics, and value-based care solutions based inLincoln, Nebraska . KPI Ninja is known for its powerful capabilities, flexible configurations, and comprehensive applications designed to fulfill the promise of data-driven health care. The acquisition consideration transferred was$21.4 million and was comprised of net cash consideration of$18.5 million andHealth Catalyst common shares with a fair value of$2.9 million , net of shares subject to revesting that are accounted for as post-acquisition stock-based compensation.
OnJuly 1, 2021 , we acquired Twistle, a healthcare patient engagement SaaS technology company that automates patient-centered communication between care teams and patients to transform the patient experience, drive better care outcomes, and reduce healthcare costs. We anticipate that Twistle's leading clinical workflow and patient engagement platform, paired with theHealth Catalyst population health offering, will enable a comprehensive go-to-market solution to address the population health needs of healthcare organizations. The acquisition consideration transferred was$91.9 million , consisting of net cash consideration of$46.7 million ,Health Catalyst common shares with a fair value of$43.1 million , net of shares subject to revesting that are accounted for as post-acquisition stock-based compensation, and contingent consideration based on certain earn-out performance targets for Twistle during an earn-out period that ended onJune 30, 2022 , which had an initial estimated fair value of$2.1 million . The earn-out contingent consideration liability was fully settled during the three months endedSeptember 30, 2022 for cash consideration of$1.6 million and the issuance of 439,327 shares of our common stock. 50 --------------------------------------------------------------------------------
Components of Our Results of Operations
Revenue
We derive our revenue from sales of technology and professional services. For the three months endedSeptember 30, 2022 and 2021, technology represented 64% and 62% of total revenue, respectively, and professional services represented 36% and 38%, of total revenue, respectively. For the nine months endedSeptember 30, 2022 and 2021, technology represented 64% and 61% of total revenue, respectively, and professional services represented 36% and 39%, 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. Our subscription contracts are cloud-based and generally have a three or five-year term, of which many are terminable after one year upon 90 days' notice. The vast majority of our DOS subscription contracts have built-in annual escalators for technology access fees. Also included in technology revenue is the maintenance and support we provide, which generally includes updates and support services. Professional services revenue. Professional services revenue primarily includes analytics services, domain expertise services, outsourcing services, and implementation services. Professional services arrangements typically include a fee for making FTE services available to our customers on a monthly basis. FTE services generally consist of a blend of analytic engineers, analysts, and data scientists based on the domain expertise needed to best serve our customers.
Deferred revenue
Deferred revenue consists of customer billings in advance of revenue being recognized from our technology and professional services arrangements. We primarily invoice our customers for technology arrangements annually or quarterly in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue and the remaining portion is recorded as deferred revenue, net of current portion on our condensed consolidated balance sheets.
Cost of revenue, excluding depreciation and amortization
Cost of technology revenue. Cost of technology revenue primarily consists of
costs associated with hosting and supporting our technology, including
third-party cloud computing and hosting costs, contractor costs, and salary and
related personnel costs for our cloud services and support teams.
Although we expect cost of technology revenue to increase in absolute dollars as
we increase headcount, cloud computing, and hosting costs to accommodate growth,
and as we continue to transition customers to third-party hosted data centers
with Microsoft Azure, 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 a small number of 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, including tech-enabled outsourcing.
51
--------------------------------------------------------------------------------
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. 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 nature, timing, and extent of these expenses. General and administrative. General and administrative expenses primarily include salary and related personnel costs for our legal, finance, people operations, IT, and other administrative teams, including certain executives. General and administrative expenses also include facilities, subscriptions, corporate insurance, outside legal, accounting, directors' fees, and the change in fair value of contingent consideration liabilities. 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, including due to restructuring initiatives.
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.
Interest and other income (expense), net
Interest and other income (expense), net primarily consists of interest expense partially offset by income from our investment holdings. Interest expense in the current year is primarily attributable to the 2.50% Convertible Senior Notes due 2025 (the Notes) and in prior years was primarily attributable to 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. The adoption of ASU 2020-06 during the first quarter of 2022 reduced our reported interest expense as it relates to our convertible senior notes.
