NANTHEALTH, INC. 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 "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 The Company provides enterprise solutions that help businesses transform complex data into actionable insights. By offering efficient ways to move, interpret, and visualize complex and highly sensitive information, we help our customers in healthcare, life sciences, logistics, telecommunications, and other industries, to automate, understand, and act on data while keeping it secure and scalable.NantHealth's product portfolio comprises the latest technology in payer/provider collaboration platforms for real-time coverage decision support (NaviNet and Eviti) and data solutions that include multi-data analysis, reporting and professional services offerings (Quadris). In addition,The OpenNMS Group, Inc. ("OpenNMS"), aNantHealth subsidiary, helps businesses monitor and manage network health and performance. Altogether, we generally derive revenue from SaaS subscription fees, support services, professional services, and revenue sharing through collaborations with complementary businesses. We market certain of our solutions as a comprehensive integrated solution that includes our clinical decision support, payer engagement solutions, data analysis and network monitoring and management. We also market our clinical decision support, payer engagement solutions, data analysis and network monitoring and management 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 health care community to drive adoption ofNantHealth products and services; •strengthen our commercial organization to increase ourNantHealth solutions client base and to broaden usage of our solutions by existing clients; •develop new features and functionality forNantHealth solutions to address the needs of current and future healthcare provider and payer, self-insured employer and biopharmaceutical company clients, as well as logistics, telecommunications and other clients through OpenNMS; and •publish scientific and medical advances. The acquisition of OpenNMS, an enterprise-grade open-source network management company, expands and diversifiesNantHealth's software portfolio and service offerings, adding AI technologies, and enhancing cloud and SaaS capabilities. We believe OpenNMS will provideNantHealth customers with a new set of services to maintain reliable network connections for critical data flows that enable patient data collaboration and decision making at the point of care. Since our inception, we have devoted substantially all our resources to the development and commercialization ofNantHealth solutions. 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 ofSeptember 30, 2021 , our accumulated deficit was approximately$1.0 billion . We expect to continue to incur operating losses over the near term as we expand our commercial operations, invest further inNantHealth solutions, and support adoption of our molecular sequencing and analysis 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 - -------------------------------------------------------------------------------- Exchange Agreement and Note Prepayment OnApril 13, 2021 , we entered into a transaction withHighbridge Capital Management, LLC and one of its affiliates ("Highbridge") to exchange$5.0 million of its$36.9 million in existing 2016 Notes and with Cambridge to exchange$5.0 million of its$10.0 million in existing 2016 Notes for shares of our common stock, par value$0.0001 (the "Common Stock"), pursuant to an exchange agreement dated as ofApril 13, 2021 (the "Exchange Agreement") (See Note 11). OnApril 27, 2021 , concurrent with the 2021 Notes issuance, the Company used the proceeds to prepay the remaining$31.9 million of principal amount of the 2016 Notes held by Highbridge and$0.6 million of accrued interest on such 2016 Notes. Note Purchase Agreement OnApril 13, 2021 , we and our wholly owned subsidiary,NaviNet (the "Guarantor") entered into a note purchase agreement (the "Note Purchase Agreement") withHighbridge and Nant Capital , to issue and sell$137.5 million in aggregate principal amount of our 4.5% convertible senior notes due 2026 (the "2021 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 Note Purchase Agreement includes customary representations, warranties and covenants by us and customary closing conditions. Under the terms of the Note Purchase Agreement, we have agreed to indemnify the buyers against certain liabilities. The 2021 Notes were issued onApril 27, 2021 . Amended and Restated Promissory Notes OnApril 27, 2021 , in connection with the issuance of the 2021 Notes, we entered into a Third Amended and Restated Promissory Note which amends and restates our promissory note, datedJanuary 4, 2016 , as amended onMay 9, 2016 , and onDecember 15, 2016 , between us andNant Capital , to, among other things, extend the maturity date of the promissory note toOctober 1, 2026 and to subordinate the promissory note in right of payment to the 2021 Notes. OnApril 27, 2021 , in connection with the issuance of the 2021 Notes, we entered into a Second Amended and Restated Promissory Note which amends and restates our promissory note, datedAugust 8, 2018 , as amended onDecember 31, 2020 , between us andNant Capital , to, among other things, extend the maturity date of the promissory note toDecember 31, 2026 and to subordinate the Second Promissory Note in right of payment to the 2021 Notes. 2021 Indenture OnApril 27, 2021 , we and the Guarantor entered into an indenture (the "2021 Indenture") by and among us, theGuarantor andU.S. Bank National Association , as trustee (the "Trustee"), pursuant to which we issued the 2021 Notes. The 2021 Notes bear interest at a rate of 4.5% per year, payable semi-annually onApril 15 andOctober 15 of each year, beginning onOctober 15, 2021 . The 2021 Notes will mature onApril 15, 2026 , unless earlier repurchased, redeemed or converted. Repurchase of 2016 Notes In connection with the issuance of the 2021 Notes and the amended and restated promissory notes, onApril 27, 2021 , we provided a notice of a fundamental change (as defined in the indenture governing the Company's 5.5% Convertible Notes due 2021) and an offer to repurchase all our outstanding 2016 Notes. OnMay 25, 2021 , the Company purchased$55.6 million of the outstanding 2016 Notes, including accrued and unpaid interest thereon. After the Repurchased Notes, Fundamental Change Repurchase and Exchanges on the 2016 Notes,$9.5 million of unpaid principal remained outstanding, including$5.0 million held by Cambridge and$4.5 million held by Initial Purchasers. The remaining 2016 Notes have a maturity date ofDecember 15, 2021 . 2020 Acquisition ofThe OpenNMS Group, Inc. OnJuly 22, 2020 , we entered into an assignment agreement (the "Assignment Agreement") with Cambridge to acquire approximately 91% of OpenNMS for$5.6 million in cash. Contemporaneously with the closing of the Assignment Agreement, OpenNMS issued call options to the Company consisting of, when exercised, cash payment of$0.3 million and issuance of 56,769 shares of the Company's common stock in exchange for the 9% of the shares of OpenNMS common stock held by the remaining shareholders. These call options expired unexercised onSeptember 30, 2020 . InAugust 2021 , the Company purchased the remaining 9%, or 241,485 shares of outstanding OpenNMS common stock held by the remaining shareholders for$0.6 million in cash. The Company recognized the difference between the$0.6 million purchase price and the$0.1 million carrying value of the non-controlling interest acquired as a reduction to additional paid in capital of$0.5 million . As ofAugust 24, 2021 , the Company owns 100% of the outstanding common stock of OpenNMS. - 40 - -------------------------------------------------------------------------------- COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the novel coronavirus (COVID-19) a pandemic. In the same month, the President ofthe United States declared a State of National Emergency due to the COVID-19 pandemic. The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets. To date, there has been no material adverse impact to our 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 our 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, our 