Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q

 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018  
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                 to                
Commission file number: 001-37792

 
NantHealth, Inc.
(Exact name of registrant as specified in its charter)

 
 
Delaware
 
27-3019889
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

9920 Jefferson Blvd
Culver City, California
 
90232
(Address of principal executive offices)
 
(Zip Code)
(310) 883-1300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of May 7, 2018, the registrant had 108,591,946 shares of common stock, par value $0.0001 per share, outstanding.
 



NantHealth, Inc.
Form 10-Q
As of and for the quarterly period ended March 31, 2018
Table of contents


 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

We own or have rights to trademarks and service marks that we use in connection with the operation of our business. NantHealth, Inc. and our logo as well as other brands such as DeviceConX, GPS Cancer, HBox, Vitality, VitalsConX, NaviNet, Eviti, Eviti | Connect, and other marks relating to our Eviti product line are used in this Quarterly Report on Form 10-Q. Solely for convenience, the trademarks and service marks referred to in this Quarterly Report on Form 10-Q are listed without the (sm) and (TM) symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. Additionally, we do not intend for our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

- 2 -


SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including without limitation the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “project,” “plan,” “outlook,” “target,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
the structural change in the market for healthcare in the United States, including uncertainty in the healthcare regulatory framework and regulatory developments in the United States and foreign countries;
the evolving treatment paradigm for cancer, including physicians’ use of molecular information and targeted oncology therapeutics and the market size for molecular information products;
physicians’ need for precision medicine products and any perceived advantage of our solutions over those of our competitors, including the ability of our comprehensive platform to help physicians treat their patients’ cancers;
our ability to generate revenue from sales of products enabled by our molecular and biometric information platforms to physicians in clinical settings;
our ability to increase the commercial success of our sequencing and molecular analysis solution;
our plans or ability to obtain reimbursement for our sequencing and molecular analysis solution, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid;
our ability to effectively manage our growth, including the rate and degree of market acceptance of our solutions;
our ability to offer new and innovative products and services;
our ability to attract new partners and clients;
our ability to estimate the size of our target market;
our ability to maintain and enhance our reputation and brand recognition;
consolidation in the healthcare industry;
competition which could limit our ability to maintain or expand market share within our industry;
restrictions and penalties as a result of privacy and data protection laws;
our use of “open source” software;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;
breaches or failures of our security measures;
our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;
risks related to future acquisition opportunities;
the requirements of being a public company;
our ability to attract and retain key personnel;
our expectation regarding the period during which we qualify as an emerging growth company under the JOBS Act;
our ability to obtain and maintain intellectual property protection for our solutions and not infringe upon the intellectual property of others;
our ability to implement our comprehensive restructuring plan that includes a wide range of organizational efficiency initiatives and other cost reduction opportunities; and
our financial performance expectations, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability.
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

- 3 -


These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily based on our current assumptions, expectations and projections about future events and trends that we may affect our business, financial conditions, operating results, cash flows or prospects, as well as related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A, entitled “Risk Factors,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements for any reason, or to conform these statements to actual results or to changes in our expectations.

- 4 -


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
    
NantHealth, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
 
March 31,
2018
 
December 31,
2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
46,390

 
$
61,660

Accounts receivable, net
14,701

 
11,491

Inventories
805

 
839

Deferred implementation costs
11

 
1,960

Related party receivables, net
643

 
585

Prepaid expenses and other current assets
6,995

 
5,358

Total current assets
69,545

 
81,893

Property, plant, and equipment, net
23,570

 
18,517

Deferred implementation costs, net of current
2

 
3,951

Goodwill
115,930

 
114,625

Intangible assets, net
71,626

 
69,424

Investment in related party
145,169

 
156,863

Related party receivable, net of current
1,706

 
1,727

Other assets
3,777

 
2,195

Total assets
$
431,325

 
$
449,195

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
5,149

 
$
3,164

Accrued and other current liabilities
12,413

 
18,134

Deferred revenue
13,080

 
10,057

Related party payables, net
5,973

 
4,504

Total current liabilities
36,615

 
35,859

Deferred revenue, net of current
8,729

 
7,126

Related party liabilities
13,029

 
11,500

Related party promissory note
112,666

 
112,666

Related party convertible note, net
8,049

 
7,947

Convertible notes, net
75,937

 
74,845

Deferred income taxes, net
5,025

 
5,838

Other liabilities
237

 
112

Total liabilities
260,287

 
255,893

 
 
 
 
Stockholders' equity
 
 
 
Common stock, $0.0001 par value per share, 750,000,000 shares authorized; 108,591,946 and 108,383,602 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively (including 3,490 shares of restricted stock)
10

 
10

Additional paid-in capital
885,200

 
886,669

Accumulated deficit
(714,138
)
 
(693,233
)
Accumulated other comprehensive loss
(34
)
 
(144
)
Total stockholders' equity
171,038

 
193,302

Total liabilities and stockholders' equity
$
431,325

 
$
449,195

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 5 -

NantHealth, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended 
 March 31,
 
2018
 
2017
 
 
 
 
Revenue:
 
 
 
Software-as-a-service related
$
16,166

 
$
14,797

Software and hardware related
1,455

 
598

Maintenance
2,446

 
2,019

Total software-related revenue
20,067

 
17,414

Sequencing and molecular analysis
840

 
510

Home health care services
1,356

 
1,180

Total net revenue
22,263

 
19,104

 
 
 
 
Cost of Revenue:
 
 
 
Software-as-a-service related
6,602

 
6,233

Software and hardware related
885

 
1,004

Maintenance
215

 
161

Amortization of developed technologies
1,173

 
1,743

Total software-related cost of revenue
8,875

 
9,141

Sequencing and molecular analysis
1,431

 
1,593

Home health care services
762

 
784

Total cost of revenue
11,068

 
11,518

 
 
 
 
Gross profit
11,195

 
7,586

 
 
 
 
Operating Expenses:
 
 
 
Selling, general and administrative
20,737

 
17,435

Research and development
5,151

 
8,926

Amortization of acquisition-related assets
1,054

 
1,054

Total operating expenses
26,942

 
27,415

 
 
 
 
Loss from operations
(15,747
)
 
(19,829
)
Interest expense, net
(4,197
)
 
(3,969
)
Other income, net
180

 
235

Loss from related party equity method investment
(3,261
)
 
(4,526
)
Loss from continuing operations before income taxes
(23,025
)
 
(28,089
)
(Benefit from) provision for income taxes
(1,050
)
 
37

Net loss from continuing operations
(21,975
)
 
(28,126
)
Loss from discontinued operations, net of tax
(193
)
 
(12,989
)
Net loss
$
(22,168
)
 
$
(41,115
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
Continuing operations
 
 
 
Basic and diluted - common stock
$
(0.20
)
 
$
(0.23
)
 
 
 
 
Discontinued operations
 
 
 
Basic and diluted - common stock
$

 
$
(0.11
)
 
 
 
 
Total net income (loss) per share
 
 
 

- 6 -

NantHealth, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)

Basic and diluted - common stock
$
(0.20
)
 
$
(0.34
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic and diluted - common stock
108,579,271

 
121,618,039


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 7 -

NantHealth, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Dollars in thousands)
(Unaudited)


 
Three Months Ended 
 March 31,
 
2018
 
2017
 
 
 
 
Net loss
$
(22,168
)
 
$
(41,115
)
  Other comprehensive income from foreign currency translation gain
110

 
19

Total other comprehensive income (loss)
110

 
19

Comprehensive loss
$
(22,058
)
 
$
(41,096
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


- 8 -

NantHealth, Inc.
Condensed and Consolidated Stockholders’ Equity
(Dollars in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total Equity
 
Shares
 
Amount
 
 
 
Balance at December 31, 2017
108,383,602

 
$
10

 
$
886,669

 
$
(693,233
)
 
$
(144
)
 
$
193,302

Modified retrospective adjustment on adoption of ASC 606

 

 

 
1,263

 

 
1,263

Stock-based compensation

 

 
2,655

 

 

 
2,655

Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
208,344

 

 
(339
)
 

 

 
(339
)
Assignment of Liquid Genomics (see Note 18)

 

 
(3,785
)
 

 

 
(3,785
)
Other comprehensive income

 

 

 

 
110

 
110

Net loss

 

 

 
(22,168
)
 

 
(22,168
)
Balance at March 31, 2018
108,591,946

 
$
10

 
$
885,200

 
$
(714,138
)
 
$
(34
)
 
$
171,038

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


- 9 -

 NantHealth, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

    
 
Three Months Ended 
 March 31,
 
2018
 
2017 (2)
Cash flows from operating activities:
 
 
 
Net loss
$
(22,168
)
 
$
(41,115
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,297

 
8,331

Amortization of debt discounts and deferred financing offering cost
1,194

 
1,051

Change in fair value of derivatives liability
(1
)
 
(215
)
Stock-based compensation
2,718

 
250

Deferred income taxes, net
(1,177
)
 
233

Provision for bad debt expense
36

 
187

Loss from related party equity method investment
3,261

 
4,526

Changes in operating assets and liabilities, net of business combinations and divestitures:
 
 
 
Accounts receivable, net
928

 
4,626

Inventories
34

 
42

Related party receivables, net
(37
)
 
(4
)
Prepaid expenses and other current assets
538

 
(708
)
Deferred implementation costs
(13
)
 
(478
)
Accounts payable
495

 
(2,352
)
Accrued and other current liabilities
(6,769
)
 
(3,631
)
Deferred revenue
(588
)
 
354

Related party payables, net
2,720

 
2,823

Other assets and liabilities
239

 
58

Net cash used in operating activities
(13,293
)
 
(26,022
)
Cash flows from investing activities:
 
 
 
Purchase of property and equipment including internal use software
(460
)
 
(7,370
)
Assignment of Liquid Genomics, net of cash acquired (see Note 18)
68

 

Net cash used in investing activities
(392
)
 
(7,370
)
Cash flows from financing activities:
 
 
 
Tax payments related to stock issued, net of stock withheld, for vested phantom units
(339
)
 
(2,106
)
Net cash used in financing activities
(339
)
 
(2,106
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(110
)
 
39

Net decrease in cash, cash equivalents and restricted cash
(14,134
)
 
(35,459
)
Cash, cash equivalents and restricted cash, beginning of period (1)
62,010

 
160,453

Cash, cash equivalents and restricted cash, end of period (1)
$
47,876

 
$
124,994

 
Three Months Ended 
 March 31,
 
2018
 
2017 (2)
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$

 
$
(1
)
Interest received
1

 
9

Non-cash investing and financing activities:
 
 
 
Purchase of property and equipment (including internal use software)
1,570

 
1,642

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 10 -

NantHealth, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

(1) Cash and cash equivalents included restricted cash of $350 and $1,486 at January 1, 2018 and March 31, 2018, respectively, and $350 at January 1, 2017 and March 31, 2017. (2) The statement for 2017 includes provider/patient engagement solutions business.

- 11 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 1. Description of Business and Basis of Presentation
Nature of Business
Nant Health, LLC was formed on July 7, 2010, as a Delaware limited liability company. On June 1, 2016, Nant Health, LLC converted into a Delaware corporation (the “LLC Conversion”) and changed its name to NantHealth, Inc. (“NantHealth”). NantHealth, together with its subsidiaries (the “Company”), is a healthcare IT company converging science and technology. The Company works to transform clinical delivery with actionable clinical intelligence at the moment of decision, enabling clinical discovery through real-time machine learning systems. We market certain of our solutions as a comprehensive integrated solution that includes our molecular sequencing and analysis services, clinical decision support, and payer engagement solutions. We also market our molecular sequencing and analysis services, Clinical Decision Support, Payer Engagement and Connected Care solutions on a stand-alone basis. NantHealth is a majority-owned subsidiary of NantWorks, LLC (“NantWorks”), which is a subsidiary of California Capital Equity, LLC (“Cal Cap”). The three companies were founded by and are led by Dr. Patrick Soon-Shiong.

On August 25, 2017, the Company sold substantially all of the assets of the Company’s provider/patient engagement solutions business (See Note 3). The sale will enable the Company to focus on its core competencies of genomic sequencing, clinical decision support, connected care and payer engagement.
As of March 31, 2018, the Company conducted the majority of its operations in the United States, Canada, the United Kingdom, and Singapore.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NantHealth and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company's financial position and results of operation. These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2017. The results of operations of the entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2017 has been derived from the audited Consolidated Financial Statements at that date, without retrospective application of ASC 606, Revenue from Contracts with Customers. The balance sheets do not include all of the disclosures required by GAAP. Assets and liabilities of the discontinued operations are presented separately in the asset and liability sections of the prior period balance sheet. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. The adoption of ASC 606 led to the treatment of costs to fulfill certain software and hardware related implementation services being accounted for as single performance obligations with the software and hardware products and services provided. Classification in prior periods has been conformed to the current period presentation. As a result of the reclassification, we have changed the names of several of our reported product categories. Software and hardware has become Software and hardware related, Software-as-a-service has become Software-as-a-service related, and Other services has become Home health care services.
The Company believes its existing cash, cash equivalents and ability to borrow from affiliated entities will be sufficient to fund operations through at least 12 months following the issuance date of the financial statements based upon the Company’s Chairman and CEO’s intent and ability to support the Company’s operations with additional funds as required. The Company may also seek to sell additional equity, through one or more follow-on public offerings or in separate financings, or sell additional debt securities or obtain a credit facility. However, the Company may not be able to secure such financing in a timely manner or on favorable terms. Without additional funds, the Company may choose to delay or reduce its operating or investment expenditures. Further, because of the risk and uncertainties associated with the commercialization of the Company's existing products as well as products in development, the Company may need additional funds to meet its needs sooner than planned. To date, the Company's primary sources of capital were private placement of membership interests prior to its IPO, debt financing agreements, including the promissory note with Nant Capital, LLC (“NantCapital”), convertible notes, and its IPO.