Income tax provision (benefit)
Income tax provision (benefit) consists of
income taxes. Because of the uncertainty of the realization of the deferred tax
assets, we have a full valuation allowance for our net deferred tax assets,
including net operating loss carryforwards (NOLs) and tax credits related
primarily to research and development.
52
-------------------------------------------------------------------------------- As ofDecember 31, 2021 , we had federal and state NOLs of$580.0 million and$465.7 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 in the future, our ability to utilize our NOLs and tax credits could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs and tax credits may also be limited under similar provisions of state law. OnMarch 27, 2020 , the CARES Act was enacted and signed intoU.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. OnMarch 11, 2021 , ARPA was enacted and signed intoU.S. law to provide additional economic stimulus and tax credits. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act and ARPA do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions. The CARES Act also provided for the deferral of an employer's portion of social security payroll taxes for the remainder of 2020. We deferred the social security payroll tax match beginning inApril 2020 and fully paid all related deferred payroll taxes inDecember 2021 . OnAugust 16, 2022 , the Inflation Reduction Act of 2022 (IRA) was enacted and signed intoU.S. law. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur afterDecember 31, 2022 and introduces a 15% corporate alternative minimum tax on adjusted financial statement income. We do not expect the tax provisions of the IRA to have a material impact on our condensed consolidated financial statements. 53 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth our consolidated results of operations data and
such data as a percentage of total revenue for each of the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Revenue:
Technology $ 43,997 $ 38,262 $ 131,624 $ 107,630
Professional services 24,357 23,475 75,450 69,580
Total revenue 68,354 61,737 207,074 177,210
Cost of revenue, excluding depreciation and
amortization shown below:
Technology(1)(2) 14,572 12,094 41,895 34,766
Professional services(1)(2)(3) 21,768 20,992 63,048 55,711
Total cost of revenue, excluding depreciation
and amortization 36,340 33,086 104,943 90,477
Operating expenses:
Sales and marketing(1)(2)(3) 25,401 20,808 67,141 53,164
Research and development(1)(2)(3) 20,770 16,385 56,066 45,254
General and administrative(1)(2)(3)(4) 19,192 23,056 45,551 60,596
Depreciation and amortization 12,372 10,651 36,633 26,604
Total operating expenses 77,735 70,900 205,391 185,618
Loss from operations (45,721) (42,249) (103,260) (98,885)
Interest and other income (expense), net 142 (4,423) (2,700) (12,082)
Loss before income taxes (45,579) (46,672) (105,960) (110,967)
Income tax provision (benefit) 156 (6,658) (4,339) (6,749)
Net loss $ (45,735) $ (40,014) $ (101,621) $ (104,218)
(1)Includes stock-based compensation expense, as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Stock-Based Compensation Expense: (in thousands) (in thousands)
Cost of revenue, excluding depreciation
and amortization:
Technology $ 494 $ 533 $ 1,563 $ 1,481
Professional services 1,991 2,149 6,082 5,866
Sales and marketing 7,037 6,098 20,925 16,848
Research and development 3,390 2,510 9,643 7,443
General and administrative 4,392 6,197 15,143 17,086
Total $ 17,304 $ 17,487 $ 53,356 $ 48,724
54
--------------------------------------------------------------------------------
(2)Includes acquisition-related costs, net, as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Acquisition-related costs, net: (in thousands) (in thousands)
Cost of revenue, excluding depreciation and
amortization:
Technology $ 74 $ 30 $ 267 $ 30
Professional services 143 64 509 64
Sales and marketing 367 296 1,557 296
Research and development 693 455 2,358 455
General and administrative $ 2,015 $ 5,672 $ (1,503) $ 15,942
Total $ 3,292 $ 6,517 $ 3,188 $ 16,787
(3)Includes restructuring costs, as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Restructuring costs: (in thousands) (in thousands)
Cost of revenue, excluding depreciation
and amortization:
Professional services $ 247 $ - $ 247 $ -
Sales and marketing 1,559 - 1,559 -
Research and development 2,257 - 2,257 -
General and administrative $ 436 $ - $ 436 $ -
Total $ 4,499 $ - $ 4,499 $ -
(4)Includes non-recurring lease-related charges, as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Non-recurring lease-related charges: (in thousands) (in thousands)
General and administrative $ 3,700 $ 1,800 $ 3,700 $ 1,800
55
--------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue:
Technology 64 % 62 % 64 % 61 %