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 our current and long-term account receivable collectability, as our negatively impacted customers from the pandemic may request temporary relief, delay, or not make scheduled payments. In addition, the deployment of our solutions may represent a large portion of our 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 our revenues or timing of revenue. Health conditions in some geographic areas where our 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 our employees, which could further lengthen our sales cycle and delay revenue and cash flows in the near-term. 2020 Sale of the Connected Care Business OnJanuary 13, 2020 , we 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 ours. Pursuant to the Purchase Agreement, we agreed to sell to the Purchaser certain of our assets related to our "Connected Care" business, including the products known as DCX (formerly DeviceConX), VCX (formerly VitalsConX), HBox and Shuttle Cable (collectively, the "Connected Care Business"). OnFebruary 3, 2020 , we completed the sale of the Connected Care Business for$47.3 million 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 represented a strategic shift in our operations as the sale enables us to focus on clinical decision support, payer engagement, and data analytics. 2017 Asset Purchase Agreement withAllscripts OnAugust 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 toAllscripts substantially all of the assets of our provider/patient engagement solutions business, including our FusionFX solution and components of its NantOS software connectivity solutions (the "Business"). OnAugust 25, 2017 , we andAllscripts completed the sale pursuant to the APA.Allscripts conveyed to us 15,000,000 shares of our common stock at par value of$0.0001 per share that were previously owned byAllscripts as consideration for the transaction. We retired the shares of stock.Allscripts also paid$1.7 million of cash consideration to us as an estimated working capital payment, and we recorded a receivable of$1.0 million related to final working capital adjustments. We are also responsible for payingAllscripts for fulfilling certain customer service obligations of the business post-closing. - 41 - -------------------------------------------------------------------------------- Concurrent with the closing and as contemplated by the APA, we andAllscripts modified the amended and restated mutual license and reseller agreement datedJune 26, 2015 , which was further amended onDecember 30, 2017 , such that, among other things, the Company committed to deliver a minimum of$95.0 million of total bookings over a ten-year period ("Bookings Commitment") from referral transactions and sales of certainAllscripts products under this agreement (see Note 12 of the Consolidated Financial Statements). We also agreed thatAllscripts shall receive at least$0.5 million per year in payments from bookings (the "Annual Minimum Commitment"). If the total payments received byAllscripts from bookings during such period are less than the Annual Minimum Commitment, we shall pay toAllscripts the difference between the Annual Minimum Commitment and the total amount received byAllscripts from bookings during such period. In the event of a 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 fromAllscripts on each software referral transaction that results in a booking withAllscripts . We account for the Bookings Commitment at its estimated fair value over the life of the agreement. The total estimated liability was$35.0 million and$33.9 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. - 42 - -------------------------------------------------------------------------------- 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 withUnited 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 withU.S. GAAP. Non-GAAP net loss from continuing operations excludes the effects of (1) loss from equity method investments including impairment losses, (2) stock-based compensation expense, (3) change in fair value of derivatives liability, (4) change in fair value of the Bookings Commitment, (5) noncash interest expense related to convertible notes, (6) intangible amortization, (7) securities litigation costs, (8) the impacts of certain income tax benefits and provisions from noncash activity, and (9) the loss on exchange and prepayments of the 2016 Notes. The following table reconciles Net loss from continuing operations attributable toNantHealth to Net loss from continuing operations attributable toNantHealth - Non-GAAP for the three and nine months endedSeptember 30, 2021 and 2020. (Dollars in thousands, except per share Three Months Ended amounts) September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net loss from continuing operations attributable to NantHealth$ (10,843) $ (10,984) $ (41,578) $ (68,179) Adjustments to GAAP net loss from continuing operations attributable toNantHealth : Loss on Exchange and Prepayment of 2016 Notes - - 742 - Loss from related party equity method investment - - - 31,702 Stock-based compensation expense from continuing operations 799 633 2,533 1,761 Change in fair value of derivatives liability - (56) (4) 7 Change in fair value of Bookings Commitment (3,670) (657) 1,133 3,070 Noncash interest expense related to convertible notes 58 1,644 568 4,779 Intangible amortization from continuing operations 2,222 2,165 6,646 6,184 Securities litigation costs - - - (103) Tax benefit (provision) resulting from certain noncash tax items (17) 20 (105) (16) Total adjustments to GAAP net loss from continuing operations attributable to NantHealth (608) 3,749 11,513 47,384 Net loss from continuing operations attributable to NantHealth - Non-GAAP$ (11,451) $
(7,235)
Weighted average basis common shares outstanding 115,243,671 110,929,357 113,706,124 110,859,611 Net loss per common share from continuing operations attributable toNantHealth - Non-GAAP$ (0.10) $ (0.07) $ (0.26)$ (0.19) - 43 -
-------------------------------------------------------------------------------- The following table reconciles Net loss per common share from continuing operations attributable toNantHealth to Net loss per common share from continuing operations attributable toNantHealth - Non-GAAP for the three and nine months endedSeptember 30, 2021 and 2020. (Dollars in thousands, except per share Three Months Ended Nine Months Ended amounts) September 30, September 30, 2021 2020 2021 2020 Net loss per common share from continuing operations attributable to NantHealth$ (0.09) $ (0.10) $ (0.37) $ (0.62) Adjustments to GAAP net loss per common share from continuing operations attributable toNantHealth : Loss on Exchange and Prepayment of 2016 Notes - - 0.01 - Loss from related party equity method investment - - - 0.28 Stock-based compensation expense from continuing operations 0.01 0.01 0.03 0.02 Change in fair value of derivatives liability - - - - Change in fair value of Bookings Commitment (0.04) (0.01) 0.01 0.03 Noncash interest expense related to convertible notes - 0.01 - 0.04 Intangible amortization from continuing operations 0.02 0.02 0.06 0.06 Securities litigation costs - - - - Tax benefit (provision) resulting from certain noncash tax items - - - - Total adjustments to GAAP net loss per common share from continuing operations attributable to NantHealth (0.01) 0.03 0.11 0.43 Net loss per common share from continuing operations attributable toNantHealth - Non-GAAP$ (0.10) $ (0.07) $ (0.26) $ (0.19) - 44 -
--------------------------------------------------------------------------------
Components of Our Results of Operations
Revenue
We generate our revenue from the sale of software-as-a-service ("SaaS"),
maintenance, and services. Our systems infrastructure and platforms support the
delivery of the implementation of value-based care models across the healthcare
continuum, and maintenance of reliable network connections. We generate revenue
from the following sources:
Software-as-a-service related - SaaS related revenue is generated from our
clients' access to and usage of our hosted software solutions on a subscription
basis for a specified contract term. In SaaS arrangements, the customer 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 .