- 12 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Note 2. Summary of Significant Accounting Policies
There have been no significant changes to the accounting policies as disclosed in the Company's Annual Report on Form 10-K, apart from the application of ASC 606, described below. The other accounting policies, including the accounting policy for revenue recognition under ASC 605, Revenue Recognition, and ASC 985, Software, applied to periods before January 1, 2018, are described in the Company’s Annual Report on Form 10-K.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Segment Reporting
The chief operating decision maker for the Company is its Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a Condensed Consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results, or plans for levels or components below the Condensed Consolidated unit level. Accordingly, management has determined that the Company operates in one reportable segment.
Revenue from Contracts with Customers
Transition to FASB ASC 606
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported in accordance with the Company’s historic accounting under ASC 605, which are included in Note 2, Summary of Significant Accounting Policies, to the Consolidated and Combined Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017.
The Company recorded a decrease of $1,263, net of tax, to the opening accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The most significant changes were to begin recognizing revenues from certain software and hardware implementation projects based on an estimate of percentage of completion, rather than at completion of the contract; to recognize estimated revenues from nursing and therapy services as the services are performed, rather than on final determination of contractual billable amounts; and to capitalize commissions as assets for contracts with performance obligations of more than one year. The adoption also led to certain costs, in relation to SaaS contracts, and previously treated as deferred implementation costs in current and long-term assets, being treated as software developed for internal use, resulting in an increase of $5,827 of software developed for internal use, being recorded at January 1, 2018 with a corresponding decrease in deferred implementation costs. The Company concluded that it was inappropriate to net down contract liabilities, referred to as deferred revenue below, with accounts receivable. This led to an increase of $5,247 in accounts receivable and a corresponding increase in deferred revenue.
This table summarizes the impact on the Company’s financial statements due to the adoption of ASC 606:

- 13 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

 
As Reported December 31, 2017
 
Adjustments due to ASC 606
 
Balance as at January 1, 2018
Balance Sheet
 
 
 
 
 
Accounts receivable, net
$
11,491

 
$
5,247

 
$
16,738

Deferred implementation costs, current
1,960

 
(1,960
)
 

Prepaid expenses and other current assets
5,358

 
1,117

 
6,475

Property, plant, and equipment, net
18,517

 
5,827

 
24,344

Deferred implementation costs, net of current
3,951

 
(3,949
)
 
2

Other assets
2,195

 
562

 
2,757

Deferred revenue, current
10,057

 
3,184

 
13,241

Deferred revenue, net of current
7,126

 
2,030

 
9,156

Deferred income taxes
5,838

 
367

 
6,205

This impact of the adoption of ASC 606 during the period ended March 31, 2018 is presented here:
 
Three Months Ended March 31, 2018
 
As Reported
 
Adjustments due to ASC 606
 
Without new Revenue Standard
Statement of Operations
 
 
 
 
 
Total net revenue
$
22,263

 
$
(533
)
 
$
21,730

Cost of revenue
11,068

 
(37
)
 
11,031

Operating expenses
26,942

 
470

 
27,412

(Benefit from) provision for income taxes
(1,050
)
 
(119
)
 
(1,169
)
Balance Sheet
 
 
 
 
 
Accounts receivable, net
14,701

 
(3,386
)
 
11,315

Deferred implementation costs, current
11

 
2,288

 
2,299

Prepaid expenses and other current assets
6,995

 
(1,611
)
 
5,384

Property, plant, and equipment, net
23,570

 
(5,884
)
 
17,686

Deferred implementation costs, net of current
2

 
3,716

 
3,718

Other assets
3,777

 
(800
)
 
2,977

Deferred revenue, current
13,080

 
(2,551
)
 
10,529

Deferred revenue, net of current
8,729

 
(530
)
 
8,199

Deferred income taxes
5,025

 
(459
)
 
4,566

The Company's accounting policies under the new standard are applied prospectively and are noted below.

Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue is recognized net of sales taxes collected from customers, which are subsequently remitted to governmental authorities. The Company’s revenue is generated from the following sources:

Software-as-a-service (“SaaS”) related - SaaS related revenue is generated from customers’ access to and usage of the Company’s hosted software solutions on a subscription basis for a specified contract term. In SaaS arrangements, the client cannot take possession of the software during the term of the contract and generally has the right to access and use the software and receive any software upgrades published during the subscription period.

- 14 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

SaaS contracts are accounted for as a single performance obligation, as implementation and hosting services are not distinct. As a result, the Company recognizes all fees, including any up front initial system implementation service fees, or other fees, ratably over time from when the system implementation or deployment services are completed, and where necessary accepted by the customer, over the contract term as stated or with consideration of termination for convenience clauses as discussed below.
Software and hardware related - Software and hardware related revenue is generated from the license of the Company’s software, on a perpetual basis, the sale of hardware and professional services that are complementary to the software and may or may not be required for the software to function as desired by the client. The services are generally provided in the form of implementation and training services and do not include maintenance revenue. The software is installed on the customer’s site or the customer’s designated vendor’s site and is not hosted by the Company or by a vendor contracted by the Company. See the section below “Contracts with Software, Hardware, and Implementation Services” for details of management’s judgments and recognition of revenue relating to the category.
Maintenance - Maintenance revenue includes ongoing post contract client support (“PCS”) or maintenance on software and hardware during the PCS term. Additionally, PCS includes ongoing development of software updates and upgrades provided to the client on a when-and-if-available basis. Revenue is recognized over the maintenance term.
Sequencing and molecular analysis - Sequencing and molecular analysis revenue is generated by providing customers with reports by performing the process of sequencing and analysis of whole genome DNA, RNA, and proteomic results under the Company's reseller agreement with NantOmics, LLC ("NantOmics"), and from blood samples via our liquid/blood-based tumor profiling platform through the Company’s subsidiary, Liquid Genomics, Inc. (See Note 18). Revenue is recognized at a point in time, when reports of results are transferred to the client, or when cash is received as described below.
The Company's sequencing and molecular analysis revenue is primarily generated from payments received from commercial third-party payers, hospitals and other provider networks and patients. The Company reports revenue from arrangements with these customers on a gross basis in accordance with ASC 606. When reports are transferred to the customer but the Company cannot conclude whether there is a contract with a customer based on the assessment of collectibility, revenue recognition is deferred until non-refundable payment is received or payment is considered probable.
Home health care services - Home health care services revenue includes the sale of nursing and therapy services provided to patients in a home care setting. These revenues are recognized at a point in time or over time, as services are provided.
Certain of the Company’s customer contracts allow for termination for convenience, with advanced notice, without substantive termination penalty. In these cases, the Company has concluded the contract term is equal to the remaining, noncancellable period. Such termination rights do not allow for refunds other than prepaid PCS or other services. These provisions do not affect when the Company commences revenue recognition.
The Company has allocated transaction price of $17,856 to unfulfilled performance obligations, these are expected to be fulfilled within three years, excluded from this amount are contracts of less than one year and variable consideration that relates to the value services provided.
Contracts with Multiple Promises for Goods and Services
The Company engages in various contracts with promises for multiple goods and services, which may generate revenue across any of the sources noted above.
In various contracts, the Company recognizes its proprietary software, hardware, PCS, results of sequencing and molecular analysis, certain professional services, and other software-related services as distinct performance obligations.
Standalone selling prices (“SSP”) are required to allocate and recognize revenue for each distinct performance obligation within each contract. The SSP for each performance obligation is determined by considering contracts in which the good or service is sold separately, and other factors including market conditions and the Company’s experience selling similar goods and services, as well as costs and margins achieved. In some cases, to estimate the SSP, the Company first estimates the selling price of each performance obligation for which an SSP is observable and then estimates the SSP of the remaining performance obligation as the residual contractual amount.
Contracts with Software, Hardware, and Implementation Services
The Company has some contracts where it provides implementation services involving significant integration of its licensed software and hardware, with customer networks that maintain patient electronic health records. These contracts represent a single performance obligation to the customer for a combined output due to the significant service of integrating the hardware, software and

- 15 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

professional services. Revenue for the single performance obligation is recognized over time based on actual, or estimated, direct implementation labor hours as a measure of progress.
In certain of those contracts, the Company’s performance also requires significant customization of its licensed software. For such contracts, the Company will also record revenue over time using the percentage of completion method to estimate the satisfaction of its performance obligations. However, where the Company lacks history and experience with certain projects involving the development of software according to customer specified criteria, the Company may be initially unable to reasonably estimate total direct software development labor hours to be expected under the project. As a result, the Company would not be able to reasonably measure its progress toward complete satisfaction of its single performance obligation. As a result, in these contracts, the Company will commence recognizing revenue when it concludes that it can reasonably measure its progress and determine that costs will be recoverable, which is typically at or near the time of the clients' acceptance of the software and the related professional services. At that point, substantially all of the uncertainty related to its ability to reasonably estimate direct labor hours to satisfy its performance obligations will have been resolved, and the Company will be able to reasonably measure the remaining progress toward complete satisfaction of its remaining professional services obligations. In such cases, the Company will commence recording revenue, at the date of meeting the customer acceptance criteria, with a cumulative catch up for the work performed to date using direct labor hours as a measure of progress consistent with other contracts involving software, hardware and implementation services. Recognition will continue for its performance obligation over the remaining performance period using the same measure of progress. A provision for the entire loss, from such a contract, will be recognized in any period it becomes evident that the contract will not be profitable.
Other contracts for perpetual software licenses, hardware, and implementation services, do not include a service of software development or significant integration. Therefore, the perpetual software licenses, hardware, and implementation services are considered separate, distinct performance obligations. Software revenue is recognized upon the later of the license term commencement or the date the software is provided to the customer, hardware revenue is recognized upon delivery, and implementation revenue is recognized over time based on actual, or estimated, direct implementation labor hours as a measure of progress.
The Company delineates between contracts with, or without, a service of significant integration by considering the complexity of the integration services and whether such services can be performed by the customer or another third party. The Company has both reseller arrangements with gross revenue presentation due to the Company’s control of goods and services before transfer to the customer, and others with net revenue presentation due to the reseller’s control of goods and services before transfer to the customer. The Company assesses control in terms of relevant indicators of performance, inventory, and pricing risk, such as which party negotiates pricing with the end customer and which party is ultimately responsible for fulfilling services, transfer of goods and services, and ensuring support.
Contract Balances
The Company records deferred revenue when cash payments are received, or payment is due, in advance of our fulfillment of performance obligations. There were $4,070 in revenues recognized during the three months ended March 31, 2018 that were included in the deferred revenue balance at the beginning of the period.

Contract assets are recognized when a contractual performance obligation has been satisfied, but payment is not due until the completion of additional performance obligations, or the right to receive payment becomes unconditional. Contract assets were $1,074 at March 31, 2018 and $796 at January 1, 2018.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs to obtain a contract with a customer, where the stated contract term, with expected renewals, is longer than one year. The Company amortizes these assets over the expected period of benefit. These costs are generally employee sales commissions, with amortization of the balance recorded in selling, general and administrative expenses. The value of these assets was $1,336 at March 31, 2018 and $866 at January 1, 2018, and amortization during the three months ended March 31, 2018 was $35.
Where management is not able to conclude that the costs of a contract will be recovered, costs to obtain the contract are expensed as incurred.
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for: contracts with an original expected length of one year or less; or where variable consideration, related to the company’s performance, is allocated to good and services delivered as a series and accounted for as a single performance obligation.
Cost of Revenue

- 16 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Cost of revenue includes associated salaries and fringe benefits, stock-based compensation, consultant costs, direct reimbursable travel expenses, depreciation related to software developed for internal use and other direct engagement costs associated with the design, development, sale and installation of systems, including system support and maintenance services for customers. System support includes ongoing client assistance for software updates and upgrades, installation, training and functionality. All service costs, except development of internal use software and deferred implementation costs, are expensed when incurred. Amortization of deferred implementation costs are also included in cost of revenue. Cost of revenue associated with each of the Company’s revenue sources consists of the following types of costs:
Software-as-a-service related - SaaS cost of revenue includes personnel-related costs, amortization of deferred implementation, and depreciation of internal use software, costs and other direct costs associated with the delivery and hosting of the Company's subscription services.
Software and Hardware related - Software and hardware related cost of revenue includes third-party software and hardware costs directly associated with solutions, including purchasing and receiving costs and includes direct costs associated with the Company’s software implementation services provided to our customers. Software and hardware related cost of revenue also includes hardware costs directly related to bringing manufactured products to their final selling destination.
Maintenance - Maintenance cost of revenue includes personnel-related costs and other direct costs associated with the ongoing support or maintenance provided to the Company’s customers.
Sequencing and molecular analysis - Sequencing and molecular analysis cost of revenue includes personnel-related costs associated with fulfillment of these services, including those of the Company's subsidiary, Liquid Genomics, Inc., and amounts due to NantOmics under the reseller agreement (See Note 18) for the sequencing and analysis of whole genome, DNA, RNA, and proteomic results. It also includes depreciation of internal use software.
Home health care services - Home health care services cost of revenue includes personnel-related, as well as direct expenses relating to the Company’s nursing and therapy services provided to patients in a home care setting.
Recent Accounting Pronouncements
Effective January 1, 2018, the Company adopted Accounting Standard Update ("ASU") No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, associated with the recognition and measurement of financial assets and liabilities. During the first quarter of 2018, the FASB issued further clarifications with the issuance of ASU No. 2018-03, effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2018, and ASU No. 2018-04, effective upon issuance. The Company has early adopted ASU No. 2018-03 and adopted ASU No. 2018-04 effective January 1, 2018 concurrently with ASU No. 2016-01. ASU No. 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU No. 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) are applied prospectively to equity investments that exist as of the date of adoption. Effective January 1, 2018, the Company elected to record its preferred stock equity investment in Innovative Oncology Business Solutions, Inc. (“IOBS”), which does not have a readily determinable fair value using the alternative method. Adoption of the Updates did not have a material effect on the Company’s accounting for equity investments, fair value disclosures and other disclosure requirements.
The Company owns non-marketable equity securities that are accounted for as an equity investment at cost minus impairment and plus or minus changes resulting from observable price changes because the preferred stock held by the Company is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value. All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an impairment indicator is present include: the investees’ earning performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern and any other information that the Company may be aware of related to the investment. Factors considered in determining whether an observable price change has occurred include: the price at which the investee issues equity instruments similar to those of the Company’s investment and the rights and preferences of those equity instruments compared to the Company’s.

