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

 
FORM 10-Q

 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020  
OR
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.
 
90232
Culver City,
California
 
(Zip Code)
(Address of principal executive offices)
 
 
(310) 883-1300
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
NH
Nasdaq Global Select Market

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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
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
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company

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.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of August 7, 2020, the registrant had 111,024,133 shares of common stock, par value $0.0001 per share, outstanding.
 



NantHealth, Inc.
Form 10-Q
As of and for the quarterly period ended June 30, 2020
Table of contents


 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
Consolidated Statement of Operations
 
 
 
 
Consolidated Statements of Comprehensive Loss
 
 
 
 
Consolidated Statements of Stockholders' Equity (Deficit)
 
 
 
 
Consolidated Statements of Cash Flows
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
Exhibits Index
 
 
 

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 GPS Cancer, Omics Core, NaviNet, Eviti, NaviNet Open, Eviti Connect, Eviti | IQ, and other marks relating to our product lines 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, or this Quarterly Report, including, without limitation, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “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;
any impact of the COVID-19 pandemic, or responses to the pandemic, on our operations or personnel, or on commercial activity or demand across our and our customers’ businesses;
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 and to accelerate commercial growth of our sequencing and molecular analysis solutions and our other products and services;
our plans or ability to obtain reimbursement for our sequencing and molecular analysis solutions, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement from third-party payers, 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, including new features and functionality for our existing 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 expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act, or 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;
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; and
our expectations regarding our ability to comply with Nasdaq continued listing standards.
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report.

- 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 are within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Quarterly Report 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 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. 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, “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. We undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations, except as required by law.

- 4 -


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

- 5 -

NantHealth, Inc.
Consolidated Balance Sheets
(Dollars in thousands)

 
June 30,
2020
 
December 31,
2019
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
37,526

 
$
5,243

Accounts receivable, net
3,473

 
6,179

Related party receivables, net
1,146

 
823

Prepaid expenses and other current assets
3,359

 
19,341

Current assets of discontinued operation

 
6,327

Total current assets
45,504

 
37,913

Property, plant, and equipment, net
13,206

 
14,985

Goodwill
97,307

 
97,307

Intangible assets, net
47,829

 
51,848

Investment in related party

 
31,702

Related party receivable, net of current
848

 
1,108

Operating lease right-of-use assets
7,776

 
8,470

Other assets
2,038

 
1,818

Noncurrent assets of discontinued operation

 
21,336

Total assets
$
214,508

 
$
266,487


 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
3,159

 
$
3,377

Accrued and other current liabilities
11,852

 
31,988

Deferred revenue
4,454

 
7,098

Related party payables, net
3,852

 
4,120

Notes payable

 
238

Current liabilities of discontinued operation

 
10,680

Total current liabilities
23,317

 
57,501

Deferred revenue, net of current
687

 
1,129

Related party liabilities
27,644

 
24,227

Related party promissory note
112,666

 
112,666

Related party convertible note, net
9,129

 
8,864

Convertible notes, net
87,518

 
84,648

Deferred income taxes, net
1,617

 
1,669

Operating lease liabilities
8,863

 
9,728

Other liabilities
25,288

 
21,542

Noncurrent liabilities of discontinued operation

 
1,649

Total liabilities
296,729

 
323,623

Commitments and Contingencies (Note 14)

 

 
 
 
 
Stockholders' deficit
 
 
 
Common stock, $0.0001 par value per share, 750,000,000 shares authorized; 110,929,357 and 110,619,678 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
11

 
11

Additional paid-in capital
890,292

 
889,955

Accumulated deficit
(972,108
)
 
(946,884
)
Accumulated other comprehensive loss
(416
)
 
(218
)
Total stockholders' deficit
(82,221
)
 
(57,136
)
Total liabilities and stockholders' deficit
$
214,508

 
$
266,487


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

- 6 -



NantHealth, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Revenue
 
 
 
 
 