Maintenance - Maintenance revenue includes technical support or maintenance on
OpenNMS software during the contract term. Our networking monitoring solutions
typically consist of a term-based subscription to the OpenNMS Meridian software
repository and associated support, which entitles customers to unspecified
software updates and upgrades on a when-and-if-available basis. Revenue is
recognized over the maintenance or support term.
Professional services - Professional services revenue is generated from
consulting services to help customers install, integrate and optimize OpenNMS,
sponsored development, and training to assist customers deploy and use OpenNMS
solutions. Sponsored development relates to professional services to build
customer specific functionality, features, and enhancements into the OpenNMS
open source platform. Typically, revenue is recognized over time using direct
labor hours as a measure of progress.
Cost of Revenue
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 customer 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 our revenue
sources consists of the following types of costs:
Software-as-a-service related - SaaS related cost of revenue includes personnel-related costs, amortization of deferred implementation costs, amortization of internal-use software, and other direct costs associated with the delivery and hosting of our subscription services.
Maintenance - Maintenance revenue includes technical support or maintenance on OpenNMS software during the contract term. Our networking monitoring solutions typically consist of a term-based subscription to the OpenNMS Meridian software repository and associated support, which entitles customers to unspecified software updates and upgrades on a when-and-if-available basis. Revenue is recognized over the maintenance or support term.
Professional services - Professional services cost of revenue include personnel-related costs and other direct costs associated with consulting, sponsored development, and training provided to our customers.
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 expandNantHealth 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. - 45 - --------------------------------------------------------------------------------
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 ofNantHealth solutions, and corporate shared services fees fromNantWorks . This includes amortization of deferred commission costs. 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 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, including costs associated with 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 our research and development expenses are related to developing new software solutions and improving our existing software solutions. 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 investments in developing new solutions and enhancing the functionality of our existing solutions. 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 noncash 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. Other Income (Expense), Net Other income (expense), net consists primarily of foreign currency gains (losses), changes in the fair value of the Bookings Commitment, changes in the fair value of our derivative liability, and other non-recurring items. Loss fromEquity Method Investment Loss from equity method investment consists of our pro rata share of losses of a company that we have an ownership interest in and account for under the equity method of accounting, amortization of basis differences, and other-than-temporary impairments in the value of our investment. We regularly evaluate our investment, which is not carried at fair value, for other-than-temporary impairment in accordance withU.S. GAAP. Provision for Income Taxes Provision for income taxes consists ofU.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 significantU.S. federal, state and foreign cash income taxes because of our current and accumulated net operating losses ("NOLs"). - 46 - -------------------------------------------------------------------------------- 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. Income (Loss) from Discontinued Operations, Net of Tax, Attributable toNantHealth Income (loss) from discontinued operations, net of tax, attributable toNantHealth consists of earnings or losses related to the disposition of components of our business. Net Loss Attributable to non-controlling Interests Net loss attributable to non-controlling interests consists of earnings or losses related to minority ownership of components of our business. - 47 - -------------------------------------------------------------------------------- Results of Operations The following table sets forth our Consolidated Statements of Operations data for each of the periods indicated. Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, 2021 2020 2021 2020
Revenue
Software-as-a-service related$ 13,879 $ 18,355 $ 45,140 $ 53,997 Maintenance 406 299 1,201 299 Professional services 57 62 257 62 Total software-related revenue 14,342 18,716 46,598 54,358 Other 17 49 20 172 Total net revenue 14,359 18,765 46,618 54,530 Cost of Revenue Software-as-a-service related 5,244 5,935 16,223 17,552 Maintenance 298 131 775 131 Professional services 6 15 13 15 Amortization of developed technologies 1,247 1,222 3,741 3,508 Total software-related cost of revenue 6,795 7,303 20,752 21,206 Other 34 216 127 827 Total cost of revenue 6,829 7,519 20,879 22,033 Gross Profit 7,530 11,246 25,739 32,497 Operating Expenses Selling, general and administrative 12,969 12,442 37,309 36,864 Research and development 4,648 4,681 14,510 12,446 Amortization of acquisition-related assets 985 958 2,956 2,691 Total operating expenses 18,602 18,081 54,775 52,001 Loss from operations (11,072) (6,835) (29,036) (19,504) Interest expense, net (3,572) (4,861) (10,943) (14,291) Other income (expense), net 3,759 747 (1,862) (2,550) Loss from related party equity method investment - - - (31,702)
Loss from continuing operations before income taxes (10,885) (10,949)