- 17 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Effective January 1, 2018, the Company adopted ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. Also, effective January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force. ASU No. 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Prior periods were retrospectively adjusted to conform to the current period’s presentation. There was no material impact on the Company’s statement of cash flows on adoption of either update.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all of the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award date is modified. ASU No. 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The amendments of this ASU should be applied prospectively to an award modified on or after the adoption date. We adopted the standard beginning in the first quarter of 2018. If we encounter a change to the terms or conditions of any of our share-based payment awards we will evaluate the need to apply modification accounting based on the new guidance. The general treatment for modifications of share-based payment awards is to record the incremental value arising from the change as additional compensation cost. The adoption of this standard did not result in a significant impact to our financial statements during the quarterly reporting period ended March 31, 2018.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This update will become effective for the Corporation’s annual and interim goodwill impairment tests beginning in the first quarter of 2020, and early adoption is permitted. The Company is still evaluating the impact of this standard update.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The update is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance will become effective for interim and annual reporting periods beginning with the year ending December 31, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its Condensed Consolidated Financial Statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission ("SEC") did not have, or are not believed by management to have, a material impact on the Company's present or future Condensed Consolidated Financial Statements.
Note 3. Discontinued Operations
Sale to Allscripts
On August 3, 2017, the Company entered into an asset purchase agreement (the “APA”) with Allscripts Healthcare Solutions, Inc. (“Allscripts”), pursuant to which the Company agreed to sell to Allscripts substantially all of the assets of the Company’s provider/patient engagement solutions business, including the Company’s FusionFX solution and components of its NantOS software connectivity solutions (the “Business”). On August 25, 2017, the Company and Allscripts completed the sale of the Business (the "Disposition") pursuant to the APA.

Allscripts conveyed to the Company 15,000,000 shares of Company's common stock at par value of $0.0001 per share that were previously owned by Allscripts as consideration for the acquired Business upon Disposition. Allscripts paid the Company $1,742 of cash consideration as an estimated working capital payment, and the Company recorded a receivable of

- 18 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

$1,021 related to final working capital adjustments. The Company is also responsible for paying Allscripts for fulfilling certain customer service obligations of the Business post-closing.

Concurrent with the closing of the Disposition and as contemplated by the APA, (a) the Company and Allscripts modified the amended and restated mutual license and reseller agreement dated June 26, 2015, which was further amended on December 30, 2017, such that, among other things, the Company committed to deliver a minimum of $95,000 of total bookings over a ten-year period (“Bookings Commitment”) from referral transactions and sales of certain Allscripts products; (b) the Company and Allscripts each licensed certain intellectual property to the other party pursuant to a cross license agreement; (c) the Company agreed to provide certain transition services to Allscripts pursuant to a transition services agreement; and (d) the Company licensed certain software and agreed to sell certain hardware to Allscripts pursuant to a software license and supply agreement. In the event of a Bookings Commitment shortfall at the end of the ten-year period, the Company may be obligated to pay 70% of the shortfall, subject to certain credits. The Company will earn 30% commission from Allscripts on each software referral transaction that results in a booking with Allscripts. The Company accounts for the Bookings Commitment at its estimated fair value over the life of the agreement and, as of March 31, 2018 and December 31, 2017, the estimated fair value was not material.

During the three months ended March 31, 2018, the Company recorded other income of $197 associated with the services under the transition services agreement.

The total loss on sale to Allscripts consisted of the following:
Cash received as consideration
$
1,742

Deferred consideration related to working capital adjustments
1,021

Estimated costs to be incurred by the Company to fulfill certain customer service obligations of
the Business post-closing
(883
)
Fair value of common stock
42,750

Net consideration received
44,630

Less: Carrying value of net assets sold
(55,255
)
Plus: Reclassification of cumulative translation adjustments of foreign subsidiaries
117

Loss from sale of Business
$
(10,508
)

The sale of the Business qualified as a discontinued operation because it comprised operations and cash flows that could be distinguished, operationally and for financial reporting purposes, from the rest of the Company. The disposal of the Business represented a strategic shift in the Company’s operations as the sale enables the Company to focus on genomic sequencing, clinical decision support, connected care and payer engagement.

The operating results of the Company's discontinued operations are as follows:
 
Three Months Ended 
 March 31,
 
2018
 
2017
Major line items constituting loss from discontinued operations
 
 
 
Net revenue
$

 
$
3,405

Cost of revenue

 
7,511

Selling, general and administrative
193

 
3,443

Research and development

 
4,473

Amortization of software license and acquisition-related assets

 
760

Other (income) expense

 
(38
)
Loss from sale of Business

 

Gain from dissolution of a business component

 

  Loss from discontinued operations, before income taxes
(193
)
 
(12,744
)
Provision for income taxes

 
245

  Loss from discontinued operations, net of income taxes
$
(193
)
 
$
(12,989
)


- 19 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Cumulative translation adjustment gains or losses of foreign subsidiaries related to divested Business are reclassified into income once the liquidation of the respective foreign subsidiaries is substantially complete. At the completion of the sale of the Business, the Company reclassified $117 of cumulative translation adjustment gains from accumulated comprehensive loss to the Company's loss from sale of Business.

The significant operating and investing cash and non-cash items of the discontinued operations included in the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 were as follows:

 
Three Months Ended 
March 31,
 
2018
 
2017
 
 
 
 
Depreciation and amortization from discontinued operations
$

 
$
3,905

Dissolution of Net.Orange Ltd
On August 29, 2017, the Company dissolved its wholly-owned U.K. subsidiary, Net.Orange Ltd. The Company reclassified $860 of cumulative translation adjustment gains from accumulated comprehensive loss to the Company's results of discontinued operations.
Note 4. Accounts Receivable, net
Previously, accounts receivable, net excluded amounts related to post contract client support (“PCS”) and other services that were billed but not yet delivered at each period end. These undelivered services are also excluded from the deferred revenue balances on the accompanying Condensed Consolidated Balance Sheets. The amount of outstanding and unpaid invoices excluded from both the accounts receivable and deferred revenue balances as of December 31, 2017 was $6,198. On implementing ASC 606 the Company has concluded that its receivables should be reported separately from deferred revenue and therefore the outstanding and unpaid invoices for undelivered services, are not excluded from accounts receivable at March 31, 2018.
 
Accounts receivable are included on the Condensed Consolidated Balance Sheets, net of the allowance for doubtful accounts. The allowance for doubtful accounts at March 31, 2018 and December 31, 2017 was $149 and $149, respectively.
Note 5. Inventories
Inventories as of March 31, 2018 and December 31, 2017 consisted of $805 and $839 of finished goods, respectively.

Note 6. Prepaid Expenses and Other Current Assets and Accrued and Other Current Liabilities
Prepaid expenses and other current assets as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
 
 
 
Prepaid expenses
$
2,809

 
$
2,791

Restricted cash (1)
350

 
350

Other current assets
3,836

 
2,217

Prepaid expenses and other current assets
$
6,995

 
$
5,358


(1) Additional $1,136 of noncurrent restricted cash as of March 31, 2018 is included in the Company’s Consolidated Balance Sheets as part of Other assets. Current and noncurrent restricted cash consists of funds that are contractually restricted as to usage or withdrawal related to the Company's security deposits in the form of standby letters of credit for leased facilities. No amounts have been drawn upon the letters of credit as of March 31, 2018.

Accrued and other current liabilities of March 31, 2018 and December 31, 2017 consisted of the following:

- 20 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

 
March 31,
2018
 
December 31,
2017
 
 
 
 
Payroll and related costs
$
4,974

 
$
7,051

NaviNet acquisition accrued earnout
559

 
5,408

Units of NantOmics to be transferred for assignment of Liquid Genomics
524

 

Other accrued and other current liabilities
6,356

 
5,675

Accrued and other current liabilities
$
12,413

 
$
18,134


Note 7. Property, Plant, and Equipment, net
Property, plant and equipment, net as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
 
 
 
Computer equipment and software
$
14,005

 
$
13,998

Furniture and equipment
3,980

 
3,211

Leasehold and building improvements
4,240

 
4,233

Construction in progress
1,216

 
629

Property, plant, and equipment, excluding internal use software
23,441

 
22,071

Less: Accumulated depreciation and amortization
(18,613
)
 
(15,248
)
Property, plant and equipment, excluding internal use software, net
4,828

 
6,823

Internal use software
26,252

 
17,690

Less: Accumulated depreciation and amortization, internal use software
(7,510
)
 
(5,996
)
Internal use software, net
18,742

 
11,694

Property, plant, and equipment, net
$
23,570

 
$
18,517

 
Depreciation and amortization expense from continuing operations was $3,070 for the three months ended March 31, 2018, of which $2,126 related to internal use software costs. Depreciation and amortization expense from continuing and discontinued operations was $3,111 for the three months ended March 31, 2017, of which $1,330 related to internal use software costs.

Amounts capitalized to internal use software for the three months ended March 31, 2018 and 2017 were $2,735 and $1,038, respectively.


- 21 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Note 8. Intangible Assets, net
The Company’s definite-lived intangible assets as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
 
 
 
Customer relationships
$
52,000

 
$
52,000

Developed technologies
36,700

 
32,000

Trade name
3,000

 
3,000

 
91,700

 
87,000

Less: accumulated amortization
(20,074
)
 
(17,576
)
Intangible assets, net
$
71,626

 
$
69,424


Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or the pattern in which economic benefits are consumed, if reliably determinable. The Company reviews its definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Amortization expense from continuing operations was $2,227 for the three months ended March 31, 2018 and amortization expense from continuing and discontinued operations was $5,220 for the three months ended March 31, 2017.
At February 28, 2018, the Company recorded $4,700 of definite-lived intangible assets and accumulated amortization of $271 related to the assignment of Liquid Genomics (See Note 18). These intangibles are amortized over a period of thirteen years.
The estimated future amortization expense over the next five years and thereafter for the intangible assets that exist as of March 31, 2018 is as follows:
 
Amounts
Remainder of 2018
$
6,832

2019
9,150

2020
8,400

2021
8,400

2022
8,400

Thereafter
30,444

Total future intangible amortization expense
$
71,626

Note 9. Goodwill
Goodwill as of March 31, 2018 and December 31, 2017 was $115,930 and $114,625, respectively. Goodwill as of December 31, 2017 excluded $16,444 associated with discontinued operations based on the relative fair value of the Business disposed to the total reporting unit as of August 25, 2017 (See Note 3).
On February 28, 2018, the Company recognized $1,305 of goodwill related to the assignment of Liquid Genomics, Inc. (See Note 18).
Goodwill acquired in a business combination and determined to have an indefinite useful life is not amortized but is tested for impairment annually as of October 1 or between annual tests when an impairment indicator exists.
Note 10. Investments
Equity method investment
Investment in NantOmics

- 22 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

In 2015, the Company purchased a total of 169,074,539 Series A-2 units of NantOmics, LLC (“NantOmics”), a related party of the Company, for an aggregate purchase price of $250,774. The Series A-2 units do not have any voting rights and represent approximately 14.28% of NantOmics’ issued and outstanding membership interests. NantOmics is majority owned by NantWorks and delivers molecular diagnostic capabilities with the intent of providing actionable intelligence and molecularly driven decision support for cancer patients and their providers at the point of care.

At February 28, 2018, the Company transferred 9,088,362 of the Series A-2 units to NantOmics as consideration for the assignment of Liquid Genomics. An additional 564,779 units will be transferred by May 31, 2018. This will reduce NantHealth's ownership of NantOmics to approximately 13.6%.
 