 
 
Software-as-a-service related
$
17,521

 
$
18,291

 
$
35,642

 
$
36,093

Total software-related revenue
17,521

 
18,291

 
35,642

 
36,093

Sequencing and molecular analysis
64

 
491

 
123

 
1,305

Home health care services

 
1,270

 

 
2,863

Total net revenue
17,585

 
20,052

 
35,765

 
40,261

 
 
 
 
 
 
 
 
Cost of Revenue:
 
 
 
 
 
 
 
Software-as-a-service related
5,916

 
5,658

 
11,617

 
11,366

Maintenance

 
97

 

 
167

Amortization of developed technologies
1,143

 
1,143

 
2,286

 
2,376

Total software-related cost of revenue
7,059

 
6,898

 
13,903

 
13,909

Sequencing and molecular analysis
259

 
1,177

 
611

 
3,604

Home health care services

 
648

 

 
1,471

Total cost of revenue
7,318

 
8,723

 
14,514

 
18,984

 
 
 
 
 
 
 
 
Gross Profit
10,267

 
11,329

 
21,251

 
21,277

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Selling, general and administrative
11,995

 
13,811

 
24,422

 
29,135

Research and development
4,215

 
3,391

 
7,765

 
7,241

Amortization of acquisition-related assets
866

 
1,054

 
1,733

 
2,108

Impairment of intangible asset

 
3,977

 

 
3,977

Total operating expenses
17,076

 
22,233

 
33,920

 
42,461

 
 
 
 
 
 
 
 
Loss from operations
(6,809
)
 
(10,904
)
 
(12,669
)
 
(21,184
)
Interest expense, net
(4,773
)
 
(4,473
)
 
(9,430
)
 
(8,887
)
Other (expense) income, net
(6,751
)
 
1,069

 
(3,297
)
 
(1,436
)
Loss from related party equity method investment
(29,918
)
 
(2,208
)
 
(31,702
)
 
(4,418
)
Loss from continuing operations before income taxes
(48,251
)
 
(16,516
)
 
(57,098
)
 
(35,925
)
Provision for income taxes
4

 
622

 
97

 
848

Net loss from continuing operations
(48,255
)
 
(17,138
)
 
(57,195
)
 
(36,773
)
(Loss) income from discontinued operations, net of tax
(34
)
 
2,425

 
31,971

 
2,137

Net loss
$
(48,289
)
 
$
(14,713
)
 
$
(25,224
)
 
$
(34,636
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share
 
 
 
 
 
 
 
Continuing operations - common stock
$
(0.44
)
 
$
(0.15
)
 
$
(0.52
)
 
$
(0.33
)
Discontinued operations - common stock
$

 
$
0.02

 
$
0.29

 
$
0.02

Total net loss per share - common stock
$
(0.44
)
 
$
(0.13
)
 
$
(0.23
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic and diluted - common stock
110,831,456

 
110,209,510

 
110,731,925

 
110,057,981



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

- 7 -

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


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Net loss
$
(48,289
)
 
$
(14,713
)
 
$
(25,224
)
 
$
(34,636
)
Other comprehensive (loss) income from foreign currency translation
(10
)
 
82

 
(198
)
 
137

Total other comprehensive (loss) income
(10
)
 
82

 
(198
)
 
137

Comprehensive loss
$
(48,299
)
 
$
(14,631
)
 
$
(25,422
)
 
$
(34,499
)

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

- 8 -

NantHealth, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive Loss
 
Total Stockholders' Deficit
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2019
110,619,678

 
$
11

 
$
889,955

 
$
(946,884
)
 
$
(218
)
 
$
(57,136
)
Stock-based compensation expense

 

 
668

 

 

 
668

Other comprehensive loss

 

 

 

 
(188
)
 
(188
)
Net income

 

 

 
23,065

 

 
23,065

Balance at March 31, 2020
110,619,678

 
11

 
890,623

 
(923,819
)
 