Professional services 36 38 36 39
Total revenue 100 100 100 100
Cost of revenue, excluding depreciation
and amortization shown below:
Technology 21 20 20 20
Professional service 32 34 30 31
Total cost of revenue, excluding
depreciation and amortization 53 54 50 51
Operating expenses
Sales and marketing 37 34 32 30
Research and development 30 27 27 26
General and administrative 28 37 22 34
Depreciation and amortization 18 17 18 15
Total operating expenses 113 115 99 105
Loss from operations (66) (69) (49) (56)
Interest and other income (expense),
net - (7) (1) (7)
Loss before income taxes (66) (76) (50) (63)
Income tax provision (benefit) - (11) (2) (4)
Net loss (66) % (65) % (48) % (59) %
Discussion of the Three Months Ended
Revenue
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Revenue:
Technology $ 43,997 $ 38,262 $ 5,735 15 %
Professional services 24,357 23,475 882 4 %
Total revenue $ 68,354 $ 61,737 $ 6,617 11 %
Percentage of revenue:
Technology 64 % 62 %
Professional services 36 38
Total 100 % 100 %
Total revenue was
compared to
increase of
Technology revenue was$44.0 million , or 64% of total revenue, for the three months endedSeptember 30, 2022 , compared to$38.3 million , or 62% of total revenue, for the three months endedSeptember 30, 2021 . The technology revenue growth was primarily from new DOS Subscription Customers, acquired technology customers, revenue from existing customers paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services. 56 -------------------------------------------------------------------------------- Professional services revenue was$24.4 million , or 36% of total revenue, for the three months endedSeptember 30, 2022 , compared to$23.5 million , or 38% of total revenue, for the three months endedSeptember 30, 2021 . The professional services revenue growth is primarily due to implementation, analytics, outsourcing, and other improvement services being provided to new DOS Subscription Customers, as well as greater non-recurring and project-based services.
Cost of revenue, excluding depreciation and amortization
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Cost of revenue, excluding depreciation
and amortization:
Technology $ 14,572 $ 12,094 $ 2,478 20 %
Professional services 21,768 20,992 776 4 %
Total cost of revenue, excluding
depreciation and amortization $ 36,340 $ 33,086 $ 3,254 10 %
Percentage of total revenue 53 % 54 %
Cost of technology revenue, excluding depreciation and amortization, was $14.6
million for the three months ended September 30, 2022 , compared to $12.1 million
for the three months ended September 30, 2021 , an increase of $2.5 million , or
20%. The increase in cost of technology revenue was primarily due to $1.0
million in increased cloud computing and hosting costs largely from the expanded
use of Microsoft Azure to serve existing and new customers, a $0.6 million
increase in dues, subscriptions, and royalties, and a $0.5 million increase in
contractors and outside services.
Cost of professional services revenue was $21.8 million for the three months
ended September 30, 2022 , compared to $21.0 million for the three months ended
September 30, 2021 , an increase of $0.8 million , or 4%. This increase was
primarily due to a $0.7 million increase in contractor and outside service fees.
Operating expenses
Sales and marketing
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 25,401 $ 20,808 $ 4,593 22 %
Percentage of total revenue 37 %
34 %
Sales and marketing expenses were$25.4 million for the three months endedSeptember 30, 2022 , compared to$20.8 million for the three months endedSeptember 30, 2021 , an increase of$4.6 million , or 22%. The increase was primarily due to$1.6 million in restructuring costs, a$0.9 million increase in stock-based compensation, a$0.8 million increase in advertising and marketing costs, a$0.8 million increase in contractor and outside service fees, and a$0.6 million increase in travel costs. Sales and marketing expense as a percentage of total revenue increased from 34% in the three months endedSeptember 30, 2021 to 37% in the three months endedSeptember 30, 2022 . 57
--------------------------------------------------------------------------------
Research and development
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Research and development $ 20,770 $ 16,385 $ 4,385 27 %
Percentage of total revenue 30 % 27 %
Research and development expenses were $20.8 million for the three months ended
September 30, 2022 , compared to $16.4 million for the three months ended
September 30, 2021 , an increase of $4.4 million , or 27%. The increase was
primarily due to $2.3 million in restructuring costs, a $0.9 million increase in
stock-based compensation, and a $0.7 million increase in contractor and outside
service fees.
