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 Annual Report on Form 10-K, or Annual 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 Annual Report, particularly in Item 1A, "Risk Factors." OverviewNantHealth, Inc. ("NantHealth" or 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, molecular analysis 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 customer base and to broaden usage of our solutions by existing customers; •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 customers, as well as logistics, telecommunications and other customers 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 ofDecember 31, 2021 , our accumulated deficit was approximately$1.1 billion . We expect to continue to incur operating losses over the near term as we expand our commercial operations and invest further inNantHealth 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 customers through maintaining and expanding sales, marketing and solution development activities, (iv) expand our relationships with existing customers through delivery of add-on and complementary solutions and services and (v) continue our commitment of service in support of our customer satisfaction programs. - 72 - --------------------------------------------------------------------------------
Purchase, Exchange and Prepayment of Convertible Notes
OnApril 13, 2021 , we and our wholly owned subsidiary,NaviNet (the "Guarantor") entered into a note purchase agreement (the "Note Purchase Agreement") withHighbridge Capital Management, LLC and one of its affiliates ("Highbridge") andNant Capital , an entity affiliated with Dr.Patrick Soon-Shiong , the Company's Executive Chairman, 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. 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 . The 2021 Notes will mature onApril 15, 2026 , unless earlier repurchased, redeemed or converted. OnApril 13, 2021 , we entered into a transaction with Highbridge to exchange$5.0 million of its$36.9 million in existing 5.5% convertible senior notes due 2021 (the "2016 Notes") and withCambridge Equities, L.P. ("Cambridge"), an entity affiliated withDr. Soon-Shiong , 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"). OnApril 27, 2021 , concurrent with the 2021 Notes issuance, the Company used the proceeds to prepay the remaining$31.9 million principal amount of the 2016 Notes held by Highbridge, including$0.6 million of accrued interest on such 2016 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. OnApril 27, 2021 , in connection with the issuance of the 2021 Notes and the amended and restated promissory notes, we provided a notice of a fundamental change (as defined in the indenture governing the 2016 Notes) 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.
Acquisition of
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 .
In
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 outbreak. 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. - 73 - -------------------------------------------------------------------------------- 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.
Nasdaq Delisting
OnFebruary 18, 2022 , we received a notice (the "Notice") fromThe Nasdaq Stock Market LLC ('Nasdaq") informing us that for the last 30 consecutive business days, the bid price of our common stock had closed below$1.00 per share, which is the minimum required closing bid price for continued listing on Nasdaq pursuant to Listing Rule 5450(a)(1) (the "Bid Price Requirement"). The Notice has no immediate effect on our Nasdaq listing or trading of our common stock. We have 180 calendar days, or untilAugust 17, 2022 , to regain compliance. To regain compliance, the closing bid price of our common stock must be at least$1.00 per share for a minimum of ten consecutive business days. If we do not regain compliance byAugust 17, 2022 , we may be eligible for additional time to regain compliance or if we are otherwise not eligible, we may request a hearing before aHearings Panel .
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 ("NantWorks"), 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 was 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 molecular analysis, clinical decision support, payer engagement, and data analytics.
2017 Asset Purchase Agreement with
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. - 74 - -------------------------------------------------------------------------------- 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$35.7 million and$33.9 million as ofDecember 31, 2021 and 2020, respectively.