(406
)
 
(33,591
)
Stock-based compensation expense

 

 
408

 

 

 
408

Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
309,679

 

 
(739
)
 

 

 
(739
)
Other comprehensive loss

 

 

 

 
(10
)
 
(10
)
Net loss

 

 

 
(48,289
)
 

 
(48,289
)
Balance at June 30, 2020
110,929,357

 
11

 
890,292

 
(972,108
)
 
(416
)
 
(82,221
)


- 9 -

NantHealth, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands)
(Unaudited)

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive Loss
 
Total Stockholders' Equity (Deficit)
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
109,491,277

 
$
11

 
$
887,289

 
$
(884,122
)
 
$
(347
)
 
$
2,831

Stock-based compensation expense

 

 
707

 

 

 
707

Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
430,370

 

 
(53
)
 

 

 
(53
)
Assignment of NantHealth Labs (see Note 19)

 

 
20

 

 

 
20

Other comprehensive income

 

 

 

 
55

 
55

Net loss

 

 

 
(19,923
)
 

 
(19,923
)
Balance at March 31, 2019
109,921,647

 
11

 
887,963

 
(904,045
)
 
(292
)
 
(16,363
)
Stock-based compensation expense

 

 
707

 

 

 
707

Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
532,860

 

 
(209
)
 

 

 
(209
)
Other comprehensive income

 

 

 

 
82

 
82

Net loss

 

 

 
(14,713
)
 

 
(14,713
)
Balance at June 30, 2019
110,454,507

 
11

 
888,461

 
(918,758
)
 
(210
)
 
(30,496
)
    
The accompanying notes are an integral part of these Consolidated Financial Statements.


- 10 -

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

 
Six Months Ended 
 June 30,
 
2020 (2)
 
2019 (2)
Cash flows from operating activities:
 
 
 
Net loss
$
(25,224
)
 
$
(34,636
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
(Gain) loss on sale of businesses
(32,211
)

582

Depreciation and amortization
8,305

 
11,943

Amortization of debt discounts and deferred financing offering cost
3,135

 
2,760

Impairment of goodwill and other intangible assets


3,977

Change in fair value of derivatives liability
63

 

Change in fair value of Bookings Commitment
3,727

 
1,505

Stock-based compensation
1,049

 
1,323

Deferred income taxes, net
(265
)
 
251

Provision for bad debt expense
121

 
24

Loss from related party equity method investment
31,702

 
4,418

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
4,165

 
285

Inventories
(18
)
 
193

Related party receivables, net
(63
)
 
320

Prepaid expenses and other current assets
15,640

 
(1,836
)
Accounts payable
(437
)
 
1,394

Accrued and other current liabilities
(20,110
)
 
(2,398
)
Deferred revenue
(2,963
)
 
(1,072
)
Related party payables, net
2,934

 
2,624

Change in operating lease right-of-use assets and liabilities
(180
)
 
(192
)
Other assets and liabilities
(104
)
 
(629
)
Net cash used in operating activities
(10,734
)
 
(9,164
)
Cash flows from investing activities:
 
 
 
Net proceeds from sale of businesses
46,401

 
300

Purchases of property and equipment, including internal-use software
(2,157
)
 
(2,088
)
Net cash provided by (used in) investing activities
44,244

 
(1,788
)
Cash flows from financing activities:
 
 
 
Repayments of insurance promissory note
(238
)


Tax payments related to stock issued, net of stock withheld, for vested equity awards
(739
)
 
(267
)
Net cash used in financing activities
(977
)
 
(267
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(11
)
 
(10
)
Net increase (decrease) in cash, cash equivalents and restricted cash
32,522

 
(11,229
)
Cash, cash equivalents and restricted cash, beginning of period (1)
6,379

 
19,441

Cash, cash equivalents and restricted cash, end of period (1)
$
38,901

 
$
8,212


- 11 -

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

 
 
 
 