Research and development expense as a percentage of revenue increased from 27%
in the three months ended September 30, 2021 to 30% in the three months ended
September 30, 2022 .
General and administrative
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
General and administrative $ 19,192 $ 23,056 $ (3,864) (17) %
Percentage of total revenue 28 %
37 %
General and administrative expenses were$19.2 million for the three months endedSeptember 30, 2022 , compared to$23.1 million for the three months endedSeptember 30, 2021 , a decrease of$3.9 million , or 17%. The decrease was primarily due to a$3.2 million decrease in change in fair value of contingent consideration liabilities, a$1.8 million decrease in stock-based compensation, a$0.6 million decrease in salary and related personnel costs, partially offset by an increase of$1.9 million from lease-related impairment charges. General and administrative expense as a percentage of revenue decreased from 37% in the three months endedSeptember 30, 2021 to 28% in the three months endedSeptember 30, 2022 .
Depreciation and amortization
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Depreciation and amortization $ 12,372 $ 10,651 $ 1,721 16 %
Percentage of total revenue 18 % 17 %
Depreciation and amortization expenses were $12.4 million for the three months
ended September 30, 2022 , compared to $10.7 million for the three months ended
September 30, 2021 , an increase of $1.7 million , or 16%. This increase was
primarily due to the amortization of acquired intangible assets resulting from
our recent business combinations.
Depreciation and amortization expense as a percentage of revenue increased from
17% in the three months ended
ended
58 --------------------------------------------------------------------------------
Interest and other income (expense), net
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Interest income $ 1,976 55 $ 1,921 3,493 %
Interest expense (1,811) (4,463) 2,652 (59) %
Other expense (23) (15) (8) n/m(1)
Total interest and other income
(expense), net $ 142 $ (4,423) $ 4,565 (103) %
__________________
(1)Not meaningful
Interest and other income (expense), net increased $4.6 million , or 103%, for
the three months ended September 30, 2022 , compared to the three months ended
September 30, 2021 . This change is primarily due to a decrease in non-cash
interest expense of $2.6 million related to the modified retrospective adoption
of ASU 2020-06 and an increase of $1.9 million of interest and investment income
from increased interest rates. Refer to Note 1 and Note 9 of the condensed
consolidated financial statements for further information about our recent
accounting adoption.
Income tax provision (benefit)
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Income tax provision (benefit) $ 156 $ (6,658) $ 6,814 n/m(1)
__________________
(1)Not meaningful
Our income tax provision consists of current and deferred taxes for U.S.
federal, state, and foreign income taxes. As we have a full valuation allowance
on deferred tax assets, our income tax provision typically consists primarily of
minimal state and foreign income taxes.
The income tax benefit of $6.7 million recorded for the three months ended
September 30, 2021 was primarily related to the discrete deferred tax benefit
attributable to the release of a portion of the valuation allowance during the
quarter. The release of the valuation allowance was attributable to the
acquisition of Twistle, which resulted in deferred tax liabilities that, upon
acquisition, allowed us to recognize certain deferred tax assets that had
previously been offset by a valuation allowance.
59
--------------------------------------------------------------------------------
Discussion of the Nine Months Ended
Revenue
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Revenue:
Technology $ 131,624 $ 107,630 $ 23,994 22 %
Professional services 75,450 69,580 5,870 8 %
Total revenue $ 207,074 $ 177,210 $ 29,864 17 %
Percentage of revenue:
Technology 64 % 61 %
Professional services 36 39
Total 100 % 100 %
Total revenue was
compared to
increase of
Technology revenue was$131.6 million , or 64% of total revenue, for the nine months endedSeptember 30, 2022 , compared to$107.6 million , or 61% of total revenue, for the nine months endedSeptember 30, 2021 . The technology revenue growth was primarily from new DOS Subscription Customers, acquired technology customers, revenue from existing customers paying higher technology access fees from contractual, annual escalators, and new offerings of expanded support services. Professional services revenue was$75.5 million , or 36% of total revenue, for the nine months endedSeptember 30, 2022 , compared to$69.6 million , or 39% of total revenue, for the nine months endedSeptember 30, 2021 . The professional services revenue growth is primarily due to implementation, analytics, outsourcing, and other improvement services being provided to new DOS Subscription Customers, as well as greater non-recurring and project-based services.