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) loss on exchange and prepayment of the 2016 Notes, (4) change in fair value of the derivatives liability, (5) change in fair value of the Bookings Commitment, (6) noncash interest expense related to the convertible notes, (7) intangible assets amortization, (8) impairment of intangible assets, including internal-use software, (9) securities litigation costs, and (10) the impacts of certain income tax benefits and provisions from noncash activity. - 75 - -------------------------------------------------------------------------------- The following table reconciles Net loss from continuing operations attributable toNantHealth to Net loss from continuing operations attributable toNantHealth - Non-GAAP for the years endedDecember 31, 2021 and 2020: Year Ended (Dollars in thousands, except per share amounts)
2021 2020
Net loss from continuing operations attributable to NantHealth $ (58,282) $ (88,319)
Adjustments to GAAP net loss from continuing operations
attributable to NantHealth :
Loss from related party equity method investment - 31,702
Stock-based compensation expense from continuing operations 3,879 2,722
Loss on Exchange and Prepayment of 2016 Notes 742 -
Change in fair value of derivatives liability (4) 4
Change in fair value of Bookings Commitment 2,323 11,168
Noncash interest expense related to convertible notes 622 6,477
Intangible amortization from continuing operations 8,880 8,395
Impairment of intangible assets, including internal-use software - 729
Securities litigation costs - (103)
Tax provision (benefit) resulting from certain noncash tax items (60) 228
Total adjustments to GAAP net loss from continuing operations
attributable to
16,382 61,322
Net loss from continuing operations attributable to
$
(41,900)
Weighted average basic common shares outstanding 114,148,604 110,954,858
Net loss per common share from continuing operations attributable
to
$
(0.37)
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 years endedDecember 31, 2021 and 2020: Year EndedDecember 31, 2021 2020
Net loss per common share from continuing operations attributable
to
$ (0.51) $ (0.80) Adjustments to GAAP net loss per common share from continuing operations attributable toNantHealth : Loss from related party equity method investment - 0.29 Stock-based compensation expense from continuing operations 0.04 0.02 Loss on Exchange and Prepayment of 2016 Notes 0.01 - Change in fair value of derivatives liability - - Change in fair value of Bookings Commitment 0.01 0.10 Noncash interest expense related to convertible notes - 0.06 Intangible amortization from continuing operations 0.08 0.08
Impairment of intangible assets, including internal-use software -
0.01
Securities litigation costs - -
Tax provision (benefit) resulting from certain noncash tax items -
-
Total adjustments to GAAP net loss per common share from
continuing operations attributable to
0.14 0.56
Net loss per common share from continuing operations attributable
to NantHealth - Non-GAAP $ (0.37) $ (0.24)
- 76 ---------------------------------------------------------------------------------
Components of Our Results of Operations
Revenue
We generate our revenue from the sale of SaaS, maintenance, and services. Our systems infrastructure and platforms support the delivery of both personalized comprehensive sequencing and molecular analysis, 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 customers' 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 andNaviNet . 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 software license and maintenance, which entitle 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, depreciation related to lab equipment, 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 cost of revenue includes personnel-related costs, amortization of internal-use software, and other direct costs associated with the ongoing support or maintenance provided to our customers.
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, amortization of acquisition-related assets, and impairment of
intangible assets, including internal-use software.
- 77 -
--------------------------------------------------------------------------------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.
Impairment of intangible assets, including internal use software
Impairment of intangible assets consists of the impairment loss from the
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 Expense, Net
Other 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 from
Loss from related party 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. - 78 - --------------------------------------------------------------------------------
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"). 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 from Discontinued Operations, Net of Tax, Attributable to
Income from discontinued operations, net of tax, attributable to
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests consists of earnings or losses related to minority ownership of components of our business.
- 79 -
--------------------------------------------------------------------------------Results of Operations
The following table sets forth our Consolidated Statements of Operations data for each of the periods indicated:
Year Ended
(Dollars in thousands) December 31,
2021 2020
Revenue
Software-as-a-service related $ 60,402 $ 72,198
Maintenance 1,717 677
Professional services 507 86
Total software-related revenue 62,626 72,961
Other 23 211
Total net revenue 62,649 73,172
Cost of Revenue
Software-as-a-service related 21,503 23,056