 
Six Months Ended 
 June 30,
 
2020
 
2019
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
2,944

 
$
2,943

Noncash investing and financing activities:
 
 
 
Purchases of property and equipment including internal use software
$
102

 
$
91

(1) Cash and cash equivalents included restricted cash of $1,136 and $1,375 at December 31, 2019 and June 30, 2020, respectively, and $1,136 and $1,136 at December 31, 2018 and June 30, 2019, respectively. Restricted cash is included in other assets and 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 and funds held in an escrow account related to the sale of the Connected Care Business (see Note 4). No amounts have been drawn upon the letters of credit as of June 30, 2020.
(2) The statements for the six months ended June 30, 2020 and 2019 include the Connected Care Business (see Note 4).
The accompanying notes are an integral part of these Consolidated Financial Statements.

- 12 -

NantHealth, Inc.
Notes to 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. The Company markets certain of its solutions as a comprehensive integrated solution that includes its molecular sequencing and analysis services, clinical decision support, and payer engagement solutions. The Company also markets molecular sequencing and analysis services, clinical decision support, and payer engagement 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 June 7, 2019, the Company sold its home health care services business (see Note 4).

On February 3, 2020, the Company sold certain of its assets related to its Connected Care Business (see Note 4).

The sales will enable the Company to focus on its core competencies of genomic sequencing, clinical decision support, and payer engagement.
As of June 30, 2020, the Company conducted the majority of its operations in the United States and the United Kingdom.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) a pandemic. In the same month, the President of the United States declared a State of National Emergency due to the COVID-19 outbreak. Many jurisdictions, particularly in North America (including the United States), Europe and Asia, as well as U.S. states in which the Company operates, including California, have adopted or are considering laws, rules, regulations or decrees intended to address the COVID-19 outbreak, including implementing travel restrictions, closing non-essential businesses and/or restricting daily activities. In addition, many communities have limited, and are considering to further limit, social mobility and gathering. To date, there has been no material adverse impact to the Company's business from the COVID-19 pandemic. Given the unprecedented and evolving nature of the pandemic, the future impact of these changes and potential changes on the Company and its contractors, consultants, customers, resellers and partners is unknown at this time.

However, in light of the uncertainties regarding economic, business, social, health and geopolitical conditions, the Company’s revenues, earnings, liquidity, and cash flows could be adversely affected, whether on an annual or quarterly basis. Continued impacts of the COVID-19 pandemic could materially adversely affect the Company’s current and long-term accounts receivable collectibility, as its negatively impacted customers from the pandemic may request temporary relief, delay, or not make scheduled payments. In addition, the deployment of the Company’s solutions may represent a large portion of its customers' investments in software technology. Decisions to make such an investment are impacted by the economic environment in which the customers operate. Uncertain global geopolitical, economic and health conditions and the lack of visibility or the lack of financial resources may cause some customers to reduce, postpone or terminate their investments, or to reduce or not renew ongoing paid services, adversely impacting the Company’s revenues or timing of revenue. Health conditions in some geographic areas where the Company’s customers operate could impact the economic situation of those areas. These conditions, including the COVID-19 pandemic, may present risks for health and limit the ability to travel for Company employees, which could further lengthen the Company’s sales cycle and delay revenue and cash flows in the near-term.
For information on the CARES Act, refer to Note 15.

- 13 -

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

Basis of Presentation and Principles of Consolidation
The accompanying unaudited Consolidated Financial Statements include the accounts of NantHealth and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim 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 operations. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission ("SEC"), these Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2019. The results of operations of the entities disposed of are included in the unaudited Consolidated Financial Statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. The accompanying Consolidated Balance Sheet as of December 31, 2019 has been derived from the audited Consolidated Financial Statements at that date. 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 Company believes its existing cash, cash equivalents, and its 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. The Company continues to have its 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. The Company may also consider selling off components of its business. 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 have been the private placement of membership interests prior to its IPO, debt financing agreements, including the promissory note with Nant Capital, LLC (“NantCapital”) and its convertible notes, its IPO, and proceeds from the sale of components of its business.