(41,841) (68,047)
Provision for income taxes 23 77 21 174
Net loss from continuing operations (10,908) (11,026) (41,862) (68,221)
Income (loss) from discontinued operations, net of
tax attributable to
- (16) 24 31,955
Net loss (10,908) (11,042) (41,838) (36,266)
Net loss attributable to non-controlling interests (65) (42) (284) (42)
Net loss attributable to NantHealth $ (10,843) $
(11,000)
- 48 -
--------------------------------------------------------------------------------The following table sets forth our Consolidated Statements of Operations data as a percentage of revenue for each of the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenue
Software-as-a-service related 96.7 % 97.8 % 96.8 % 99.0 %
Maintenance 2.8 % 1.6 % 2.6 % 0.5 %
Professional services 0.3 % 0.3 % 0.6 % 0.1 %
Total software-related revenue 99.8 % 99.7 % 100.0 % 99.6 %
Other 0.1 % 0.3 % - % 0.3 %
Total net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Revenue
Software-as-a-service related 36.5 % 31.6 % 34.8 % 32.2 %
Maintenance 2.1 % 0.7 % 1.7 % 0.2 %
Professional services - % 0.1 % - % - %
Amortization of developed technologies 8.7 % 6.5 % 8.0 % 6.5 %
Total software-related cost of revenue 47.3 % 38.9 % 44.5 % 38.9 %
Other 0.3 % 1.2 % 0.3 % 1.5 %
Total cost of revenue 47.6 % 40.1 % 44.8 % 40.4 %
Gross Profit 52.4 % 59.9 % 55.2 % 59.6 %
Operating Expenses
Selling, general and administrative 90.2 % 66.3 % 80.1 % 67.7 %
Research and development 32.4 % 24.9 % 31.1 % 22.8 %
Amortization of acquisition-related assets 6.9 % 5.1 % 6.3 % 4.9 %
Total operating expenses 129.5 % 96.3 % 117.5 % 95.4 %
Loss from operations (77.1) % (36.4) % (62.3) % (35.8) %
Interest expense, net (24.9) % (25.9) % (23.5) % (26.2) %
Other income (expense), net 26.2 % 4.0 % (4.0) % (4.7) %
Loss from related party equity method investment - % - % - % (58.1) %
Loss from continuing operations before income taxes (75.8) %
(58.3) % (89.8) % (124.8) %
Provision for income taxes 0.2 % 0.5 % - % 0.3 %
Net loss from continuing operations (76.0) % (58.8) % (89.8) % (125.1) %
Income (loss) from discontinued operations, net of
tax attributable to
- % - % 0.1 % 58.6 %
Net loss (76.0) % (58.8) % (89.7) % (66.5) %
Net loss attributable to non-controlling interests (0.5) % (0.2) % (0.6) % (0.1) %
Net loss attributable to NantHealth (75.5) % (58.6) % (89.1) % (66.4) %
- 49 --------------------------------------------------------------------------------- Comparison of Three and Nine Months EndedSeptember 30, 2021 and 2020. Revenue Period-To-Period Change Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, September 30, September 30, 2021 2020 2021 2020 Amount Amount Amount Amount Amount Percent Amount Percent Software-as-a-service related$ 13,879 $ 18,355 $ 45,140 $ 53,997 $ (4,476) (24.4) %$ (8,857) (16.4) % Maintenance 406 299 1,201 299 107 35.8 % 902 301.7 % Professional services 57 62 257 62 (5) (8.1) % 195 314.5 % Total software-related revenue 14,342 18,716 46,598 54,358 (4,374) (23.4) % (7,760) (14.3) % Other 17 49 20 172 (32) (65.3) % (152) (88.4) % Total net revenue$ 14,359 $ 18,765 $ 46,618 $ 54,530 $ (4,406) (23.5) %$ (7,912) (14.5) % Comparison of the three-month periods endedSeptember 30, 2021 and 2020 Total revenue decreased$4.4 million , or 23.5%, for the three months endedSeptember 30, 2021 , compared to the prior year period, due to decreased SaaS revenue of which$2.0 million was primarily related to Statement of Works ("SOWs") becoming fully amortized as ofDecember 31, 2020 , and$2.3 million related to a customer contract that ended inJune 2021 . The decrease was partially offset by new revenue from maintenance and professional services of$0.1 million due to the acquisition of OpenNMS. We believe that significant opportunities exist for expanded cross-selling across our products and across our existing customer base, including Eviti,NaviNet , and OpenNMS customer bases. Comparison of the nine months endedSeptember 30, 2021 and 2020 Total revenue decreased$7.9 million , or 14.5%, for the nine months endedSeptember 30, 2021 , compared to the prior year period, largely due to decreased SaaS revenue of which$5.4 million was primarily due to SOWs becoming fully amortized as ofDecember 31, 2020 . In addition, two customer contracts that ended inJune 2020 andJune 2021 contributed a$2.4 million and$1.6 million decrease, respectively. This decrease was partially offset by a$1.1 million increase in provider revenues. Maintenance and professional services revenue increased$1.1 million due to the acquisition of OpenNMS. - 50 - --------------------------------------------------------------------------------
Cost of Revenue
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Software-as-a-service related $ 5,244 $ 5,935 $ 16,223 $ 17,552 $ (691) (11.6) % $ (1,329) (7.6) % Maintenance 298 131 775 131 167 127.5 % 644 491.6 % Professional services 6 15 13 15 (9) (60.0) % (2) (13.3) % Amortization of developed technologies 1,247 1,222 3,741 3,508 25 2.0 % 233 6.6 % Total software-related cost of revenue 6,795 7,303 20,752 21,206 (508) (7.0) % (454) (2.1) % Other 34 216 127 827 (182) (84.3) % (700) (84.6) % Total cost of revenue$ 6,829 $ 7,519 $ 20,879 $ 22,033 $ (690) (9.2) %$ (1,154) (5.2) % Comparison of the three-month periods endedSeptember 30, 2021 and 2020 Total cost of revenue decreased$0.7 million , or 9.2%, for the three months endedSeptember 30, 2021 , compared to the prior year period. The decrease in SaaS costs was driven by lower amortization of internal use software of$0.6 million . Comparison of the nine months endedSeptember 30, 2021 and 2020 Total cost of revenue decreased$1.2 million , or 5.2% for the nine months endedSeptember 30, 2021 , compared to the prior year period. The decrease in SaaS costs was driven by lower amortization of internal use software of$1.7 million as 16 internally developed software assets became fully depreciated between the fourth quarter of 2020 and the third quarter of 2021. The increase in maintenance and professional services costs was primarily driven by the acquisition of OpenNMS.