The Company applies the equity method to account for its investment in NantOmics as the interest in the equity is similar to a partnership interest. Further, the Company has the ability to exert significant influence over the operating and financial policies of the entity since NantWorks controls both NantHealth and NantOmics. The difference between the carrying amount of the investment in NantOmics and the Company’s underlying equity in NantOmics’ net assets relate to both definite and indefinite-lived intangible assets. The Company attributed $28,195 and $14,382 of these differences to NantOmics’ developed technologies and its reseller agreement with the Company, respectively, prior to the application of developed technology intangibles included in NantOmics net assets, and the remaining basis differences were attributed to goodwill. The Company amortizes the basis differences related to the definite-lived intangible assets over the assets’ estimated useful lives and records these amounts as a reduction in the carrying amount of its investment and an increase in its equity method loss.

The investment in related party is assessed for possible impairment when events indicate that the fair value of the investment may be below the carrying value. When such a condition is deemed to be other than temporary, the carrying value of the investment is written down to its fair value, and the amount of the write-down is included in net loss. In making the determination as to whether a decline is other than temporary, the Company considers such factors as the duration and extent of the decline, the investee’s financial performance, and the Company's ability and intention to retain the investment for a period that will be sufficient to allow for any anticipated recovery in the investment’s market value. The new cost basis of the investment is not changed for subsequent recoveries in fair value.

The fair value of the Company's equity method investment is determined using the income approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations for future revenue, operating expenses, and earnings before interest, taxes, depreciation and amortization, capital expenditures and an anticipated tax rate. The related cash flow forecasts are discounted using an estimated weighted-average cost of capital at the date of valuation.  Differences between the carrying value of an equity investment and its underlying equity in the net assets of the related party are assigned to the extent practicable to specific assets and liabilities based on our analysis of the various factors giving rise to the difference. When appropriate, the Company's share of the related party’s reported earnings is adjusted quarterly to reflect the difference between these allocated values and the related party’s historical book values.

At June 30, 2017 and at December 31, 2016, the Company determined that other than temporary impairments of $35,991 and $29,816, respectively, in the value of the investment in NantOmics had occurred, predominantly attributed to declines in the value of goodwill. The declines in the fair value were primarily caused by delays in the Company’s GPS revenue growth and changes in the risk profile of the financial projections for NantOmics. The Company based its financial projections on information that the Company believed were reasonable; however, actual results may differ materially from those projections. The other than temporary impairments were based on judgments and estimates that were forward looking in nature and it is reasonably possible that the estimate of the impairments of the equity method investment in NantOmics will change in the near term due to the following: actual NantOmics cash distribution is materially lower than expected, significant adverse changes in NantOmics's operating environment, increase in the discount rate, and changes in other key assumptions. Risks and uncertainties are related to assumptions regarding future financial performance, commercial acceptance of product and service offerings, risk of reimbursement for the Company’s sequencing and molecular analysis solution, developments in the healthcare and molecular diagnostics industry, NantOmics' ability to integrate its business acquisitions, regulatory risks, and other general business risks including unanticipated adverse changes in NantOmics' operating environment.


- 23 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

The Company reports its share of NantOmics’ income or loss and the amortization of basis differences using a one quarter lag. For the three months ended March 31, 2018 and 2017, the Company recognized equity losses of $3,261 and $4,526, respectively.

The Company used the following summarized financial information for NantOmics for the three months ended December 31, 2017 and 2016 to record its equity method losses for the three months ended March 31, 2018 and 2017, respectively:

 
Three Months ended December 31
 
2017
 
2016
Sales
$
1,385

 
$
2,415

Gross loss
(4,269
)
 
(2,217
)
Loss from operations
(13,454
)
 
(7,770
)
Net loss
(31,959
)
 
(21,766
)
Net loss attributable to NantOmics
(31,420
)
 
(20,513
)
Cost method Investment
Investment in IOBS
On June 16, 2015, the Company invested $1,750 in Innovative Oncology Business Solutions, Inc. (“IOBS”) in exchange for 1,750,000 shares of IOBS’ Series A preferred stock. IOBS offers community oncology practices an alternative medical home model for oncology patients that improves health outcomes, enhances patient care experiences and significantly reduces costs of care. The shares of preferred stock represent 35.0% of the outstanding equity of IOBS on an as-converted basis. The Company applied the cost method to account for its investment because the preferred stock is not considered in-substance common stock, is not considered a debt instrument as the Company cannot unilaterally demand redemption of the preferred stock and the preferred stock does not have a readily determinable fair value.

As of March 31, 2018 and December 31, 2017, IOBS was considered a variable interest entity. The Company is not the primary beneficiary of IOBS because it only has the right to elect two of five directors. All major decisions of IOBS require the majority vote by the members of the board of directors, including decisions made to manage the business including hiring and firing of officers and other critical management functions. Therefore, the Company does not consolidate IOBS.

The Company’s maximum exposure to loss as a result of its involvement with IOBS is approximately $1,750, which is primarily composed of the original cost of the investment in IOBS’ Series A preferred stock. No other arrangements exist that could require the Company to provide additional financial support or otherwise expose the Company to a loss.
Note 11. Convertible Notes
In December 2016, the Company entered into the Purchase Agreement with J.P. Morgan Securities LLC and Jefferies LLC, as representatives of the several initial purchasers named therein (collectively, the “Initial Purchasers”), to issue and sell $90,000 in aggregate principal amount of its 5.50% senior convertible notes due 2021 ("Convertible Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons pursuant to Regulation S under the Securities Act. In December 2016, the Company entered into a purchase agreement (the “Cambridge Purchase Agreement”) with Cambridge Equities, L.P., an entity affiliated with Dr. Patrick Soon-Shiong, the Company’s Chairman and Chief Executive Officer (“Cambridge”), to issue and sell $10,000 in aggregate principal amount of the Convertible Notes in a private placement pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. In December 2016, pursuant to the exercise of the overallotment by the Initial Purchasers, the Company issued an additional $7,000 principal amount of the Convertible Notes. The total net proceeds from this offering were approximately $102,714, $9,917 from Cambridge and $92,797 from the Initial Purchasers, after deducting the Initial Purchasers’ discount and debt issuance costs of $4,286 in connection with the Convertible Notes offering.

- 24 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

On December 21, 2016, the Company entered into an Indenture, relating to the issuance of the Convertible Notes (the “Indenture”), by and between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The interest rates are fixed at 5.50% per year, payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2017. The Convertible Notes will mature on December 15, 2021, unless earlier repurchased by the Company or converted pursuant to their terms.
In connection with the offering of the Convertible Notes, on December 15, 2016, the Company entered into a Second Amended and Restated Promissory Note which amended and restated the Amended and Restated Promissory Note, dated May 9, 2016, between the Company and NantCapital, to, among other things, extend the maturity date of the promissory note to June 30, 2022 and to subordinate such promissory note in right of payment to the Convertible Notes (See Note 18).
The initial conversion rate of the Convertible Notes is 82.3893 shares of common stock per $1 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately $12.14 per share). Prior to the close of business on the business day immediately preceding September 15, 2021, the Convertible Notes will be convertible only under the following circumstances:
(1) during any calendar quarter commencing after March 31, 2017 (and only during such calendar quarter), if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 120% of the conversion price on such trading day;
(2) during the five-business day period after any five consecutive trading day period in which, for each day of that period, the trading price per $1 principal amount of the Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; or
(3) upon the occurrence of specified corporate transactions as described in the Indenture agreement.
Upon conversion, the Convertible Notes will be settled in cash, shares of the Company’s common stock or any combination thereof at the Company’s option.
Upon the occurrence of a fundamental change (as defined in the Indenture), holders may require the Company to purchase all or a portion of the Convertible Notes in principal amounts of $1 or an integral multiple thereof, for cash at a price equal to 100% of the principal amount of the Convertible Notes to be purchased plus any accrued and unpaid interest to, but excluding, the fundamental change purchase date. The conversion rate will be subject to adjustment upon the occurrence of certain specified events.
On or after the date that is one year after the last date of original issuance of the Convertible Notes, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending within the five trading days immediately preceding a conversion date is greater than or equal to 120% of the conversion price on each applicable trading day, the Company will make an interest make-whole payment to a converting holder (other than a conversion in connection with a make-whole fundamental change in which the conversion rate is adjusted) equal to the sum of the present values of the scheduled payments of interest that would have been made on the Convertible Notes to be converted had such Convertible Notes remained outstanding from the conversion date through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the Convertible Notes had not been so converted. The present values of the remaining interest payments will be computed using a discount rate equal to 2.0%. The Company may pay any interest make-whole payment either in cash or in shares of its common stock, at the Company’s election as described in the Indenture.

The Company accounts for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) by recording the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the Convertible Notes.  The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the Convertible Notes.
The liability component of the Convertible Notes on the date of issuance was computed as $83,079, consisting of the value of the embedded interest make-whole derivative of $1,499 and the carrying value of the Convertible Notes of $81,580. Accordingly, the equity component on the date of issuance was $23,921. If the debt will be considered current at the balance sheet date, the liability component of the convertible notes will be classified as current liabilities and presented in current portion of convertible notes debt and the equity component of the convertible debt will be considered a redeemable security and presented as redeemable equity on the Company's Condensed Consolidated Balance Sheet.

- 25 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Offering costs of $4,286 related to the issuance of the Convertible Notes were allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as deferred financing offering costs and equity issuance costs, respectively. Approximately $972 of this amount was allocated to equity and the remaining $3,314 were capitalized as deferred financing offering costs.
The debt discounts and deferred financing offering costs on the Convertible Notes are being amortized to interest expense over the contractual terms of the Convertible Notes, using the effective interest method at an effective interest rate of 12.82%.
As of March 31, 2018, the remaining life of the Convertible Notes is approximately 45 months.

The following table summarizes how the issuance of the Convertible Notes is reflected in the Company's Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017.
 
Related party
 
Others
 
Total
Balance as of March 31, 2018
 
 
 
 
 
Gross proceeds
$
10,000

 
$
97,000

 
$
107,000

Unamortized debt discounts and deferred financing offering costs
(1,951
)
 
(21,063
)
 
(23,014
)
Net carrying amount
$
8,049

 
$
75,937

 
$
83,986

 
 
 
 
 
 
Balance as of December 31, 2017
 
 
 
 
 
Gross proceeds
$
10,000

 
$
97,000

 
$
107,000

Unamortized debt discounts and deferred financing offering costs
(2,053
)
 
(22,155
)
 
(24,208
)
Net carrying amount
$
7,947

 
$
74,845

 
$
82,792

 
The following table sets forth the Company's interest expense recognized in the Company's Condensed Consolidated Statements of Operations:
 
Three Months Ended March 31, 2018
 
Related party
 
Others
 
Total
Accrued coupon interest expense
$
137

 
$
1,334

 
$
1,471

Amortization of debt discounts
100

 
957

 
1,057

Amortization of deferred financing offering costs
3

 
135

 
138

Total convertible notes interest expense
$
240

 
$
2,426

 
$
2,666


- 26 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 12. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 consisted of the following:
 
March 31, 2018
 
Total
 fair value
 
Quoted price in active markets for identical assets
 (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
 (Level 3)
Assets - Cash equivalents
$
29,430

 
$
29,430

 
$

 
$

Assets - Held-to-maturity
1,136

 

 
1,136

 

Liabilities - Interest make-whole derivative
5

 

 

 
5

 
December 31, 2017
 
Total
 fair value
 
Quoted price in active markets for identical assets
 (Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
 (Level 3)
Assets - Cash equivalents
$
57,683

 
$
57,683

 
$

 
$

Assets - Held-to-maturity
361

 

 
361

 

Liabilities - Interest make-whole derivative
7

 

 

 
7


The Company’s intangible assets and goodwill are initially measured at fair value and any subsequent adjustment to the initial fair value occurs only if an impairment charge is recognized. The fair values of the Company’s marketable securities and cash equivalents (consisting of mainly money market accounts) are based on quoted market prices in active markets with no valuation adjustment.