Note 2. Summary of Significant Accounting Policies
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 on the 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 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 consolidated unit level. Accordingly, management has determined that the Company operates in one reportable segment.
Recently Adopted Accounting Pronouncements

Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. The adoption of this guidance has no impact on the Consolidated Financial Statements.

Effective January 1, 2020, the Company adopted, on a prospective basis, ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirement for capitalizing implementation costs incurred by a customer in a cloud clouding arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The adoption of this guidance did not have a material impact on the Consolidated Financial Statements.


- 14 -

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

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for the Company's annual and interim periods beginning in January 1, 2021, and early adoption is permitted. The Company early adopted, on a prospective basis, this ASU in the first quarter of 2020. One of the provisions in this ASU is the change from the intraperiod tax allocation exception in ASC 740-20-45-7 to the incremental approach when there is a current period loss from continuing operations. ASU No. 2019-12 removed this exception, which impacted the Company's tax provision for (benefit from) income taxes between continuing operations and discontinued operations.
Upcoming Accounting Standard Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the Company expects to collect over the instrument's contractual life. ASU No. 2016-13 is effective for fiscal periods beginning after December 15, 2022 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company is still evaluating the effects of this ASU.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not have, nor are believed by management to have, a material impact on the Company's present or future Consolidated Financial Statements.

Note 3. Revenue Recognition
Contract Balances
The Company records deferred revenue when cash payments are received, or payment is due, in advance of its fulfillment of performance obligations. During the three months ended June 30, 2020 and 2019, there were revenues of $1,821 and $1,901 recognized, respectively, that were included in the deferred revenue balance at the beginning of the period. During the six months ended June 30, 2020 and 2019, there were revenues of $3,649 and $4,145 recognized, respectively.
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 $1,231 at June 30, 2020 and $1,455 at December 31, 2019. During the three months ended June 30, 2020 and 2019, the Company recorded amortization of $226 and $198, respectively. During the six months ended June 30, 2020 and 2019, the Company recorded amortization of $469 and $368, respectively.
Performance Obligations
As of June 30, 2020, the Company has allocated a total transaction price of $5,958 to unfulfilled performance obligations that are expected to be fulfilled within nine years. Excluded from this amount are contracts of less than one year and variable consideration that relates to the value of services provided.

- 15 -

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

Note 4. Discontinued Operations and Divestitures
Discontinued Operations
Sale of Connected Care Business

On January 13, 2020, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with Masimo Corporation (“Masimo”), VCCB Holdings, Inc., a wholly owned subsidiary of Masimo (collectively with Masimo, the “Purchaser”), and, solely with respect to certain provisions of the Purchase Agreement, NantWorks, LLC, an affiliate of the Company. Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchaser certain of its assets related to its Connected Care business, including the products known as DCX (formerly DeviceConX), VCX (formerly VitalsConX), HBox and Shuttle Cable (collectively, the “Connected Care Business”).

On February 3, 2020, the Company completed the sale of the Connected Care Business for $47,250 of cash consideration in exchange for assets primarily related to the Connected Care Business (as defined under the terms of the Purchase Agreement). The cash consideration is subject to adjustment based upon the final amount of working capital as of the closing date.

The sale of the Connected Care 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 Connected Care Business, which represented the Company's medical device interoperability solutions, represented a strategic shift in the Company’s operations as the sale enables the Company to focus on genomic sequencing, clinical decision support, and payer engagement.