Selling, General and Administrative
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Selling, general and
administrative $ 12,969 $ 12,442 $ 37,309 $ 36,864 $ 527 4.2 % $ 445 1.2 %
Comparison of the three-month periods ended September 30, 2021 and 2020
Selling, general and administrative expenses increased by $0.5 million , or 4.2%,
for the three months ended September 30, 2021 compared to the prior year period,
driven primarily by $1.1 million of higher costs related to the acquisition of
OpenNMS, offset by a $0.8 million reduction attributed to cost saving measures.
Comparison of the nine months ended September 30, 2021 and 2020
Selling, general and administrative expenses increased $0.4 million , or 1.2%,
for the nine months ended September 30, 2021 compared to the prior year period,
driven primarily by $2.6 million of higher costs related to the acquisition of
OpenNMS, offset by a $1.0 million reduction in personnel costs and a $0.9
million reduction in other cost saving measures.
- 51 -
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Research and Development
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Research and development $ 4,648 $ 4,681 $ 14,510 $ 12,446 $ (33) (0.7) % $ 2,064 16.6 %
Comparison of the three-month periods ended
Comparison of the nine months endedSeptember 30, 2021 and 2020 Research and development expenses increased$2.1 million or 16.6% from$12.4 million for the nine months endedSeptember 30, 2020 to$14.5 million for the nine months endedSeptember 30, 2021 , driven primarily by$1.4 million of higher costs related to the acquisition of OpenNMS and$0.7 million in higher personnel costs in other product lines. Amortization of Acquisition-related Assets Period-To-Period Change Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, September 30, September 30, 2021 2020 2021 2020 Amount Amount Amount Amount Amount Percent Amount Percent
Amortization of
acquisition-related assets
2.8 % $ 265 9.8 %
Comparison of the three-month periods ended September 30, 2021 and 2020
Amortization of acquisition-related assets was flat at $1.0 million for three
months ended September 30, 2020 compared to $1.0 million for three months ended
September 30, 2021 .
Comparison of the nine months ended September 30, 2021 and 2020
Amortization of acquisition-related assets increased 9.8% from $2.7 million for
nine months ended September 30, 2020 compared to $3.0 million for nine months
ended September 30, 2021 . Amortization expense increases related to the
acquisition of OpenNMS, offset by fully amortized NaviNet intangible assets.
- 52 -
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Interest Expense, net
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Interest expense, net $ 3,572 $ 4,861 $ 10,943 $ 14,291 $ (1,289) (26.5) % $ (3,348) (23.4) %
Comparison of the three-month periods ended September 30, 2021 and 2020
Interest expense, net decreased by $1.3 million , from $4.9 million to $3.6
million for the three months ended September 30, 2020 and 2021, respectively.
This decrease is related to the Company's adoption of ASU No. 2020-06, Debt -
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), resulting in less
noncash interest expense from January 1, 2021 , which was partially offset by
higher interest cost associated with issuance of the 2021 Notes in April 2021 .
Gross Convertible Debt increased from $107 million at December 31, 2020 to $147
million as of September 30, 2021 . See Note 2 and Note 11 to the accompanying
Consolidated Financial Statements.
Comparison of the nine months ended September 30, 2021 and 2020
Interest expense, net decreased by $3.3 million , from $14.3 million to $10.9
million for the nine months ended September 30, 2020 and 2021, respectively.
This decrease is related to the Company's adoption of ASU No. 2020-06, Debt -
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), resulting in less
noncash interest expense from January 1, 2021 , which was partially offset by
higher interest costs associated with the issuance of the 2021 Notes in April
2021 . Gross Convertible Debt increased from $107 million at December 31, 2020 to
$147 million as of September 30, 2021 . See Note 2 and Note 11 to the
accompanying Consolidated Financial Statements.
See the section entitled "Liquidity and Capital Resources" and Note 11 and Note
19 to the accompanying Consolidated Financial Statements for further discussion
of our convertible notes and the related party note with Nant Capital .
- 53 -
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Other Expense, net
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Other income (expense), net $ 3,759 $ 747 $ (1,862) $ (2,550) $ 3,012 403.2 % $ 688 (27.0) %
Comparison of the three-month periods ended September 30, 2021 and 2020
The increase of $3.0 million in Other expense, net for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 was
driven by the change in the fair value of the Bookings commitment. The change in
the fair value of the Bookings commitment is a result of macroeconomic factors.
The change in fair value for the three months ended September 30, 2021 was a
gain of $3.7 million , compared to a gain of $0.7 million for the three month
period ended September 30, 2020 .
Comparison of the nine months ended September 30, 2021 and 2020
Other expense, net, decreased by $0.7 million , from $2.6 million for the nine
months ended September 30, 2020 to $1.9 million for the nine months ended
September 30, 2021 . The other expense decrease was mainly driven by a $1.9
million increase in the fair value of the Bookings Commitment liability. The
change in the fair value of the Bookings commitment is a result of macroeconomic
factors. The Company also recorded losses resulting from the exchange and
prepayment of the 2016 Notes of $0.7 million in the nine month period ended
September 30, 2021 .
Loss from Related Party Equity Method Investment
Period-To-Period Change
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Loss from related party
equity method investment $ - $ - $ - $ 31,702 $ - - % $ (31,702) (100.0) %
Comparison of the three and nine month periods ended September 30, 2021 and 2020
Loss from related party equity method investment for the three and nine months
ended September 30, 2020 was related to the pro rata share of losses from our
investment in NantOmics . Our investment in NantOmics was fully impaired at June
30, 2020 (see Note 10 to the accompanying Consolidated Financial Statements).