Cost of revenue, excluding depreciation and amortization
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Cost of revenue, excluding depreciation
and amortization:
Technology $ 41,895 $ 34,766 $ 7,129 21 %
Professional services 63,048 55,711 7,337 13 %
Total cost of revenue, excluding
depreciation and amortization $ 104,943 $ 90,477 $ 14,466 16 %
Percentage of total revenue 50 % 51 %
Cost of technology revenue, excluding depreciation and amortization, was $41.9
million for the nine months ended September 30, 2022 , compared to $34.8 million
for the nine months ended September 30, 2021 , an increase of $7.1 million , or
21%. The increase was primarily due to a $3.0 million increase in cloud
computing and hosting costs largely from the expanded use of Microsoft Azure to
serve existing and new customers, a $1.9 million increase in dues,
subscriptions, and royalties, a $1.4 million increase in salary and related
personnel costs from an increase in cloud services and support headcount, and a
$0.7 million increase in contractors and outside services.
60
--------------------------------------------------------------------------------
Cost of professional services revenue was $63.0 million for the nine months
ended September 30, 2022 , compared to $55.7 million for the nine months ended
September 30, 2021 , an increase of $7.3 million , or 13%. This increase was
primarily due to a $4.7 million increase in salary and related personnel costs
from additional professional services headcount, and a $2.1 million increase in
contractor and outside service fees.
Operating expenses
Sales and marketing
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 67,141 $ 53,164 $ 13,977 26 %
Percentage of total revenue 32 %
30 %
Sales and marketing expenses were$67.1 million for the nine months endedSeptember 30, 2022 , compared to$53.2 million for the nine months endedSeptember 30, 2021 , an increase of$14.0 million , or 26%. The increase was primarily due to a$5.8 million increase in salary and related personnel costs, including$1.6 million of restructuring costs, a$4.1 million increase in stock-based compensation, a$1.3 million increase in advertising and marketing costs, a$1.1 million increase in travel-related expenses, and a$1.0 million increase in contractor and outside service fees. Sales and marketing expense as a percentage of total revenue increased from 30% in the nine months endedSeptember 30, 2021 to 32% in the nine months endedSeptember 30, 2022 . Research and development Nine Months Ended September 30, 2022 2021 $ Change % Change (in thousands, except percentages) Research and development$ 56,066 $ 45,254 $ 10,812 24 % Percentage of total revenue 27 % 26 % Research and development expenses were$56.1 million for the nine months endedSeptember 30, 2022 , compared to$45.3 million for the nine months endedSeptember 30, 2021 , an increase of$10.8 million , or 24%. The increase was primarily due to a$6.5 million increase in salary and related personnel costs including$2.3 million of restructuring costs, a$2.2 million increase in contractor and outside service fees, and a$2.2 million increase in stock-based compensation. Research and development expense as a percentage of revenue increased from 26% for the nine months endedSeptember 30, 2021 to 27% in the nine months endedSeptember 30, 2022 . . General and administrative Nine Months Ended September 30, 2022 2021 $ Change % Change (in thousands, except percentages) General and administrative$ 45,551 $ 60,596 $ (15,045) (25) % Percentage of total revenue 22 %
34 %
General and administrative expenses were
61 -------------------------------------------------------------------------------- The decrease was primarily due to a$19.6 million decrease in change in fair value of contingent consideration liabilities, partially offset by an increase of$2.6 million in salary and related personnel costs primarily from additional headcount, a$1.9 million increase in lease-related impairment charges, and a$1.0 million increase in acquisition-related costs. General and administrative expense as a percentage of revenue decreased from 34% in the nine months endedSeptember 30, 2021 to 22% in the nine months endedSeptember 30, 2022 . Depreciation and amortization Nine Months Ended September 30, 2022 2021 $ Change % Change (in thousands, except percentages) Depreciation and amortization$ 36,633 $ 26,604 $ 10,029 38 % Percentage of total revenue 18 % 15 % Depreciation and amortization expenses were$36.6 million for the nine months endedSeptember 30, 2022 , compared to$26.6 million for the nine months endedSeptember 30, 2021 , an increase of$10.0 million , or 38%. This increase was primarily due to the amortization of acquired intangible assets resulting from our recent business combinations. Depreciation and amortization expense as a percentage of revenue increased from 15% in the nine months endedSeptember 30, 2021 to 18% in the nine months endedSeptember 30, 2022 .