The total gain on sale of the Connected Care Business consisted of the following:
Cash received as consideration
$
47,250

Less: Carrying value of net assets sold
(14,190
)
Less: Costs to sell
(849
)
Gain on sale of the Connected Care Business
$
32,211



The carrying amounts of the major classes of assets and liabilities of the Company's discontinued operation as of December 31, 2019 were as follows:
 
December 31,
2019
Accounts receivable, net
$
4,739

Inventories
798

Prepaid expenses and other current assets
790

Current assets of discontinued operation
6,327

Property, plant, and equipment, net
1,110

Goodwill
18,623

Operating lease right-of-use assets
1,603

Total assets of discontinued operation
$
27,663

 
 
Accounts payable
$
574

Accrued and other current liabilities
456

Deferred revenue
9,650

Current liabilities of discontinued operation
10,680

Deferred revenue, net of current
157

Deferred income taxes, net
210

Operating lease liabilities
$
1,282

Total liabilities of discontinued operation
$
12,329




- 16 -

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

The operating results of the Company's discontinued operation are as follows:
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Major classes of line items constituting pretax income (loss) of discontinued operations
 
 
 
 
 
 
 
Net revenue
$

 
$
5,634

 
$
1,165

 
$
9,154

Cost of revenue

 
(1,093
)
 
(467
)
 
(2,122
)
Selling, general and administrative
(2
)
 
(1,366
)
 
(526
)
 
(2,831
)
Research and development
9

 
(1,193
)
 
(583
)
 
(2,423
)
Other expense, net

 
(15
)
 
(5
)
 
(15
)
Pretax loss from discontinued operations related to major classes of pretax income (loss)
7

 
1,967

 
(416
)
 
1,763

Pretax gain on sale of the Connected Care Business

 

 
32,211

 

Total pretax income (loss) from discontinued operations
7

 
1,967

 
31,795

 
1,763

Provision for (benefit from) income taxes
7

 
(489
)
 
(216
)
 
(489
)
Total income (loss) from discontinued operations, net of tax
$

 
$
2,456

 
$
32,011

 
$
2,252



The significant operating and investing cash and noncash items of the discontinued operation included on the Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 were as follows:
 
Six Months Ended 
 June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Depreciation and amortization
$
10

 
$
243

Gain on sale of the Connected Care Business
32,211

 

Cash flows from investing activities:
 
 
 
Net proceeds from sale of the Connected Care Business
46,401

 

Purchases of property and equipment, including internal-use software
76

 


Divestitures
Sale of Home Health Care Services Business

On June 7, 2019, the Company completed the divestiture of its home health care services business in exchange for cash proceeds of $300, which resulted in a loss on sale of business of $582. The home health care services business does not qualify as a discontinued operation as its divestiture does not represent a strategic shift that has had a major impact on the Company's operations or financial results.
Note 5. Accounts Receivable, net
Accounts receivable are included on the Consolidated Balance Sheets, net of the allowance for doubtful accounts. The allowance for doubtful accounts at June 30, 2020 and December 31, 2019 was $120 and $95, respectively.

- 17 -

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

Note 6. Prepaid Expenses and Other Current Assets and Accrued and Other Current Liabilities
Prepaid expenses and other current assets as of June 30, 2020 and December 31, 2019 consisted of the following:
 
June 30,
2020
 
December 31,
2019
Prepaid expenses
$
2,139

 
$
1,794

Securities litigation insurance receivable
413

 
16,627

Other current assets
807

 
920

Prepaid expenses and other current assets
$
3,359

 
$
19,341


Accrued and other current liabilities as of June 30, 2020 and December 31, 2019 consisted of the following:
 
June 30,
2020
 
December 31,
2019
Payroll and related costs
$
5,190

 
$
8,106

Securities litigation expense payable
413

 
17,127

Operating lease liabilities
1,613

 
1,617

Other accrued and other current liabilities
4,636

 
5,138

Accrued and other current liabilities
$
11,852

 
$
31,988



Note 7. Property, Plant and Equipment, net
Property, plant and equipment, net as of June 30, 2020 and December 31, 2019 consisted of the following:
 