Maintenance 1,174 361
Professional services 14 16
Amortization of developed technologies 4,988 4,755
Total software-related cost of revenue 27,679 28,188
Other 128 1,038
Total cost of revenue 27,807 29,226
Gross Profit 34,842 43,946
Operating Expenses
Selling, general and administrative 52,092 48,534
Research and development 19,707 17,274
Amortization of acquisition-related assets 3,942 3,676
Impairment of intangible assets, including internal-use software - 729
Total operating expenses 75,741 70,213
Loss from operations (40,899) (26,267)
Interest expense, net (14,481) (19,199)
Other expense, net (3,089) (10,824)
Loss from related party equity method investment - (31,702)
Loss from continuing operations before income taxes (58,469) (87,992)
Provision for income taxes 97 447
Net loss from continuing operations (58,566) (88,439)
Income from discontinued operations, net of tax, attributable to
23 31,993
Net loss (58,543) (56,446)
Net loss attributable to noncontrolling interests (284) (120)
Net loss attributable to NantHealth $ (58,259) $ (56,326)
- 80 ---------------------------------------------------------------------------------
The following table sets forth our Consolidated Statements of Operations data as a percentage of revenue for each of the periods indicated (Unaudited):
Year Ended
December 31,
2021 2020
Revenue
Software-as-a-service related 96.5 % 98.7 %
Maintenance 2.7 % 0.9 %
Professional services 0.8 % 0.1 %
Total software-related revenue 100.0 % 99.7 %
Other 0.0 % 0.3 %
Total net revenue 100.0 % 100.0 %
Cost of Revenue
Software-as-a-service related 34.3 % 31.5 %
Maintenance 1.9 % 0.5 %
Professional services 0.0 % 0.0 %
Amortization of developed technologies 8.0 % 6.5 %
Total software-related cost of revenue 44.2 % 38.5 %
Other 0.2 % 1.4 %
Total cost of revenue 44.4 % 39.9 %
Gross Profit 55.6 % 60.1 %
Operating Expenses
Selling, general and administrative 83.1 % 66.3 %
Research and development 31.5 % 23.6 %
Amortization of acquisition-related assets 6.3 % 5.0 %
Impairment of intangible assets, including internal-use software 0.0 % 1.1 %
Total operating expenses 120.9 % 96.0 %
Loss from operations (65.3) % (35.9) %
Interest expense, net (23.1) % (26.2) %
Other expense, net (4.9) % (14.8) %
Loss from related party equity method investment 0.0 % (43.4) %
Loss from continuing operations before income taxes (93.3) % (120.3) %
Provision for income taxes 0.2 % 0.6 %
Net loss from continuing operations (93.5) % (120.9) %
Income from discontinued operations, net of tax, attributable to
0.0 % 43.7 %
Net loss (93.5) % (77.2) %
Net loss attributable to noncontrolling interests (0.5) % (0.2) %
Net loss attributable to NantHealth (93.0) % (77.0) %
- 81 -
--------------------------------------------------------------------------------
Comparison of the years ended
Revenue
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Software-as-a-service related $ 60,402 $ 72,198 $ (11,796) (16.3) %
Maintenance 1,717 677 1,040 153.6 %
Professional services 507 86 421 489.5 %
Total software-related revenues 62,626 72,961 (10,335) (14.2) %
Other 23 211 (188) (89.1) %
Total net revenue $ 62,649 $ 73,172 $ (10,523) (14.4) %
Total revenue decreased $10.5 million , or 14.4%, from $73.2 million for the year
ended December 31, 2020 to $62.6 million for the year ended December 31, 2021 .
The total decline in revenue was driven primarily by a decrease in our SaaS
revenue.
The decrease in SaaS revenue was primarily attributable to a decrease of $7.6
million in Statement of Works ("SOWs") on professional implementation services
that became fully amortized as of December 31, 2020 , and two customer contracts
that ended in June 2020 and June 2021 , which contributed to a $2.4 million and
$3.8 million decrease, respectively. These decreases were partially offset by a
$1.4 million increase in other SaaS revenues and higher revenues of $1.2 million
from our Eviti platform driven by an expansion in covered lives on our largest
customer.
Maintenance and professional services revenue increased
We believe that significant opportunities exist for expanded cross-selling
across our products and across our existing customer base, including Eviti,
Cost of Revenue
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount PercentageSoftware-as-a-service related$ 21,503 $ 23,056 $ (1,553) (6.7) % Maintenance 1,174 361 813 225.2 % Professional services 14 16 (2) (12.5) % Amortization of developed technologies 4,988 4,755 233 4.9 % Total software-related cost of revenue 27,679 28,188 (509) (1.8) % Other 128 1,038 (910) (87.7) % Total cost of revenue$ 27,807 $ 29,226 $ (1,419) (4.9) % Cost of revenue decreased$1.4 million , or 4.9%, from$29.2 million in the year endedDecember 31, 2020 to$27.8 million for the year endedDecember 31, 2021 . The decrease in cost of revenue was primarily driven by a decrease in our SaaS solutions. The decrease in SaaS related cost of revenue was primarily attributable to lower amortization of internal-use software of$1.2 million as internally developed assets became fully amortized, and$1.0 million decrease in personnel costs driven by higher capitalization of labor costs for the development of internal-use software. These decreases were partially offset by an increase in software and licensing costs of$0.3 million . - 82 - --------------------------------------------------------------------------------
Maintenance and professional services related costs of revenue increased
Other cost of revenue decreased$0.9 million and was primarily attributable to lower amortization of internal-use software that was impaired in December of 2020.