The Company's investment securities as of March 31, 2018 and December 31, 2017 include certificates of deposit that are classified by management as held-to-maturity since the Company has the positive intent and ability to hold to maturity. The fair value of these investments approximate carrying values, and the Company has classified these instruments as Level 2 in the fair value hierarchy. The securities have maturity dates of one to three years.
Level 3 Inputs
In December 2016, the Company issued $107,000 in aggregate principal amount of Convertible Notes due December 15, 2021, of which $10,000 issued to a related party (See Note 11). The Convertible Notes include an interest make-whole feature whereby if a noteholder converts any of the Convertible Notes one year after the last date of original issuance of the Convertible Notes, they are entitled, in addition to the other consideration payable or deliverable in connection with such conversion, to an interest make-whole payment equal to the sum of the present values of the scheduled payments, computed using a discount rate equal to 2.0%, of interest that would have been made on the Convertible Notes to be converted had such Convertible Notes remained outstanding from the conversion date through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the Convertible Notes had not been so converted. The Company may pay any interest make-whole payment either in cash or in shares of its common stock, at the Company’s election as described in the Indenture. The Company has determined that this feature is an embedded derivative and have recognized the fair value of this derivative as a liability in the Company's Condensed Consolidated Balance Sheets, with subsequent changes to fair value recorded through earnings at each reporting period as part of other income, net on the Company's Condensed Consolidated Statements of Operations as change in fair value of derivative liability.  
The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the three months ended March 31, 2018:

- 27 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

 
 
December 31, 2017
 
Additions
 
Change in fair value
 
March 31, 2018
Interest make-whole derivative liability:
 
 
 
 
 
 
 
 
Others
 
$
7

    
$

    
$
(2
)
 
$
5

As of March 31, 2018 and December 31, 2017, the fair value and carrying value of the Company's Convertible Notes were:
 
 
 
Fair value
 
Carrying value
 
Face value
 
 
 

 
 

 
 

5.5% convertible senior notes due December 15, 2021:
 
 
 
 
 
 
Balance as of March 31, 2018
 
 
 
 
 
 
Related party
 
$
7,443

    
$
8,049

    
$
10,000

Others
 
72,199

 
75,937

 
97,000

 
 
$
79,642

 
$
83,986

 
$
107,000

Balance as of December 31, 2017
 
 
 
 
 
 
Related party
 
$
7,327

    
$
7,947

    
$
10,000

Others
 
71,076

 
74,845

 
97,000

 
 
$
78,403

 
$
82,792

 
$
107,000


The fair value shown above represents the fair value of the debt instrument, inclusive of both the debt and equity components, but excluding the derivative liability. The carrying value represents only the carrying value of the debt component.

Note 13. Commitments and Contingencies
The Company's principal commitments consist of obligations under its outstanding debt obligations, non-cancelable leases for its office space and certain equipment and vendor contracts to provide research services, and purchase obligations under license agreements and reseller agreements.
Lease Arrangements
The Company leases both real estate and equipment used in its operations and classifies those leases as either operating or capital leases for accounting purposes. As of March 31, 2018 and December 31, 2017, the Company had no material capital leases and the remaining lives of its operating leases ranged from one to five years.
Rental expense associated with operating leases is charged to expense in the year incurred and is included in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2018 and 2017, the rental expense was charged to selling, general and administrative expense in the amount of $964 and $1,254, respectively.
As of the date of this filing, the Company had entered into two new real estate leases in Philadelphia and Boston, which increased the Company's future minimum rental commitments. As of March 31, 2018, the Company’s future minimum rental commitments under its noncancelable operating leases are as follows:
 
Amounts
2018
$
3,270

2019
2,595

2020
2,584

2021
2,472

2022
2,383

Thereafter
4,543

Total minimum rental commitments
$
17,847


- 28 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Regulatory Matters
The Company is subject to regulatory oversight by the U.S. Food and Drug Administration and other regulatory authorities with respect to the development, manufacturing, and sale of some of the solutions. In addition, the Company is subject to the Health Insurance Portability and Accountability Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act and related patient confidentiality laws and regulations with respect to patient information. The Company reviews the applicable laws and regulations regarding effects of such laws and regulations on its operations on an on-going basis and modifies operations as appropriate. The Company believes it is in substantial compliance with all applicable laws and regulations. Failure to comply with regulatory requirements could have a significant adverse effect on the Company’s business and operations.
Legal Matters
The Company is, from time to time, subject to claims and litigation that arise in the ordinary course of its business. The Company intends to defend vigorously any such litigation that may arise under all defenses that would be available. Except as discussed below, in the opinion of management, the ultimate outcome of proceedings of which management is aware, even if adverse to them, would not have a material adverse effect on the Company’s Condensed Consolidated Financial Condition or Results of Operations. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Securities Litigation
In March 2017, a number of putative class action securities complaints were filed in U.S. District Court for the Central District of California, naming as defendants the Company and certain of our current or former executive officers and directors. These complaints have been consolidated with the lead case captioned Deora v. NantHealth, Inc., 2:17-cv-01825. In June 2017, the lead plaintiffs filed an amended consolidated complaint, which generally alleges that defendants violated federal securities laws by making material misrepresentations in NantHealth’s IPO registration statement and in subsequent public statements. In particular, the complaint refers to various third-party articles in alleging that defendants misrepresented NantHealth’s business with the University of Utah, donations to the university by non-profit entities associated with our founder Dr. Soon-Shiong, and orders for GPS Cancer. The lead plaintiffs seek unspecified damages and other relief on behalf of putative classes of persons who purchased or acquired NantHealth securities in the IPO or on the open market from June 1, 2016 through May 1, 2017. In March 2018, the court largely denied Defendants’ motion to dismiss the consolidated amended complaint. A trial date has been set for August 2019. The Company believes that the claims lack merit and intends to vigorously defend the litigation.

In May 2017, a putative class action complaint was filed in California Superior Court, Los Angeles County, asserting claims for violations of the Securities Act based on allegations similar to those in Deora. That case is captioned Bucks County Employees Retirement Fund v. NantHealth, Inc., BC 662330. The parties agreed to a stay of the case pending resolution of the motion to dismiss in in the federal Deora case. The Company believes that the claims lack merit and intends to vigorously defend the litigation.

In April 2018, two putative shareholder derivative actions-captioned Engleman v. Soon-Shiong, Case No. 2018-0282-AGB, and Petersen v. Soon-Shiong, Case No. 2018-0302-AGB-were filed in the Delaware Court of Chancery. The plaintiff in the Engleman action previously filed a similar complaint in California Superior Court, Los Angeles County, which was dismissed based on a provision in the Company’s charter requiring derivative actions to be brought in Delaware. The Engleman and Petersen complaints contain allegations similar to those in Deora, but assert causes of action on behalf of NantHealth against various of the Company’s current or former executive officers and directors for alleged breaches of fiduciary duty, abuse of control, gross mismanagement, and unjust enrichment. The Company is named solely as a nominal defendant.

In April 2018, a putative shareholder derivative action captioned Shen v. Soon-Shiong was filed in U.S. District Court for the District of Delaware. The complaint contains allegations similar to those in Deora, but asserts causes of action on behalf of NantHealth against various of the Company’s current or former executive offers and directors for alleged breaches of fiduciary duty and unjust enrichment, as well as alleged violations of the federal securities laws based on alleged misstatements or omissions in the Company’s 2017 proxy statement.
Real Estate Litigation
On March 9, 2018, PayPal, Inc. (“PayPal”) commenced an action against the Company in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts, for Suffolk County. The action is captioned PayPal, Inc. v. NantHealth, Inc., Civil Action No. 18-0780-E. This action arises out of a Sublease Agreement that PayPal and the Company entered into on or about November 30, 2017. The Sublease Agreement pertained to commercial real estate that PayPal leased at One International Place in Boston, Massachusetts. On January 25, 2018, the Company notified PayPal that it was electing to terminate the Sublease Agreement.


- 29 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

In its Verified Complaint, PayPal alleges that the Company breached the Sublease Agreement. In addition, PayPal asserts claims for breach of the covenant of good faith and fair dealing, and violations of Massachusetts General Laws, Chapter 93A, sections 2 and 11, and seeks a declaratory judgment recognizing and enforcing the terms of the Sublease Agreement. Among other relief, PayPal seeks damages, treble damages, interest, costs, and attorneys’ fees.

On April 12, 2018, the Company filed its answer and jury demand in the action. The Company denies any liability to PayPal and intends to vigorously defend the action.

The monetary and other impact of these actions may remain unknown for substantial periods of time. The cost to defend, settle or otherwise resolve these matters may be significant and divert management's attention. We cannot assure you that we will prevail in these lawsuits. If we are ultimately unsuccessful in these matters, we could be required to pay substantial amounts which might materially adversely affect our business, operating results and financial condition.

Note 14. Income Taxes
The provision for income taxes for the three months ended March 31, 2018 and 2017 in continuing operations was a benefit of $1,050 and expense of $37, respectively. The tax provision for income taxes for the three and three months ended March 31, 2018 and March 31, 2017 in continuing operations included an income tax provision for the consolidated group based on an estimated annual effective tax rate. Prior to June 1, 2016 the provision for income taxes consisted of income tax provision for the corporate subsidiaries of NantHealth.

The effective tax rates for the three months ended March 31, 2018 and 2017 were a provision of 4.56% and 0.13% in continuing operations, respectively. The effective tax rates for the three months ended March 31, 2018 and March 31, 2017 respectively differed from the U.S. federal statutory rates of 21% in 2018 and 34% in 2017 primarily as a result of a reduction to the deferred tax liability related to an indefinite lived intangible, nondeductible expenses, state income taxes, foreign income tax rate differential and the impact of valuation allowance on its deferred tax assets.

The Company has evaluated all available evidences supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all deferred tax assets. If/when the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period(s) such determination is made. The Company files income tax returns in the U.S. Federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. The Company is no longer subject to income tax examination by the U.S. federal, state or local tax authorities for years ended December 31, 2012 or prior, however, its tax attributes, such as net operating loss (“NOL”) carryforwards and tax credits, are still subject to examination in the year they are used.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, modifies the rules with respect to the deductibility of certain executive compensation, and creates new taxes on certain foreign sourced earnings. We are applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act. At March 31. 2018, we have not completed our accounting for the tax effects of the Act. We have made a reasonable estimate of certain effects of the act as of December 31, 2017. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. Our estimates may also be affected as we gain a more thorough understanding of the tax law. These changes would likely not be material to income tax expense given the companies valuation allowance against the U.S. net deferred tax assets.

Note 15. Stockholders’ Equity
Allscripts Stock
As discussed in Note 3, Allscripts conveyed to the Company 15,000,000 shares of Company's common stock at par value of $0.0001 per share that were previously owned by Allscripts as consideration for the acquired Business upon Disposition.
LLC Agreement and Amended Certificate of Incorporation

- 30 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Prior to the LLC Conversion, the Company’s operations were governed by its LLC Agreement. Upon the consummation of the LLC Conversion, the Company converted into a corporation, and the LLC Agreement no longer governs the Company's operations or the rights of its equityholders.
The LLC Agreement provided that the board of directors had the power and discretion to manage and control the business, property and affairs of the company, but that certain actions required the consent of certain of the Company's former members. Under the LLC Agreement, the Company had units authorized, including Series A through H units. Each equityholder holding Series A, B, D, E, F, G or H units had one vote for each unit held. Profits interests units awarded under the Nant Health, LLC Profits Interests Plan (the "Profits Interests Plan") took the form of Series C units of the Company. Holders of Series C units did not have the right to vote. The LLC Agreement also set forth the rights of and restrictions on unitholders, including certain rights of first refusal and preemptive and co-sale rights. The LLC Agreement also provided that, upon the LLC Conversion, the allocation of shares of the Company's common stock among the pre-IPO equityholders was dependent upon the IPO price of its common stock, based on the relative rights of the pre-IPO equityholders as set forth in the LLC Agreement. As a result, as part of the LLC Conversion, the Company set the actual allocation of shares among its pre-IPO equityholders based upon the IPO price of its common stock.
Concurrently with the consummation of the LLC Conversion, the LLC Agreement was terminated, other than certain provisions relating to certain pre-termination tax matters and certain liabilities.

In accordance with the Company’s amended and restated certificate of incorporation, which was filed immediately following the closing of its IPO, the Company is authorized to issue 750,000,000 shares of common stock, with a par value of $0.0001 per share, and 20,000,000 shares of undesignated preferred stock, with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share held on all matters submitted to a vote of its stockholders. Holders of the Company’s common stock have no cumulative voting rights. Further, as of March 31, 2018 and December 31, 2017, holders of the Company’s common stock have no preemptive, conversion, redemption or subscription rights and there are no sinking fund provisions applicable to the Company’s common stock. Upon liquidation, dissolution or winding-up of the Company, holders of the Company’s common stock are entitled to share ratably in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding shares of preferred stock. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared from time to time by the Company’s board of directors. As of March 31, 2018 and December 31, 2017, there were no outstanding shares of preferred stock.
Other Equity Contributions

In December 2016, the Company entered into an agreement to provide genomic and proteomic sequencing and related bioinformatics services to an institution related to cancer research. The agreement provides that the institution pay the Company a fixed per-test fee in exchange for the services to be provided by the Company. A private charitable 501(c)(3) non-profit organization controlled by the Company’s Chairman and CEO also made a charitable gift to the institution in December 2016. The gift does not contractually or otherwise require the institution to use the Company’s molecular profiling solutions or any of the Company’s other products or services. No amounts related to this arrangement have been recognized in the Company’s Condensed Consolidated Balance Sheets or Statements of Operations as of or for the three months ended March 31, 2018 or March 31, 2017. During July 2017, the agreement with the institution was canceled.