- 54 -
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Income (loss) from Discontinued Operations, Net of Tax, Attributable to
NantHealth
Period-To-Period Change
Three Months Ended September Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) 30, 2021 September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Income (loss) from
discontinued operations,
net of tax attributable to
NantHealth $ - $ (16) $ 24 $ 31,955 $ 16 (100.0) % $ (31,931) (99.9) %
Comparison of the three and nine month periods ended September 30, 2021 and 2020
For the three and nine months ended September 30, 2020 , the income (loss) from
discontinued operations, net of tax, attributable to NantHealth was primarily
related to the gain on sale of the Connected Care Business (see Note 4 to the
accompanying Consolidated Financial Statements).
Net Loss Attributable to non-controlling Interests
Period-To-Period Change
Three Months Ended September Nine Months Ended Three Months Ended Nine Months Ended
(Dollars in thousands) 30, 2021 September 30, September 30, September 30,
2021 2020 2021 2020
Amount Amount Amount Amount Amount Percent Amount Percent
Net loss attributable to
non-controlling interests $ (65) (42) (284) (42) $ (23) 54.8 % $ (242) 576.2 %
Comparison of the three and nine month periods ended September 30, 2021 and 2020
For the three and nine months ended September 30, 2021 , the net loss
attributable to non-controlling interests was related to OpenNMS (see Note 19 to
the accompanying Consolidated Financial Statements). During the third quarter of
2021, the Company purchased the remaining non-controlling interest in OpenNMS
that it did not previously own.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2021 , we had cash and cash equivalents of $45.5 million ,
compared to $22.8 million as of December 31, 2020 , of which $0.4 million and
$0.4 million , respectively, related to foreign subsidiaries.
At December 31, 2020 , due to continued anticipated operating cash outflows and
the upcoming maturity of the 2016 Notes, there existed a substantial doubt
regarding our ability to continue as a going concern. This doubt was alleviated
by the issuance of the 2021 Notes. We believe our existing cash and cash
equivalents will be sufficient to fund operations through at least 12 months
following the issuance date of the financial statements. We continue to have our
Chairman and CEO's intent and ability to support our operations with additional
funds as required. We 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, we may not be able to
secure such financing in a timely manner or on favorable terms. We may also
consider selling off components of our business. Without additional funds, we
may choose to delay or reduce our operating or investment expenditures. Further,
because of the risk and uncertainties associated with the commercialization of
our existing products as well as products in development, we may need additional
funds to meet our needs sooner than planned. To date, our primary sources of
capital have been the private placement of membership interests prior to our
IPO, debt financing agreements, including the promissory note with Nant Capital,
LLC ("Nant Capital ") and our convertible notes, the sale of our common stock,
and proceeds from the sale of components of our business.
- 55 -
--------------------------------------------------------------------------------
Convertible Notes
In December 2016 , we entered into a purchase agreement (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 $90.0 million in aggregate
principal amount of our 5.5% Convertible Senior Notes due 2021 (the "2016
Notes") in a private placement to qualified institutional buyers pursuant to
Rule 144A under the Securities Act of 1933 (the "Securities Act"). In December
2016 , we entered into a purchase agreement (the "Cambridge Purchase Agreement")
with Cambridge Equities, L.P. ("Cambridge"), an entity affiliated with
Dr. Patrick Soon-Shiong , our Chairman and Chief Executive Officer, to issue and
sell $10.0 million in aggregate principal amount of the 2016 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,
we issued an additional $7.0 million principal amount of the 2016 Notes. The
total net proceeds from this offering were approximately $102.7 million ,
comprised of $9.9 million from Cambridge and $92.8 million from the Initial
Purchasers, after deducting the Initial Purchasers' discount and debt issuance
costs of $4.3 million in connection with the 2016 Notes offering.
On December 21, 2016 , we entered into an indenture, relating to the issuance of
the 2016 Notes (the "Indenture"), by and between us and U.S. Bank National
Association , as trustee (the "Trustee"). The interest rates are fixed at 5.5%
per year, payable semi-annually on June 15 and December 15 of each year,
beginning on June 15, 2017 . The 2016 Notes will mature on December 15, 2021 ,
unless earlier repurchased by us or converted pursuant to their terms. The
initial conversion rate of the 2016 Notes is 82.3893 shares of common stock per
$1,000 principal amount of 2016 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 2016
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 sales price of our
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 $1,000 principal amount of the 2016 Notes for such
trading day was less than 98% of the product of the last reported sales price of
our common stock and the conversion rate on such trading day; or (3) upon the
occurrence of specified corporate transactions. Upon conversion, the 2016 Notes
will be settled in cash, shares of our common stock or any combination thereof
at our option.
Upon the occurrence of a fundamental change (as defined in the Indenture),
holders may require us to purchase all or a portion of the 2016 Notes in
principal amounts of $1,000 or an integral multiple thereof, for cash at a price
equal to 100% of the principal amount of the 2016 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 April 13, 2021 , the Company entered into a purchase agreement (the "Purchase
Agreement") with Nant Capital, LLC ("Nant Capital ") and Highbridge Capital
Management LLC ("Highbridge") to provide for the issuance of 4.5% convertible
senior notes due on April 15, 2026 (the "2021 Notes") for an aggregate principal
amount of $137.5 million in a private placement. The Company used the proceeds
from the 2021 Notes issuance to repurchase certain of the Company's existing
5.5% convertible senior notes due 2021 and for general corporate purposes.
On April 13, 2021 , Highbridge and Cambridge each agreed to exchange $5.0 million
of its $36.9 million and $10.0 million in existing 2016 Notes, respectively, for
shares of our common stock, par value $0.0001 , pursuant to the Exchange
Agreement.
On April 27, 2021 , concurrent with the 2021 Notes issuance, the Company used the
proceeds to prepay the remaining $31.9 million of principal amount of the 2016
Notes held by Highbridge and $0.6 million of accrued interest on such 2016
Notes.