Selling, General and Administrative
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Selling, general and administrative $ 52,092 $ 48,534 $ 3,558 7.3 %
Selling, general and administrative expenses increased $3.6 million , or 7.3%,
from $48.5 million for the year ended December 31, 2020 to $52.1 million for the
year ended December 31, 2021 . The increase was primarily attributable to $3.8
million of higher costs due to a full year of selling, general and
administrative expenses recognized from OpenNMS, which was acquired in July of
2020. These increases were partially offset by a $0.6 million decline in
personnel related costs in other product lines.
Research and Development
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Research and development $ 19,707 $ 17,274 $ 2,433 14.1 %
Research and development expenses increased $2.4 million , or 14.1%, from $17.3
million for the year ended December 31, 2020 to $19.7 million for the year ended
December 31, 2021 . The increase was primarily attributable to $2.2 million of
higher costs due to a full year of research and development expenses recognized
on the acquisition of OpenNMS.
Amortization of Acquisition-related Assets
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Amortization of acquisition-related assets $ 3,942 $ 3,676 $ 266 7.2 %
Amortization of acquisition-related assets increased $0.3 million , or 7.2%, from
$3.7 million for the year ended December 31, 2020 to $3.9 million for the year
ended December 31, 2021 , as a result of a full year of amortization recognized
on the acquisition of OpenNMS.
- 83 -
--------------------------------------------------------------------------------
Interest Expense, Net
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Interest expense, net $ 14,481 $ 19,199 $ (4,718) (24.6) %
Interest expense, net decreased by $4.7 million , from $19.2 million for the year
ended December 31, 2020 to $14.5 million for the year ended December 31, 2021 .
On January 1, 2021 , the Company early adopted Accounting Standards Update
("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 $5.7 million of less noncash interest expense. This
decrease was partially offset by $0.7 million in higher convertible debt
interest driven by the convertible notes issued in 2021, and an increase in
additional interest on the Nant Capital Note of $0.3 million .
Refer to the section entitled "Liquidity and Capital Resources" below and Note
11, and Note 19 to our Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K for further discussion of our Convertible Notes
and the Nant Capital Note.
Other Expense, Net
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Other expense, net $ 3,089 $ 10,824 $ (7,735) (71.5) %
Other expense, net decreased by $7.7 million , from $10.8 million for the year
ended December 31, 2020 to $3.1 million for the year ended December 31, 2021 .
The expense during 2021 was primarily attributable to a $2.3 million increase in
the fair value of the Bookings Commitment liability, as a result of changes in
the cost of debt due to macroeconomic factors and the passage of time. In
addition, we recognized a $0.7 million loss resulting from the exchange and
prepayment of the convertible notes issued in 2016. The expense during 2020 was
mainly driven by a $11.2 million increase in the fair value of the Bookings
Commitment liability, partially offset by income from transition services
provided to Masimo related to the sale of the Connected Care Business.
Loss from
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Loss from related party equity method
investment $ - $ 31,702 $ (31,702) (100.0) %
The 2020 loss from related party equity method investment is related to our pro
rata share of losses from our investment in NantOmics , amortization of the basis
difference in the investment, and impairment losses. The loss in 2020 was
primarily due to an other-than-temporary impairment of the full carrying value
of our investment in NantOmics of $28.2 million at June 30, 2020 (see Note 10 to
the accompanying Consolidated Financial Statements).
- 84 -
--------------------------------------------------------------------------------
Income from Discontinued Operations, Net of Tax, Attributable to
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2021 2020 2021 vs. 2020
Amount Amount Amount Percentage
Income from discontinued operations, net of
tax, attributable to NantHealth $ 23 $ 31,993 $ (31,970) (99.9) %
For the year ended December 31, 2020 , income 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).
Liquidity and Capital Resources
Sources of Liquidity
As of
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 also continue to have our Chairman and CEO's intent and ability to support our operations with additional funds as required, including our ability to borrow on the$125.0 million promissory note withNant Capital (see Note 19 to the accompanying Consolidated Financial Statements). 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, the Company's primary sources of capital have been the private placement of membership interests prior to its IPO, debt financing agreements, including promissory notes withNant Capital and affiliates, convertible notes, the sale of its common stock, and proceeds from the sale of components of its business.