- 31 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Note 16. Stock-Based Compensation
The following table reflects the components of stock-based compensation expense recognized in the Company's Condensed Consolidated Statements of Operations:
 
Three Months Ended 
 March 31,
 
2018
 
2017
Series C / Restricted Stock:
 
 
 
Research and development
$
33

 
$
15

Phantom units:
 
 
 
Cost of revenue
153

 
284

Selling, general and administrative
253

 
(1,432
)
Research and development
209

 
512

Discontinued operations
0

 
906

Total phantom units stock-based compensation expense
615

 
270

Stock options:
 
 
 
Selling, general and administrative

 
(35
)
Restricted Stock Units:
 
 
 
Cost of revenue
12

 

Selling, general and administrative
1,954

 

Research and development
104

 

Total restricted stock units stock-based compensation expense
2,070

 

Total stock-based compensation expense
2,718

 
250

Amount capitalized to internal-use software
50

 
524

Total stock-based compensation cost
$
2,768

 
$
774

Retired Profits Interests Plan
On December 3, 2013, the Company adopted the Profits Interests Plan under which it had reserved an aggregate of 63,750,000 Series C units for issuance to associates, consultants and contractors of the Company in consideration for bona fide services provided to the Company.
The Series C units were considered profits interests of the Company and did not entitle their holders (the “Series C Members”) to receive distributions if the Company were liquidated immediately after the grant. Instead, the Series C Members were entitled to receive an allocation of a portion of the profit and loss of the Company arising after the date of the grant and, subject to vesting conditions, distributions made out of a portion of the profits of the Company arising after the grant date of the Series C units. Grants of the Series C units were either fully vested, partially vested, or entirely unvested at the time of the grant as determined by the Board.
Series C Members were not entitled to receive any distributions until the aggregate distributions made by the Company exceeded a hurdle amount applicable to those Series C units. The hurdle amount for each grant was determined by the Board at the date of issuance of such units. After all other members received their applicable hurdle amount, the Series C Members were entitled to receive their percentage interest of such excess distributions.
As of December 31, 2015 and through the date of the LLC Conversion, the Company had 3,470,254 Series C units outstanding.
Upon the LLC Conversion (See Note 15) on June 1, 2016, the Company issued 28,973 shares of common stock to holders of vested Series C units and 10,462 shares of restricted stock to holders of unvested Series C units. The shares of restricted stock issued to holders of unvested profits interests are subject to forfeiture until becoming fully vested in accordance with the terms of the original Series C unit grant agreements (See Restricted Stock below).

- 32 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Phantom Unit Plan
On March 31, 2015, the Company approved the Nant Health, LLC Phantom Unit Plan (the “Phantom Unit Plan”). The maximum number of phantom units that may be issued under the Phantom Plan is equal to 11,590,909 minus the number of issued and outstanding Series C units of the Company. As of March 31, 2018, there were 938,066 phantom units outstanding under the Phantom Unit Plan, after giving effect to the 1-for-5.5 reverse stock split. Each grant of phantom units made to a participant under the Phantom Unit Plan vests over a defined service period, subject to completion of a liquidity event. The Company’s IPO satisfied the liquidity event condition and the phantom units now entitle their holders to cash or non-cash payments in an amount equal to the number of vested units held by that participant multiplied by the fair market value of one share of the Company’s common stock on the date each phantom unit vests. After the Company’s IPO, the Company will no longer issue any units under the Phantom Unit Plan.

The Company intends to settle all vested phantom unit payments held by United States-based participants in shares of the Company’s common stock and classifies these awards as equity awards in its Condensed Consolidated Balance Sheet. Awards held by participants who are based outside of the United States will be settled in cash and are classified within accrued and other current liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017.

The following table summarizes the activity related to the unvested phantom units during the three months ended March 31, 2018:
 
Number of Units
 
Weighted
Average Grant
date value per
phantom unit
Unvested phantom units outstanding - December 31, 2017
1,292,784

 
$
15.01

   Granted

 


   Vested
(320,856
)
 
$
15.75

   Forfeited
(33,863
)
 
$
14.61

Unvested phantom units outstanding - March 31, 2018
938,065

 
$
14.76


The Company has previously granted phantom units to employees of related companies who are providing services to the Company under the shared services agreement with NantWorks (See Note 18) as well as certain consultants of the Company. No phantom units were granted in the periods ending March 31, 2018 or 2017. Stock compensation expense for the phantom units issued to these participants is re-measured at the end of each reporting period until the awards vest. All other grants of phantom units have been made to employees of the Company. The Company uses the accelerated attribution method to recognize expense for all phantom units since the awards’ vesting was subject to the completion of a liquidity event. The grant date fair value of the phantom units granted prior to LLC Conversion was estimated using both an option pricing method and a probability weighted expected return method.
 
As of March 31, 2018, the Company had $3,152 of unrecognized stock based compensation expense related to phantom units which will be recognized over a weighted-average period of 1.2 years. Of that amount, $3,015 of unrecognized expense is related to employee grants with a weighted-average period of 1.2 years and $137 of unrecognized expense is related to non-employee grants with a weighted-average period of 1.4 years.

During the three months ended March 31, 2018, the Company issued 208,344 shares of common stock to participants of the Phantom Unit Plan based in the United States, after withholding approximately 111,128 shares to satisfy tax withholding obligations. The Company made a cash payment of $339 to cover employee withholding taxes upon the settlement of these vested phantom units during the three months ended March 31, 2018. During the three months ended March 31, 2018 the Company also paid $101 to cash-settle 40,063 vested phantom units, held by participants of the Phantom Unit Plan based outside of the United States, and to pay cash in lieu of fractional shares for vested units held by participants based in the United States.
2016 Equity Incentive Plan
In May and June of 2016, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2016 Equity Incentive Plan (“the 2016 Plan”) in connection with the Company’s IPO. The 2016 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants. A total of 6,000,000 shares of common stock were reserved for issuance pursuant to the 2016 Plan.

- 33 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Restricted Stock
The Company issued 10,462 shares of restricted stock under the 2016 Plan on June 1, 2016, in connection with the conversion of the Series C units, of which 3,486 and 3,486 were vested and converted into unrestricted common stock during 2017 and 2016, respectively. As of March 31, 2018, and December 31, 2017, there were 3,490 shares of restricted stock.
Total stock-based compensation expense of $76 is expected to be recognized on a straight-line basis over approximately the next 0.6 years for the unvested restricted stock outstanding as of March 31, 2018. The unrecognized stock compensation relates to nonemployees and the awards are being accounted for pursuant to ASC 505-50. Stock compensation expense for the Series C units/restricted stock issued to the nonemployees is calculated based on the fair value of the award on each balance sheet date and the attribution of that cost is being recognized ratably over the vesting period.
Stock Options
During the year ended December 31, 2016, the Company issued 500,000 stock options under the 2016 equity incentive plan to Mark Burnett, who is a non-employee member of the Company’s Board of Directors, with exercise price of $14.00. The award is being accounted for pursuant to ASC 505-50. Stock compensation expense issued to the nonemployees is calculated based on the fair value of the award on each balance sheet date and the attribution of that cost is being recognized ratably over the vesting period. The Company has utilized the Black-Scholes option-pricing model to determine the fair value of the stock options.
As of March 31, 2018, the Company had $1 of unrecognized stock based compensation expense related to the stock options. This cost is expected to be recognized over a weighted-average period of 2.15 years.
Restricted Stock Units
The following table summarizes the activity related to the unvested restricted stock units during the three months ended March 31, 2018:
 
Number of Units
 
Weighted-Average Grant-Date
Fair Value
Unvested restricted stock units outstanding - December 31, 2017
3,106,024

 
$
3.43

Granted

 

Vested
(42,717
)
 
4.33

Forfeited
(147,186
)
 
3.39

Unvested restricted stock units outstanding - March 31, 2018
2,916,121

 
$
3.42

The Company recognized compensation expense related to restricted stock units of $2,070, and $0 for the three months ended March 31, 2018 and 2017 respectively. Unrecognized compensation expense related to unvested restricted stock units was $6,484 at March 31, 2018, which is expected to be recognized as expense over the weighted-average period of 2.0 years.


- 34 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Note 17. Net Loss Per Share
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted net loss per share of common stock and redeemable common stock for the three months ended March 31, 2018 and 2017:
 
Three Months Ended 
 March 31,
 
2018
 
2017
 
Common Stock
 
Common Stock
Net loss per share numerator:
 
 
 
Net loss from continuing operations
$
(21,975
)
 
$
(28,126
)
Net loss from discontinued operations
(193
)
 
(12,989
)
Net loss for basic and diluted net loss per share
$
(22,168
)
 
$
(41,115
)
Weighted-average shares for basic net loss per share
108,579,271

 
121,618,039

Effect of dilutive securities

 

Weighted-average shares for dilutive net loss per share
108,579,271

 
121,618,039

Basic and diluted net loss per share from continuing operations
$
(0.20
)
 
$
(0.23
)
Basic and diluted net loss per share from discontinued operations
$

 
$
(0.11
)
Basic and diluted total net loss per share
$
(0.20
)
 
$
(0.34
)
The following number of potential common shares at the end of each period were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented:
 
Three Months Ended 
 March 31,
 
2018
 
2017
Unvested restricted stock
3,490

 
6,976

Unvested phantom units
938,065

 
3,515,718

Unvested restricted stock units
2,916,121

 

Unexercised Stock options
500,000

 
500,000

Convertible notes
8,815,655

 
8,815,655


Note 18. Related Party Transactions
NantWorks Shared Services Agreement
In October 2012, the Company entered into a shared services agreement with NantWorks that provides for ongoing services from NantWorks in areas such as public relations, information technology and cloud services, human resources and administration management, finance and risk management, environmental health and safety, sales and marketing services, facilities, procurement and travel, and corporate development and strategy (the "Shared Services Agreement"). The Company is billed quarterly for such services at cost, without mark-up or profit for NantWorks, but including reasonable allocations of employee benefits, facilities and other direct or fairly allocated indirect costs that relate to the associates providing the services. During the three months ended March 31, 2018, the Company incurred $1,043 of expenses, related to selling, general and administrative services provided to the Company by NantWorks and affiliates, net of services provided to NantWorks and affiliates. During the three months ended March 31, 2017, the Company incurred $1,385 of expenses, related to selling, general and administrative services provided to the Company by NantWorks and affiliates, net of services provided to NantWorks and affiliates.
Related Party Receivables and Payables

- 35 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

As of March 31, 2018 and December 31, 2017, the Company had related party receivables, net of related party payables of $2,349 and $2,312, respectively, primarily consisting of a receivable from Ziosoft KK of $2,082 and $2,082, respectively, which was related to the sale of Qi Imaging. As of March 31, 2018 and December 31, 2017 the Company had related party payables, net of receivables balances, and related party liabilities of $19,002 and $16,004, respectively, which primarily relate to amounts owed to NantWorks pursuant to the Shared Services Agreement, amounts owed to NantOmics under the Second Amended Reseller Agreement (defined below) and interest payable. The balance of the related party receivables and payables represent amounts paid by affiliates on behalf of the Company or vice versa.
Amended Reseller Agreement
On June 19, 2015, the Company entered into a five and a half year exclusive Reseller Agreement with NantOmics for sequencing and bioinformatics services (the "Original Reseller Agreement"). NantOmics is a majority owned subsidiary of NantWorks and is controlled by the Company's Chairman and CEO. On May 9, 2016, the Company and NantOmics executed an Amended and Restated Reseller Agreement (the “Amended Reseller Agreement”), pursuant to which the Company received the worldwide, exclusive right to resell NantOmics’ quantitative proteomic analysis services, as well as related consulting and other professional services, to institutional customers (including insurers and self-insured healthcare providers) throughout the world. The Company retained its existing rights to resell NantOmics’ genomic sequencing and bioinformatics services. Under the Amended Reseller Agreement, the Company is responsible for various aspects of delivering its sequencing and molecular analysis solutions, including patient engagement and communications with providers such as providing interpretations of the reports delivered to the physicians and resolving any disputes, ensuring customer satisfaction, and managing billing and collections. On September 20, 2016, the Company and NantOmics further amended the Reseller Agreement (the "Second Amended Reseller Agreement"). The Second Amended Reseller Agreement permits the Company to use vendors other than NantOmics to provide any or all of the services that are currently being provided by NantOmics and clarifies that the Company is responsible for order fulfillment and branding.

The Second Amended Reseller Agreement grants to the Company the right to renew the agreement (with exclusivity) for up to three renewal terms, each lasting three years, if the Company achieves projected volume thresholds, as follows: (i) the first renewal option can be exercised if the Company completes at least 300,000 tests between June 19, 2015 and June 30, 2020; (ii) the second renewal option can be exercised if the Company completes at least 570,000 tests between July 1, 2020 and June 30, 2023; and (iii) the third renewal option can be exercised if the Company completes at least 760,000 tests between July 1, 2023 and June 30, 2026. If the Company does not meet the applicable volume threshold during the initial term or the first or second exclusive renewal terms, the Company can renew for a single additional three year term, but only on a non-exclusive basis.
The Company agreed to pay NantOmics non-cancellable annual minimum fees of $2,000 per year for each of the calendar years from 2016 through 2020 and, subject to the Company exercising at least one of its renewal options described above, the Company is required to pay annual minimum fees to NantOmics of at least $25,000 per year for each of the calendar years from 2021 through 2023 and $50,000 per year for each of the calendar years from 2024 through 2029.
On December 18, 2017, the Company and NantOmics executed Amendment No. 1 to the Second Amended Reseller Agreement. The Second Amended Reseller Agreement is amended to allow fee adjustments with respect to services completed by NantOmics between the amendment effective date of October 1, 2017 to June 30, 2018.
As of March 31, 2018 and December 31, 2017, the Company has $1,284 and $419, respectively, of outstanding related party payables under the Second Amended Reseller Agreement. During the three months ended March 31, 2018, $1,176 of direct costs were recorded as cost of revenue related to the Second Amended Reseller Agreement. During the three months ended March 31, 2017, $1,226 of direct costs were recorded as cost of revenue related to the Second Amended Reseller Agreement.
Cambridge Purchase Agreement
On December 15, 2016, the Company entered into a purchase agreement (the “Cambridge Purchase Agreement”) with Cambridge Equities, L.P., an entity affiliated with the Company's Chairman and CEO Dr. Patrick Soon-Shiong (“Cambridge”), to issue and sell $10,000 in aggregate principal amount of the Convertible Notes in a private placement pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act. The Cambridge Purchase Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions (See Note 11). The accrued and unpaid interest on the convertible notes was $162 and $24 at March 31, 2018 and December 31, 2017, respectively, as part of current related party liabilities on the Condensed Consolidated Balance Sheet.