Interest and other expense, net
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Interest income $ 2,826 669 $ 2,157 322 %
Interest expense (5,425) (12,761) 7,336 (57) %
Other (expense) income (101) 10 (111) (1,110) %
Total interest and other expense,
net $ (2,700) $ (12,082) $ 9,382 (78) %
Interest and other expense, net decreased $9.4 million , or 78%, for the nine
months ended September 30, 2022 , compared to the nine months ended September 30,
2021 . This change is primarily due to a decrease in non-cash interest expense of
$7.4 million related to the modified retrospective adoption of ASU 2020-06 and
$2.2 million increase in interest and investment income due to increasing
interest rates. Refer to Note 1 and Note 9 of the condensed consolidated
financial statements for further information about our recent accounting
adoption.
Income tax provision (benefit)
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Income tax provision (benefit) $ (4,339) (6,749) $ 2,410 n/m(1)
__________________
(1)Not meaningful
Our income tax provision consists of current and deferred taxes for
federal, state, and foreign income taxes.
62 -------------------------------------------------------------------------------- The income tax benefit of$4.3 million and$6.7 million recorded for the nine months endedSeptember 30, 2022 and 2021, respectively, is primarily related to the discrete deferred tax benefits attributable to the release of a portion of the valuation allowance during the respective periods. The release of our valuation allowance is attributable to the acquisitions of ARMUS and KPI Ninja in 2022 and Twistle in 2021, which resulted in deferred tax liabilities that, upon acquisition, allowed us to recognize certain deferred tax assets of$4.5 million and$6.8 million , respectively, that had previously been offset by a valuation allowance.
Liquidity and Capital Resources
As of
investments of
general corporate purposes, which may include acquisitions and strategic
transactions. Our cash equivalents and short-term investments are comprised
primarily of money market funds,
corporate bonds, and asset-backed securities.
Since inception, we have financed our operations primarily from the proceeds we received through private sales of equity securities, payments received from customers under technology and professional services arrangements, borrowings under our loan and security agreements, our IPO, the Note Offering, and the sale of 4,882,075 shares (inclusive of the underwriters' over-allotment option to purchase 636,792 shares) of our common stock at$53.00 per share inAugust 2021 (our Secondary Public Equity Offering). 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, development, our share repurchase program and acquisition-related 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 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. Share repurchase plan OnAugust 2, 2022 , our Board of Directors authorized a share repurchase program to repurchase up to$40.0 million of our outstanding shares of common stock (the Share Repurchase Plan). During the three months endedSeptember 30, 2022 , we repurchased and retired 709,139 shares of our common stock for$8.4 million at an average purchase price of$11.81 per share. The total remaining authorization for future shares of common stock repurchases under our Share Repurchase Plan is$31.6 million as ofSeptember 30, 2022 .
Convertible senior notes
OnApril 14, 2020 , we issued$230.0 million in aggregate principal amount of 2.50% Convertible Senior Notes due 2025, pursuant to an Indenture datedApril 14, 2020 , withU.S. Bank National Association , as trustee, in a private offering to qualified institutional buyers. We received net proceeds from the Notes of$222.5 million , after deducting the initial purchasers' discounts and offering expenses payable by us. The Notes are senior, unsecured obligations and will accrue interest payable semiannually in arrears onApril 15 andOctober 15 of each year, beginning onOctober 15, 2020 , at a rate of 2.50% per year. The Notes will mature onApril 15, 2025 , unless earlier converted, redeemed, or repurchased. The Indenture does not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Indenture permits us to repurchase the Notes prior to the maturity date. 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). 63 --------------------------------------------------------------------------------
Capped calls
OnApril 8, 2020 , concurrently with the pricing of the Notes, we entered into 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, onApril 9, 2020 , we entered into the Additional 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 option premium cost of the Capped Calls. The Capped Calls have initial cap prices of$42.00 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to the cap price.