Convertible Notes
OnApril 13, 2021 , we and our wholly owned subsidiary,NaviNet entered into a Note Purchase Agreement withHighbridge and Nant Capital and issued$137.5 million in aggregate principal amount of our 2021 Notes in a private placement. The 2021 Notes were issued onApril 27, 2021 . The total net proceeds from this offering were approximately$136.8 million , 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. The 2021 Notes will mature onApril 15, 2026 , unless earlier repurchased, redeemed or converted. 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. OnApril 27, 2021 , in connection with the issuance of the 2021 Notes, we provided a notice of a fundamental change (as defined in the indenture governing the 2016 Notes) 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. OnDecember 15, 2021 , the maturity date of the 2016 notes, the Company paid the remaining$9.5 million of the outstanding principal balance on the 2016 Notes, including accrued and unpaid interest thereon.
Open Market Sale Agreement
OnNovember 12, 2021 , we entered into an Open Market Sale Agreement (the "Sale Agreement") withJefferies LLC (the "Sales Agent") under which it may offer and sell up to$30.0 million of shares of our common stock, par value$0.0001 per share (the "Shares"), from time to time through the Sales Agent. The sales and issuances of the Shares under the Sale Agreement will be made pursuant to the Company's effective shelf registration statement on Form S-3 (the "Registration Statement") that was declared effective onMay 6, 2021 . - 85 - -------------------------------------------------------------------------------- The Sales Agent is not required to sell any specific amount of securities, but will act as our sales agent using commercially reasonable efforts to sell the Shares from time to time, consistent with their normal trading and sales practices, applicable state and federal laws, rules and regulations and the rules ofThe Nasdaq Stock Market LLC , based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company has agreed to pay the Sales Agent a commission of 3.0% of the aggregate gross proceeds from each sale of Shares pursuant to the Sale Agreement and to provide the Sales Agent with customary indemnification and contribution rights, including for liabilities under the Securities Act of 1933, as amended.
Nant Capital Notes
InJanuary 2016 , we executed a demand promissory note withNant Capital (the "Nant Capital Note"), a personal investment vehicle forDr. Soon-Shiong . As ofDecember 31, 2021 , the total advances made byNant Capital to us pursuant to the note was approximately$112.7 million . 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. When a repayment is made,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. 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. The promissory note includes customary negative covenants. No advances have currently been made under the promissory note. AtDecember 31, 2021 , we were in compliance with the covenants. 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. Capital Expenditures Our principal material cash requirements consist of obligations under our outstanding debt obligations related to theConvertible Notes and Nant Capital Note, Bookings Commitment, and non-cancelable leases for our office space. Refer to Note 11, Note 12, Note 13, and Note 19, respectively, to the accompanying Consolidated Financial Statements. Additionally, our estimated non-cancelable contractual obligations for our enterprise resource planning implementation project through the shared services agreement withNantWorks total approximately$0.8 million . See Note 14 and Note 19 to the accompanying Consolidated Financial Statements.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet arrangements.
- 86 -
--------------------------------------------------------------------------------Cash Flows
The following table sets forth our primary sources and uses of cash for the
periods indicated:
Year Ended
(Dollars in thousands) December 31,
2021 2020
Cash provided by (used in):
Operating activities $ (27,689) $ (16,854)
Investing activities (5,637) 35,254
Financing activities 40,577 (555)Effect of exchange rate changes on cash, cash equivalents and restricted cash
(11) (62)
Net increase in cash, cash equivalents and restricted cash
To date, our operations have been primarily financed through the proceeds from related party promissory notes, including the 2016 and 2021 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 convertible notes to a 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 convertible notes to a related party and others for aggregate net proceeds of$136.8 million ,$62.2 million fromNant Capital , and$74.6 million from Highbridge, after deducting offering costs of$0.7 million . 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 year endedDecember 31, 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$27.7 million in the year endedDecember 31, 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. In the year endedDecember 31, 2021 ,$23.3 million , or 40%, of our net loss of$58.5 million consisted of noncash items, including$15.7 million of depreciation and amortization expense,$3.9 million in stock-based compensation expense, a$2.3 million increase in the fair value of the Bookings Commitment liability, a$0.7 million loss on Exchange and Prepayment of the 2016 Notes, and$0.6 million amortization of debt discounts and deferred financing offering costs.