- 36 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Assignment of Liquid Genomics
On February 28, 2018, the Company acquired 100% of the equity of Liquid Genomics, Inc. (“Liquid Genomics”), a company that provides liquid biopsy analysis of gene expressions and mutations using circulating tumor RNA and DNA, pursuant to an assignment agreement dated February 1, 2018 between the Company and NantOmics, a related party. The purchase price for the acquisition consisted of 9,088,362 Series A-2 units of NantOmics previously owned by the Company that were transferred at the closing plus 564,779 of Series A-2 units of NantOmics owned by the Company that will be transferred to NantOmics by May 31, 2018.

The Company and NantOmics are controlled by the Company's Chairman and CEO, therefore no gain or loss was recognized on the transaction. The difference in the purchase price and the historical cost of the assets and liabilities acquired was recorded as a distribution from equity at the assignment date. The transaction did not cause a material change in the reporting entity, and the Company has not retrospectively adjusted its previously issued financial statements. The consolidation of Liquid Genomics at February 28, 2018 added $48 to the Company's sequencing and molecular analysis revenue for the period ending March 31, 2018. This revenue was substantially all earned from an agreement with an affiliate, described below. As a result of consolidating Liquid Genomics at February 28, 2018, net loss of the Company increased by $97 during the three months ended March 31, 2018.
 
 Amounts
NantOmics Series A-2 shares transferred, or to be transferred, to NantOmics
$
8,956

Assets and liabilities of Liquid Genomics at assignment:
 
Goodwill
1,305

Intangible asset
4,429

Other assets
251

Liabilities assumed
(814
)
Net assets acquired at assignment
5,171

Recorded as distribution from additional paid-in capital
$
3,785

Liquid Tumor Profiling Services Agreement
In March 2018, Liquid Genomics, a wholly-owned subsidiary of the Company, and NantKwest, Inc. ("NantKwest"), an affiliate, entered into agreements whereby Liquid Genomics is providing liquid tumor profiling services to NantKwest. Under this agreement, Liquid Genomics recorded $45 of revenue during the three months ended March 31, 2018.

- 37 -

NantHealth, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)

Related Party Promissory Notes
On January 4, 2016, the Company executed a $112,666 demand promissory note in favor of NantCapital to fund the acquisition of NaviNet. The note bears interest at a per annum rate of 5.0%, compounded annually and computed on the basis of the actual number of days elapsed and a year of 365 or 366 days, as the case may be. The unpaid principal and any accrued and unpaid interest on the note was originally due and payable on demand in either (i) cash, (ii) shares of the Company's common stock based on per share price of $18.6126, (iii) Series A-2 units of NantOmics based on a per unit price of $1.484 to the extent such equity is owned by the Company or (iv) any combination of the foregoing, all at the option of NantCapital. Subject to the preceding sentence, the Company may prepay the outstanding amount at any time, either in whole or in part, without premium or penalty and without the prior consent of NantCapital. On May 9, 2016, the promissory note with NantCapital was amended to provide that all outstanding principal and accrued interest is due and payable on June 30, 2021, and not on demand. On December 15, 2016, in connection with the offering of the Convertible Notes, the Company entered into a Second Amended and Restated Promissory Note which amends and restates the Amended and Restated Promissory Note, dated May 9, 2016, between the Company and NantCapital, to, among other things, extend the maturity date of the Promissory Note to June 30, 2022 and to subordinate the Promissory Note in right of payment to the Convertible Notes (See Note 11). No other terms of the promissory note were changed. As of March 31, 2018 and December 31, 2017, the total principal and interest outstanding on the note amounted to $125,694 and $124,166, respectively. The accrued and unpaid interest on the note was $13,028 and $11,500, respectively as of March 31, 2018 and December 31, 2017, as part of non current related party liabilities on the Condensed Consolidated Balance Sheets. The Company can request additional advances subject to NantCapital approval. The NantCapital Note bears interest at a per annum rate of 5.0% compounded annually and computed on the basis of the actual number of days in the year. NantCapital has the option, but not the obligation, to require us to repay any such amount in cash, Series A-2 units of NantOmics (based on a per unit price of $1.484) held by us, shares of the Company's common stock based on a per share price of $18.6126 (if such equity exists at the time of repayment), or any combination of the foregoing at the sole discretion of NantCapital.
On January 22, 2016, the Company executed a demand promissory note in favor of NantOmics. The principal amount of the initial advance totaled $20,000. On March 8, 2016, NantOmics made a second advance to the Company for $20,000. The note bears interest at a per annum rate is 5.0% and is compounded annually. In May and June of 2016, the Company executed amendments to the demand promissory note with NantOmics, which provide that all unpaid principal of each advance owed to NantOmics and any accrued and unpaid interest would convert automatically into shares of the Company’s common stock after pricing of the Company’s IPO and immediately after conversion of the Company from a limited liability company to a corporation. On June 1, 2016, approximately $40,590 of principal and accrued interest under the promissory note with NantOmics was converted into 2,899,297 shares of the Company’s common stock in connection with the IPO. The Company can request additional advances subject to NantOmics approval, and as of March 31, 2018, there was no outstanding balance on the promissory note.

- 38 -


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs, assumptions, and information currently available to our management, and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those described in greater detail elsewhere in this Quarterly Report and in our Annual Report on Form 10-K, particularly in Item 1A, “Risk Factors”.
Overview
We are a leading next-generation, evidence-based, personalized healthcare company focused on enabling our clients to fundamentally change the diagnosis, treatment and pharmacoeconomics of cancer and other critical illnesses. We believe a molecular-driven, systems-based approach to making clinical treatment decisions based on large-scale, real time biometric and phenotypical data will become the standard of care initially for patients with cancer and, ultimately, other critical illnesses. We derive revenue from selling molecular sequencing and analysis services (including our unique, Comprehensive GPS Cancer test, for which we obtained exclusive rights from an affiliate that provides sequencing and analysis of tumor & normal samples and our liquid/blood-based tumor profiling test service which analyzes circulating tumor DNA (ctDNA) and circulating tumor RNA (ctRNA)), and from selling software solutions to healthcare payors, self-insured employers and healthcare systems.
We market certain of our solutions as a comprehensive integrated solution that includes our molecular sequencing and analysis services, Clinical Decision Support, and Payer Engagement solutions. We also market our molecular sequencing and analysis services, Clinical Decision Support, Payer Engagement and Connected Care solutions on a stand-alone basis. To accelerate our commercial growth and enhance our competitive advantage, we intend to continue to:
introduce new marketing, education and engagement efforts and foster relationships across the oncology community to drive adoption of molecular sequencing and analysis services;
pursue reimbursement of molecular sequencing and analysis services from regional and national third-party payers and government payers;
publish scientific and medical advances;
strengthen our commercial organization to increase our NantHealth solutions client base and to broaden usage of our solutions by existing clients; and
develop new features and functionality for NantHealth solutions to address the needs of current and future healthcare provider and payor, self-insured employer and biopharmaceutical company clients.
Since our inception, we have devoted substantially all of our resources to the development and commercialization of NantHealth solutions, as well as the commercial launch of our GPS Cancer business. To complement our internal growth and expertise, we have made several strategic acquisitions of companies, products and technologies. We have incurred significant losses since our inception and, as of March 31, 2018, our accumulated deficit was approximately $714.1 million. We expect to continue to incur operating losses over the near term as we drive adoption of our molecular sequencing and analysis solutions (including GPS Cancer), expand our commercial operations, and invest further in NantHealth solutions.
We plan to (i) continue investing in our infrastructure, including but not limited to solution development, sales and marketing, implementation and support, (ii) continue efforts to make infrastructure investments within an overall context of maintaining reasonable expense discipline, (iii) add new clients through maintaining and expanding sales, marketing and solution development activities, (iv) expand our relationships with existing clients through delivery of add-on and complementary solutions and services and (v) continue our commitment of service in support of our client satisfaction programs.




- 39 -



2018 Acquisition of Liquid Genomics, Inc.
On February 28, 2018, we acquired 100% of the equity of Liquid Genomics, Inc. (“Liquid Genomics”), a company that provides liquid biopsy analysis of gene expressions and mutations using circulating tumor RNA and DNA, pursuant to an assignment agreement dated February 1, 2018 between the Company and NantOmics, LLC a related party. The purchase price for the acquisition consisted of 9,088,362 Series A-2 units of NantOmics previously owned by the Company that were transferred at the closing plus 564,779 of Series A-2 units of NantOmics owned by the Company that will be transferred to NantOmics by May 31, 2018.

We believe that we have a substantial opportunity to leverage Liquid Genomics' testing as a complementary offering to our current portfolio of sequencing and molecular analysis solutions. There are significant synergies available and we intend to leverage our current sales and marketing efforts to drive provider acceptance and adoption. A key value proposition for liquid biopsy tests is ease of use (e.g., no tissue biopsy necessary, and fast delivery time). This complements our GPS Cancer test by enabling repeated measurement and monitoring of select biomarker response to therapy. Liquid Genomics is being rebranded as "Liquid GPS" beginning Q2 2018.
Evolution of GPS Cancer Test Platform
NantHealth and NantOmics, LLC (our exclusive technology partner for the GPS Cancer test) are continually taking steps to optimize the utility and value of our tests for physicians and their patients. To this end, we have leveraged our deep experience with RNA sequencing, bioinformatics and statistics to expand the clinical utility of the GPS Cancer test, while also streamlining and improving our lab workflow by consolidating to next-generation sequencing as our sole testing platform. A fundamental result of this work is that the key cancer treatment biomarkers previously assessed using our proprietary quantitative proteomics platform are, beginning in April 2018, now assessed solely via RNA sequencing, gene expression and statistical analysis. This change is based on the established clinical and scientific utility of tumor RNA sequencing. The tumor RNA transcriptome reveals gene and somatic variant expression, identifies gene fusions and validates their expression, and determines the relevance of gene copy number alterations. GPS Cancer currently assesses RNA expression of over 19,000 genes in a tumor sample and we have shown significant concordance between our RNA and proteomics expression platforms. We believe this change will result in operational efficiencies, an improved cost structure and more rapid transfer of scientific advancements in expression analysis to our clinical report. We also believe that our proprietary quantitative proteomics platform remains the most advanced technology available and a strategic asset of NantOmics. This platform continues to have potential commercial and research applications going forward.
2017 Asset Purchase Agreement with Allscripts
On August 3, 2017, we entered into an asset purchase agreement, which we refer to as the "APA," with Allscripts Healthcare Solutions, Inc., or “Allscripts”, pursuant to which we agreed to sell to Allscripts substantially all of the assets of our provider/patient engagement solutions business, including our FusionFX solution and components of its NantOS software connectivity solutions. On August 25, 2017, the Company and Allscripts completed the sale pursuant to the APA.

Allscripts conveyed to the Company 15,000,000 shares of the Company's common stock at par value of $0.0001 per share that were previously owned by Allscripts as consideration for the acquired business upon the disposition. Allscripts paid the Company $1.7 million of cash consideration as an estimated working capital payment, and the Company recorded a receivable of $1.0 million related to final working capital adjustments. We are also responsible for paying Allscripts for fulfilling certain customer service obligations of the sold business post-closing.

Concurrent with the closing of the disposition and as contemplated by the APA, (a) the Company and Allscripts modified the amended and restated mutual license and reseller agreement dated June 26, 2015, which was further amended on December 30, 2017, such that, among other things, the Company committed to deliver a minimum of $95 million of total bookings over a ten-year period, or the Allscripts “Bookings Commitment”, from referral transactions and sales of certain Allscripts products; (b) the Company and Allscripts each licensed certain intellectual property to the other party pursuant to a cross license agreement; (c) we agreed to provide certain transition services to Allscripts pursuant to a transition services agreement; and (d) we licensed certain software and agreed to sell certain hardware to Allscripts pursuant to a software license and supply agreement. In the event of an Allscripts Bookings Commitment shortfall at the end of the ten-year period, we may be obligated to pay 70% of the shortfall, subject to certain credits. We will earn 30% commission from Allscripts on each software referral transaction that results in a booking with Allscripts.

The sale of the business to Allscripts qualified as a discontinued operations because it comprised operations and cash flows that could be distinguished, operationally and for financial reporting purposes, from the rest of the Company. The disposal

- 40 -


of the business to Allscripts represented a strategic shift in our operations as the sale enables us to focus on genomic sequencing, clinical decision support, connected care and payer engagement.