On April 27, 2021 , the 2021 Notes were issued to the three investors under an
indenture (the "Indenture") dated April 27, 2021 entered into between the
Company and U.S. Bank National Association (the "Trustee"). In addition, the
Company reimbursed Highbridge $0.1 million for the actual costs and expenses
incurred by it in connection with the Transaction, and the Company incurred
issuance costs paid to third parties of $0.6 million As such, the net proceeds
from the offering were approximately $136.8 million .
On April 27, 2021 , we provided a notice of a fundamental change (as defined in
the indenture governing the Company's 5.5% Convertible Notes due 2021) and an
offer to repurchase all of our outstanding 2016 Notes. On May 25, 2021 , we
repurchased $55.6 million of the 2016 Notes, including accrued and unpaid
interest thereon. See Note 11 to the accompanying Consolidated Financial
Statements.
After the Repurchased Notes, Fundamental Change Repurchase and Exchanges on the
2016 Notes, $9.5 million of unpaid principal remained outstanding, including
$5.0 million held by Cambridge and $4.5 million held by Initial Purchasers. The
remaining 2016 Notes have a maturity date of December 15, 2021 .
- 56 -
--------------------------------------------------------------------------------Nant Capital Notes
InJanuary 2016 , we executed a demand promissory note withNant Capital (the "Nant Capital Note"), a personal investment vehicle for Dr.Patrick Soon-Shiong , our Chairman and CEO. As ofSeptember 30, 2021 , the total advances made byNant Capital to us pursuant to the note was approximately$112.7 million . InMay 2016 , the Nant Capital Note was amended and restated to provide that all outstanding principal and accrued and unpaid interest is due and payable onJune 30, 2021 , and not on demand. OnDecember 15, 2016 , in connection with the offering of the 2016 Notes, we entered into a Second Amended and Restated Promissory Note which amended and restated the Amended and Restated Promissory Note, datedMay 9, 2016 , between us andNant Capital , to, among other things, extend the maturity date of the Nant Capital Note toJune 15, 2022 and to subordinate the Nant Capital Note in right of payment to the 2016 Notes. The Nant Capital 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.Nant Capital has the option, but not the obligation, to require us to repay any such amount in cash, Series A-2 units ofNantOmics (based on a per unit price of$1.484 ) held by us, shares of our 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 ofNant Capital . OnApril 27, 2021 , in connection with the issuance of the 2021 Notes, we entered into a Third Amended and Restated Promissory Note which amends and restates its promissory note, datedJanuary 4, 2016 , as amended onMay 9, 2016 , and onDecember 16, 2016 , between the Company andNant Capital , to, among other things, extend the maturity date of the promissory note toOctober 1, 2026 and to subordinate the promissory note in right of payment to the 2021 Notes. OnAugust 8, 2018 , we executed a promissory note in favor ofNant Capital , with a maturity date ofJune 15, 2022 . OnDecember 31, 2020 , we executed an agreement withNant Capital to amend and restate the original promissory note, allowing us to request advances up a maximum commitment of$125.0 million that bears interest at a per annum rate of 5.5%, extended the maturity date toDecember 31, 2023 , and created an option for the securitization of the debt under the promissory note upon full repayment of the 2016 Notes. Interest payments on outstanding amounts are due onDecember 15th of each calendar year. The promissory note is subordinated to the 2016 Notes. The promissory note includes customary negative covenants. No advances have currently been made under the promissory note. AtSeptember 30, 2021 , we were in compliance with the covenants. OnApril 27, 2021 , in connection with the issuance of the 2021 Notes, we andNant Capital entered into a Second Amended and Restated Promissory Note which amends and restates its promissory note, datedAugust 8, 2018 , as amended onDecember 31, 2020 , between the Company andNant Capital , to, among other things, extend the maturity date of the promissory note toDecember 31, 2026 and to subordinate the promissory note in right of payment to the 2021 Notes. If we raise additional funds by issuing equity securities or securities convertible into equity, our stockholders could experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders and require significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products and scale back our business and operations. The following table sets forth our primary sources and uses of cash for the periods indicated: Nine Months Ended (Dollars in thousands) September 30, 2021 2020 Cash provided by (used in): Operating activities$ (22,385) $ (15,985) Investing activities (4,672) 36,645 Financing activities 50,743 242
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(17) 2
Net increase (decrease) in cash, cash equivalents and restricted
cash $ 23,669 $ 20,904
- 57 --------------------------------------------------------------------------------- To date, our operations have been primarily financed through the proceeds from related party promissory notes, the convertible notes, the sale of components of our business, and through equity issuances, including net cash proceeds from our IPO. InJune 2016 , we sold 6,900,000 shares of common stock at a price of$14.00 per share, which includes 400,000 shares sold to the underwriter upon exercise of their overallotment option to purchase additional shares of our Company. We raised net proceeds of$83.6 million from our IPO, after underwriting fees, discounts and commissions of$4.9 million and other offering costs of$8.1 million . InDecember 2016 , we issued the 2016 Notes to related party and others for aggregate net proceeds of$102.7 million ,$9.9 million from Cambridge, and$92.8 million from others, after deducting underwriting discounts and commissions and offering costs of$4.3 million . InFebruary 2020 , we received$47.3 million in proceeds from the sale of our Connected Care Business. InApril 2021 , we issued the 2021 Notes for total net proceeds of approximately$136.8 million , comprised of$62.2 million fromNant Capital and$74.5 million from Highbridge, after deducting Highbridge's debt issuance costs of$0.1 million and$0.6 million in debt issuance costs paid to third parties in connection with the 2021 Notes offering. Operating Activities Our cash flows from operating activities have been driven by rate of revenue, billings, and collections, the timing and extent of spending to support product development efforts and enhancements to existing services, the timing of general and administrative expenses, and the continuing market acceptance of our solutions. In addition, our net loss in the nine months endedSeptember 30, 2021 has been greater than our use of cash for operating activities due to the inclusion of noncash charges. Cash used in operating activities of$22.4 million during the nine months endedSeptember 30, 2021 was a result of our continued investments in enhancements to current products, research and development, sales and marketing, and expenses incurred as a public company, including costs associated with public company reporting and corporate governance requirements. During the nine months endedSeptember 30, 2021 , our net loss of$41.8 million included noncash items of$11.6 million of depreciation and amortization,$1.1 million increase in the fair value of the Bookings Commitment liability,$2.1 million recognized as stock based compensation, and a$0.7 million loss on