June 30,
2020
 
December 31,
2019
Computer equipment and software
$
12,325

 
$
12,144

Furniture and equipment
2,179

 
2,292

Leasehold and building improvements
7,133

 
7,160

Property, plant, and equipment, excluding internal-use software
21,637

 
21,596

Less: Accumulated depreciation and amortization
(17,526
)
 
(17,078
)
Property, plant and equipment, excluding internal-use software, net
4,111

 
4,518

Internal-use software
34,034

 
33,278

Construction in progress - Internal-use software
3,970

 
2,973

Less: Accumulated depreciation and amortization, internal-use software
(28,909
)
 
(25,784
)
Internal-use software, net
9,095

 
10,467

Property, plant, and equipment, net
$
13,206

 
$
14,985


 
Depreciation and amortization expense from continuing operations was $1,799 and $3,807, respectively, for the three and six months ended June 30, 2020, of which $1,421 and $3,056, respectively, related to internal use software costs. Depreciation and amortization expense from continuing operations was $3,586 and $6,850, respectively, for the three and six months ended June 30, 2019, of which $2,401 and $4,948, respectively, related to internal-use software costs.

Amounts capitalized to internal-use software for the three months ended June 30, 2020 and 2019 were $943 and $984, respectively. Amounts capitalized to internal-use software for the six months ended June 30, 2020 and 2019 were $2,153 and $1,896, respectively.


- 18 -

NantHealth, Inc.
Notes to 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 June 30, 2020 and December 31, 2019 consisted of the following:
 
June 30,
2020
 
December 31,
2019
Customer relationships
$
52,000

 
$
52,000

Developed technologies
32,000

 
32,000

Trade name
3,000

 
3,000

 
87,000

 
87,000

Less: Accumulated amortization
(39,171
)
 
(35,152
)
Intangible assets, net
$
47,829

 
$
51,848



Amortization of definite-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 for the three months ended June 30, 2020 and 2019 was $2,009 and $2,197, respectively. Amortization expense from continuing operations for the six months ended June 30, 2020 and 2019 was $4,019 and $4,484, respectively.

During the three months ended June 30, 2019, the Company identified an indicator of impairment with respect to the NantHealth Labs, Inc. definite-lived intangible assets given the decline in sales and the Company's decision to cease commercial sales of its liquid biopsy test offering to focus on performing a study to measure the clinical utility of the AR-V7 analyte for informing treatment in patients with castration-resistant prostate cancer. Although the Company will continue this study while also pursuing other strategically aligned clinical studies that support its liquid biopsy platform, the Company determined that the assets were not recoverable given the significant amount of costs required to further build evidence of clinical utility while also ceasing commercial sales of the Liquid GPS product. Therefore, the Company fully impaired the intangible assets as of June 30, 2019 and recorded an impairment loss of $3,977 within operating expenses.

The estimated future amortization expense over the next five years and thereafter for the intangible assets that exist as of June 30, 2020 is as follows:
 
Amounts
Remainder of 2020
$
4,019

2021
8,038

2022
8,038

2023
3,467

2024
3,467

2025
3,467

Thereafter
17,333

Total future intangible amortization expense
$
47,829


Note 9. Goodwill
Goodwill as of both June 30, 2020 and December 31, 2019 was $97,307, net of goodwill allocated to the discontinued operation of $18,623. The goodwill allocated to the discontinued operation was based on the fair value of the Connected Care Business as a percentage of the total fair value of the Connected Care Business and the Company that remains after the sales transaction (see Note 4).
Goodwill acquired in a business combination is tested for impairment annually as of October 1, or between annual tests when an impairment indicator exists.

- 19 -

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

Note 10. Investments
Equity method investment

Investment in NantOmics

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, at the time of purchase, represented 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.

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. At the time of the purchase, 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.

At February 28, 2018, the Company transferred 9,088,362 of the Series A-2 units to NantOmics as consideration for the assignment of NantHealth Labs, Inc. (see Note 19). An additional 564,779 units were transferred by May 31, 2018. This reduced NantHealth's ownership of NantOmics to approximately