The consummation of the transactions contemplated by the APA is reflected in the Condensed Consolidated Financial Statements.
2017 Corporate Restructuring Plan
In August 2017, we committed to and began implementation of a comprehensive restructuring plan that included a wide range of organizational efficiency initiatives and other cost reduction opportunities. The plan was substantially completed by the end of 2017 and allowed us to focus on our core competencies of genomic sequencing, clinical decision support, connected care and payer engagement. We incurred charges from this restructuring related to severance and other cash expenditures and recognized the majority of the expenses related to this restructuring in the quarter ended September 30, 2017.
Non-GAAP Net Loss from Continuing Operations and Non-GAAP Net Loss Per Share from Continuing Operations
Adjusted net loss from continuing operations and adjusted net loss per share from continuing operations are financial measures that are not prepared in conformity with United States generally accepted accounting principles (U.S. GAAP). Our management believes that the presentation of Non-GAAP financial measures provides useful supplementary information regarding operational performance, because it enhances an investor’s overall understanding of the financial results for our core business. Additionally, it provides a basis for the comparison of the financial results for our core business between current, past and future periods. Other companies may define these measures in different ways. Non-GAAP financial measures should be considered only as a supplement to, and not as a substitute for or as a superior measure to, financial measures prepared in accordance with U.S. GAAP.

Non-GAAP net loss from continuing operations excludes the effects of (1) loss from equity method investments, (2) stock based compensation expense, (3) intangible amortization, (4) corporate restructuring expenses, (5) acquisition related compensation expense (6) acquisition related sales incentives, which have been recorded as contra revenue, (7) change in fair value of derivatives liability, (8) non-cash interest expense related to convertible notes, (9) securities litigation costs, and (10) the impacts of certain income tax benefits and provisions from non-operating activity.
 

The following table reconciles Net loss from continuing operations to Net loss from continuing operations - Non-GAAP and Shares outstanding to Shares outstanding - Non-GAAP for the three months ended March 31, 2018 and 2017 (Unaudited):
(Dollars in thousands, except per share amounts)
Three Months Ended 
 March 31,
 
2018
 
2017
Net loss from continuing operations
$
(21,975
)
 
$
(28,126
)
Adjustments to GAAP net loss:


 


Loss from related party equity method investment including impairment loss
3,261

 
4,526

Stock-based compensation expense from continuing operations
2,718

 
250

Corporate restructuring from continuing operations

 
220

Acquisition related sales incentive
145

 
662

Change in fair value of derivatives liability
(1
)
 
(215
)
Non-cash interest expense related to convertible notes
1,194

 
1,051

Intangible amortization from continuing operations
2,227

 
2,797

Securities litigation costs
73

 

Tax benefit resulting from certain non-operating activity
(1,123
)
 

Total adjustments to GAAP net loss from continuing operations
8,494

 
9,291

Net loss - Non-GAAP from continuing operations
$
(13,481
)
 
$
(18,835
)
 
 
 
 
Weighted average shares outstanding
108,579,271

 
121,618,039

 
 
 
 
Net loss per share from continuing operations - Non-GAAP
$
(0.12
)
 
$
(0.15
)


- 41 -


The following table reconciles net loss from continuing operations per common share to net loss per common share from continuing operations Non-GAAP for the three months ended March 31, 2018 and 2017 (Unaudited):

 
Three Months Ended 
 March 31,
 
2018
 
2017
Net loss per common share from continuing operations
$
(0.20
)
 
$
(0.23
)
Adjustments to GAAP net loss per common share from continuing operations:
 
 
 
Loss from related party equity method investment including impairment loss
0.03

 
0.04

Stock-based compensation expense from continuing operations
0.03

 

Corporate restructuring from continuing operations

 

Acquisition related sales incentive

 
0.01

Change in fair value of derivatives liability

 

Non-cash interest expense related to convertible notes
0.01

 
0.01

Intangible amortization from continuing operations
0.02

 
0.02

Securities litigation costs

 

Tax benefit resulting from certain non-operating activity
(0.01
)
 

Total adjustments to GAAP net loss per common share from continuing operations
0.08

 
0.08

Net loss per common share from continuing operations - Non-GAAP
$
(0.12
)
 
$
(0.15
)





- 42 -


Components of Our Results of Operations
Revenue
We generate our revenue from the sale of software-as-a-service, software licenses, maintenance, hardware and services. Our systems infrastructure and platforms support the delivery of both personalized comprehensive sequencing and molecular analysis and the implementation of value-based care models across the healthcare continuum. We generate revenue from the following sources:

Software-as-a-service related - Software-as-a-service related, or SaaS, revenue is generated from our clients’ access to and usage of our hosted software solutions on a subscription basis for a specified contract term, which is typically annually. In our SaaS arrangements, the client cannot take possession of the software during the term of the contract and generally only has the right to access and use the software and receive any software upgrades published during the subscription period. Solutions sold under a SaaS model include our Eviti platform solutions and NaviNet.

Software and hardware related - Software and hardware related revenue is generated from the sale of software licenses and the sale of our hardware. The software is installed on the client’s site or the client’s designated vendor’s site and is not hosted by us or by a vendor contracted by us. We also generate revenue from the resale of third-party software and hardware to our clients. Our software license and hardware solutions include DeviceConX software and HBox. Software and hardware related also includes revenue from professional services we provide that are generally complementary to our software solutions and may or may not be required for the solution to function as desired by the client. When associated with software, these services are generally provided in the form of training and implementation services during the software license period and do not include PCS.

Maintenance - Maintenance revenue includes ongoing post-contract client support ("PCS") or maintenance, during the paid PCS term. Additionally, PCS includes ongoing development of software updates and upgrades provided to the client on a when and if available basis. We sell our DeviceConX solution with maintenance contracts.

Sequencing and molecular analysis - Sequencing and molecular analysis revenue is generated by the process of performing sequencing and analysis of DNA and RNA from tumor and normal samples and from blood samples via our liquid/blood-based tumor profiling platform. We recognize revenue upon the delivery of the analysis and reporting of the results to the client or on a cash basis when we cannot conclude that a contract has been established.

Home health care services - Home health care services revenue includes revenue related to nursing and therapy services provided to patients in a home care setting and any other services not included in the preceding revenue sources.
Cost of Revenue
Cost of revenue consists primarily of personnel-related costs for associates providing services to our clients and supporting our revenue-generating platform infrastructure, including salaries, benefits and bonuses. Additional expenses include consultant costs, direct reimbursable travel expenses and other direct engagement costs associated with the design, development, sale and installation of our solutions, including system support and maintenance services. Our cost of revenue associated with each of our revenue sources is as follows:

Software-as-a-service related- SaaS cost of revenue includes personnel-related, amortization of deferred implementation costs, depreciation of internal use software and other direct costs associated with the delivery and hosting of Eviti, our cancer-decision support solution, and NaviNet on a subscription basis.

Software and hardware related - Software and hardware related cost of revenue includes third-party software and hardware costs directly associated with our solutions. Software and hardware related cost of revenue also includes personnel-related costs, amortization of deferred implementation costs, depreciation of internal use software and other direct costs associated with software training and implementation services provided to our clients

Maintenance - Maintenance cost of revenue includes personnel-related and other direct costs associated with the ongoing support or maintenance we provide for our clients.

Sequencing and molecular analysis - Sequencing and molecular analysis cost of revenue includes internal costs associated with these services and amounts due to NantOmics under our Reseller Agreement for sequencing and molecular analysis via NantOmics tissue-based tumor profiling platform.

- 43 -



Home health care services - Home health care services includes direct expenses relating to our nursing and therapy services provided to patients in a home care setting.
Cost of revenue also includes amortization of our developed technologies used to generate revenue. We plan to continue to expand our capacity to support our growth, which will result in higher cost of revenue in absolute dollars. We expect cost of revenue to decrease as a percentage of revenue over time as we expand NantHealth solutions and realize economies of scale.
Operating Expenses
Our operating expenses consist of selling, general and administrative, research and development, and amortization of acquisition-related assets.

Selling, general and administrative

Selling, general and administrative expense consists primarily of personnel-related expenses for our sales and marketing, finance, legal, human resources, and administrative associates, stock based compensation, advertising and marketing promotions of NantHealth solutions, and corporate shared services fees from NantWorks. It also includes trade show and event costs, sponsorship costs, point of purchase display expenses and related amortization as well as legal costs, facility costs, consulting and professional fees, insurance and other corporate and administrative costs.

We expect to continue to grow our investment in selling and other related expenses supporting future growth in our molecular sequencing and analysis services, including GPS Cancer and our liquid tumor profiling tests, as well as expanding our brand. We continue to review our other selling, general and administrative investments and expect to drive cost savings through greater efficiencies and synergies across our company. Additionally, we expect to continue to incur additional costs for legal, accounting, insurance, investor relations and other costs associated with operating as a public company. These increases include additional costs we expect to incur associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies as well as increased costs for directors’ and officers’ liability insurance and an enhanced investor relations function. However, we expect our selling, general and administrative expense to decrease as a percentage of revenue over the long term as our revenue increases and we realize economies of scale.

Research and development

Research and development expenses consist primarily of personnel-related costs for associates working on development of solutions, including salaries, benefits and stock based compensation. Also included are non-personnel costs such as consulting and professional fees to third-party development resources.
Substantially all of our research and development expenses are related to developing new software solutions and improving our existing software solutions. To date, research and development expenses have been expensed as incurred as the period between achieving technological feasibility and the release of software solutions for sale has been short and development costs qualifying for capitalization have been insignificant.
With the exception of stock based compensation, we expect our research and development expenses to continue to increase in absolute dollars and as a percentage of revenue as we continue to make significant investments in developing new solutions and enhancing the functionality of our existing solutions with a focus on cancer care. However, we expect our research and development expenses to decrease as a percentage of revenue over the long term as we realize economies of scale from our developed technology.

Amortization of Acquisition Related Assets

Amortization of acquisition related assets consists of non-cash amortization expense related to our non-revenue generating technology as well as amortization expense that we recognize on intangible assets that we acquired through our investments.
Interest Expense, net
Interest expense, net primarily consists of interest expense associated with our outstanding borrowings, including coupon interest expense, amortization of debt discounts and amortization of deferred financing offering cost, offset by interest income earned on our cash and cash equivalents and marketable securities.

- 44 -


Other Income (expense), net
Other income (expense), net consists primarily of unrealized and realized gains (losses), dividend income on our cash equivalent financial instruments, change in fair value of derivative liability and other non-recurring items.
Loss from Equity Method Investment Including Impairment Loss
Loss from equity method investment consists of our pro rata share of losses of a company that we own an ownership interest in and account for under the equity method of accounting including impairment loss. We regularly evaluate our investments, which are not carried at fair value, for other than temporary impairment in accordance with U.S. GAAP.
Provision for (Benefit from) Income Taxes
Provision for income taxes consists of U.S. federal and state and foreign income taxes. We are required to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. To date, we have no significant U.S. federal, state and foreign cash income taxes because of our LLC status prior to June 1, 2016 and current and accumulated net operating losses.
We record a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such a determination, we consider all the available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. When we establish or reduce the valuation allowance against the deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period such determination is made.

- 45 -


Results of Operations
The following table sets forth our Condensed Consolidated Statements of Operations data for each of the periods indicated (Unaudited):

- 46 -


(Dollars in thousands, except per share amounts)
Three Months Ended 
 March 31,
 
2018
 
2017
Revenue:
 
 
 
Software-as-a-service related
$
16,166

 
$
14,797

Software and hardware related
1,455

 
598

Maintenance
2,446

 
2,019

Total software-related revenue
20,067

 
17,414

Sequencing and molecular analysis
840

 
510

Home health care services
1,356

 
1,180

Total net revenue
22,263

 
19,104

 
 
 
 
Cost of Revenue:
 
 
 
Software-as-a-service related
6,602

 
6,233

Software and hardware related
885

 
1,004

Maintenance
215

 
161

Amortization of developed technologies
1,173

 
1,743

Total software-related cost of revenue
8,875

 
9,141

Sequencing and molecular analysis
1,431

 
1,593

Home health care services
762

 
784

Total cost of revenue
11,068

 
11,518

 
 
 
 
Gross profit
11,195

 
7,586

 
 
 
 
Operating Expenses:
 
 
 
Selling, general and administrative
20,737

 
17,435

Research and development
5,151

 
8,926

Amortization of acquisition-related assets
1,054

 
1,054

Total operating expenses
26,942

 
27,415

 
 
 
 
Loss from operations
(15,747
)
 
(19,829
)
Interest expense, net
(4,197
)
 
(3,969
)
Other income, net
180

 
235

Loss from related party equity method investment
(3,261
)
 
(4,526
)
Loss from continuing operations before income taxes
(23,025
)
 
(28,089
)
(Benefit from) provision for income taxes
(1,050
)
 
37

Net loss from continuing operations
(21,975
)
 
(28,126
)
Loss from discontinued operations, net of tax
(193
)
 
(12,989
)
Net loss
$
(22,168
)
 
$
(41,115
)
 
 
 
 
Net income (loss) per share:
 
 
 
Continuing operations
 
 
 
Basic and diluted - common stock
$
(0.20
)
 
$
(0.23
)
 
 
 
 
Discontinued operations
 
 
 
Basic and diluted - common stock
$