Refer to Note 9 of our condensed consolidated financial statements for
additional details regarding the private offering of the Notes and the Capped
Calls.
Cash flows The following table summarizes our cash flows for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (in thousands) Net cash used in operating activities$ (20,449) $ (13,348) Net cash used in investing activities (45,277) (62,995) Net cash (used in) provided by financing activities (3,250) 260,168 Effect of exchange rate changes (27) (14) Net (decrease) increase in cash and cash equivalents$ (69,003) $ 183,811 Operating activities
Our largest source of operating cash flows is cash collections from our
customers for technology and professional services arrangements. Our primary
uses of cash from operating activities are for employee-related expenses,
marketing expenses, and technology costs.
For the nine months endedSeptember 30, 2022 , net cash used in operating activities was$20.4 million , which included a net loss of$101.6 million . Non-cash adjustments primarily consisted of$36.6 million in depreciation and amortization of property, equipment, and intangible assets,$53.4 million in stock-based compensation,$4.9 million in impairment of long-lived assets, reduced by a$4.7 million change in fair value of contingent consideration liabilities, and a$4.5 million deferred tax benefit. For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$13.3 million , which included a net loss of$104.2 million . Non-cash adjustments primarily consisted of$26.6 million in depreciation and amortization of property, equipment, and intangible assets,$48.7 million in stock-based compensation,$13.7 million in change in fair value of contingent consideration liabilities,$8.8 million in amortization of debt discount and issuance costs, partially offset by the$11.8 million payment in excess of the acquisition date fair value to settle the cash-based portion of consideration liabilities, and a$6.8 million deferred tax benefit.
Investing activities
Net cash used in investing activities for the nine months endedSeptember 30, 2022 of$45.3 million was primarily due to$270.2 million provided from the sale and maturity of short-term investments, reduced by$274.5 million in purchases of short-term investments,$27.8 million used to acquire KPI Ninja and ARMUS, and$10.0 million of capitalized internal-use software. 64 -------------------------------------------------------------------------------- Net cash used in investing activities for the nine months endedSeptember 30, 2021 of$63.0 million was primarily due to$46.8 million used to acquire Twistle,$11.1 million in purchases of property, equipment, and intangible assets,$3.6 million of capitalized internal-use software, and$188.4 million used to purchase short-term investments, reduced by$186.9 million provided from the sale and maturity of short-term investments.
Financing activities
Net cash used in financing activities for the nine months endedSeptember 30, 2022 of$3.3 million was primarily the result of$8.4 million in repurchases of common stock and$1.3 million in payments of acquisition-related obligations, reduced by$3.9 million in stock option exercise proceeds, and$2.6 million in proceeds from our ESPP. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 of$260.2 million was primarily the result of$245.2 million in public offering net proceeds$17.3 million in stock option exercise proceeds and$4.0 million in proceeds from our ESPP, reduced by$6.3 million in payments of acquisition-related obligations.
Contractual Obligations and Commitments
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K, filed with theSEC onMarch 1, 2022 . Refer to "Note 9-Convertible Senior Notes", "Note 14-Commitments and Contingencies", and "Note 18-Restructuring Costs" of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our commitments and contractual obligations.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Due to the COVID-19 pandemic, war inUkraine , and high level of inflation, amongst other factors, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. We will continue to actively monitor the impact of the COVID-19 pandemic,Ukraine war, recent inflationary pressures, challenging macroeconomic environment, and other factors on our estimates, including our expected credit losses and the fair value of other assets, including goodwill. There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K, filed with theSEC onMarch 1, 2022 . See "Note 1-Description of Business and Summary of Significant Accounting Policies" of our condensed consolidated financial statements included 65 --------------------------------------------------------------------------------
elsewhere in this Quarterly Report on Form 10-Q for more information regarding
the Company’s significant accounting policies.
Recent Accounting Pronouncements
See “Note 1-Description of Business and Summary of Significant Accounting
Policies” to our condensed consolidated financial statements included elsewhere
in this Quarterly Report on Form 10-Q. There have been no recent accounting
pronouncements issued which are expected to have a material effect on our
condensed consolidated financial statements.
© Edgar Online, source
link