Exchange and Prepayments of the 2016 Notes. Changes in working capital increased cash$3.0 million during the nine months endedSeptember 30, 2021 . The increase in cash was primarily attributable to a$6.2 million increase in related party payables and a$2.1 million increase in deferred revenue, largely offset by$3.0 million decrease in accounts payable and a$1.3 million increase in accounts receivable. Cash used in operating activities of$16.0 million during the nine months endedSeptember 30, 2020 was a result of our continued investments in enhancements to current products, research and development, sales and marketing, and expenses incurred as a public company, including costs associated with public company reporting and corporate governance requirements. During the nine months endedSeptember 30, 2020 , our net loss of$36.3 million included significant noncash items largely due to a$31.7 million loss on related party equity method investment,$12.6 million of depreciation and amortization, a$3.1 million increase in the fair value of the Bookings Commitment liability and$4.8 million related to the amortization of debt discounts and deferred financing offering costs, partially offset by a$32.2 million gain on the sale of our Connected Care Business (see Note 4 to the Consolidated Financial Statements). Changes in working capital decreased cash$1.3 million during the nine months endedSeptember 30, 2020 . The decrease in cash was primarily attributable to a$17.9 million decrease in accrued and other current liabilities and a$4.9 million decrease in deferred revenues, largely offset by a$14.5 million decrease in prepaid expenses, a$3.9 million decrease in accounts receivable and a$5.4 million increase in related party payables. Investing Activities Our primary investing activities have consisted of capital expenditures to develop our software as well as to purchase computer equipment and furniture and fixtures in support of expanding our infrastructure and the sale of our Connected Care Business (see Note 4 to the accompanying Consolidated Financial Statements). We had$4.7 million of cash used in investing activities during the nine months endedSeptember 30, 2021 , comprised of$4.1 million of investment used for the purchase of property and equipment, including internal-use software and$0.6 million of investment used to purchase the non-controlling interest of OpenNMS. We had$36.6 million of net cash provided by investing activities during the nine months endedSeptember 30, 2020 , comprised of$46.4 million in net proceeds from the sale of our Connected Care Business, offset by$5.5 million in net cash paid from the acquisition of OpenNMS (see Note 19 to the accompanying Consolidated Financial Statements) and$4.3 million of investment used for the purchase of property and equipment, including internal-use software. - 58 - -------------------------------------------------------------------------------- Financing Activities Cash provided by financing activities during the nine months endedSeptember 30, 2021 was$50.7 million , primarily related to the issuance of the 2021 Notes of$137.5 million , offset by prepayments on the 2016 Notes of$87.5 million (see Note 11 to the accompanying Consolidated Financial Statements). Cash used in financing activities during the nine months endedSeptember 30, 2020 of$0.2 million was due to proceeds from an insurance promissory note of$1.9 million and proceeds from exercises of stock options, offset by repayments of an insurance promissory note of$1.0 million and payments to tax authorities on the employees' behalf to satisfy withholding requirements on income earned from vested shares of the phantom unit plan and restricted stock units of$0.7 million . Contractual Obligations, Commitments and Contingencies There have been no material changes during the nine months endedSeptember 30, 2021 to our contractual obligations disclosed in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our principal material cash requirements consist of obligations under our outstanding debt obligations related to the 2016 Notes, 2021 Notes, Nant Capital Note, Bookings Commitment, and noncancelable leases for our office space. Refer to Note 11, Note 12, Note 13 and Note 19 to the accompanying Consolidated Financial Statements. Additionally, our estimated noncancelable contractual obligations for our enterprise resource planning implementation project through the shared services agreement withNantWorks total approximately$0.9 million . See Note 14 and Note 19 to the accompanying Consolidated Financial Statements. New Accounting Pronouncements See Note 2 to the accompanying Consolidated Financial Statements for a discussion of new accounting standards. Off-Balance Sheet Arrangements During the periods presented, we did not have any off-balance sheet arrangements. Related Party Transactions See Note 19 to the accompanying Consolidated Financial Statements for a discussion of related party transactions. Critical Accounting Policies and Significant Judgments and Estimates This Management's Discussion and Analysis of our Results of Operations and Liquidity and Capital Resources is based on our Consolidated Financial Statements, which we have prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the critical accounting policies and estimates discussed in Note 2 to the Consolidated Financial Statements of our Annual Report on 10-K that was filed with theSEC onFebruary 26, 2021 , reflect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Refer to Note 2 to the accompanying Consolidated Financial Statements for a discussion of any significant changes to our critical accounting policies and estimates as disclosed in our 10-K. - 59 - -------------------------------------------------------------------------------- JOBS Act OnApril 5, 2012 , the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we intend to rely on certain exemptions and reduced reporting requirements provided by the JOBS Act, including those relating to (i) providing an auditor's attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an "emerging growth company" until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of$1.07 billion or more, (ii) the date on which we are deemed to be a "large accelerated filer" under the rules of theSEC with at least$700 million of outstanding equity securities held by non-affiliates, (iii) the date on which we have issued more than$1 billion in non-convertible debt during the previous three years, or (iv) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk As ofSeptember 30, 2021 , we had$45.5 million in cash and cash equivalents which were held for working capital purposes. Our cash and cash equivalents are comprised primarily of mutual funds listed on active exchanges,U.S. treasury securities, money market funds, and cash held inFDIC - insured institutions. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. Primarily all of our investments are denominated inU.S. dollars. If overall interest rates had decreased by 10% during the periods presented, our interest income would not have been materially affected. Credit Risk Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Foreign Currency Risk We maintain offices and bank accounts in theUnited Kingdom andCanada . However, due to the low volume of activity outsidethe United States , the foreign currency risk is minimal. The effect of a 10% adverse change in exchange rates on foreign currency denominated cash and payables as ofSeptember 30, 2021 would not have been material. However, fluctuations in currency exchange rates could harm our business in the future. - 60 -
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