Changes in working capital increased cash by
Cash used in operating activities of$16.9 million in the year endedDecember 31, 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. In the year endedDecember 31, 2020 ,$37.4 million , or 66%, of our net loss of$56.4 million consisted of noncash items, including$16.8 million of depreciation and amortization expense, a$31.7 million loss from our related party equity method investment, a$11.2 million increase in the fair value of the Bookings Commitment liability,$6.5 million amortization of debt discounts and deferred financing offering costs,$2.6 million in stock-based compensation expense, and a$0.7 million impairment of intangible assets related to internal-use software, partially offset by a$32.2 million gain on sale of our Connected Care Business (see Note 4 to the accompanying Consolidated Financial Statements). - 87 - -------------------------------------------------------------------------------- Changes in working capital increased cash by$2.2 million in the year endedDecember 31, 2020 . The change in cash was primarily attributable to a$19.0 million reduction in accrued and other current liabilities, a$15.1 million reduction in prepaid expenses and other current assets, a$7.0 million increase in related party payables, net, a$7.4 million reduction in deferred revenues, and a$4.8 million reduction in accounts receivable.
Investing Activities
For the year endedDecember 31, 2021 , net cash used in investing activities was comprised of$5.1 million for the purchase of property and equipment, including internal-use software and$0.6 million of investment to purchase the non-controlling interest of OpenNMS. Our primary investing activities for the year endedDecember 31, 2020 consisted of the sale of our Connected Care Business (see Note 4 to the accompanying Consolidated Financial Statements) and capital expenditures to develop our software as well as to purchase computer equipment and furniture and fixtures in support of expanding our infrastructure. We received$35.3 million of cash from investing activities in the year endedDecember 31, 2020 , comprised of$46.4 million of net proceeds from the sale of our Connected Care Business (see Note 4 to the accompanying Consolidated Financial Statements), offset by$5.5 million net cash paid for the acquisition of OpenNMS (see Note 19 to the accompanying Consolidated Financial Statements) and$5.7 million of investment used for the purchase of property and equipment, including internal-use software.
Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2021 was$40.6 million , primarily related to the issuance of the 2021 Notes of$137.5 million , offset by payments on the 2016 Notes of$97.0 million (see Note 11 to the accompanying Consolidated Financial Statements). Cash used in financing activities during the year endedDecember 31, 2020 were primarily attributed to proceeds from, net of repayments of, an insurance promissory note and proceeds from exercises of stock options, offset by payments to tax authorities on the employees' behalf to satisfy withholding requirements on income earned from vested shares of the Nant Health, LLC Phantom Unit Plan (the "Phantom Unit Plan") and restricted stock units.
New Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" to the accompanying Consolidated Financial Statements for a discussion of new accounting standards.
Related Party Transactions
See Note 19 to the accompanying Consolidated Financial Statements for a discussion of related party transactions.
- 88 -
--------------------------------------------------------------------------------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 consider policies relating to the following matters to be critical accounting policies:
•Revenue from Contracts with Customers;
•Stock-Based Compensation;
•Change in fair value of Bookings Commitment;
•Income Taxes; •Leases; •Business Combinations;
•Software Developed for Internal Use;
•Goodwill and Intangible Assets; and
For a discussion of each of our critical accounting policies, including information and analysis of estimates and assumptions involved in their application, and other significant accounting policies, see Note 2, "Summary of Significant Accounting Policies," to the accompanying Consolidated Financial Statements.
Smaller Reporting Company Status
Currently, we qualify as a smaller reporting company. As a smaller reporting company, we are eligible and have taken advantage of certain exemptions from various reporting requirements that are not available to public reporting companies that do not qualify for this classification, including, but not limited to: •An opportunity for reduced disclosure obligations regarding executive compensation in our periodic and annual reports, including without limitation exemption from the requirement to provide a compensation discussion and analysis describing compensation practices and procedures, •An opportunity for reduced financial statement disclosure in registration statements and in annual reports on Form 10-K, which only requires two years of audited financial statements rather than the three years of audited financial statements that are required for other public companies, •An opportunity for reduced audit and other compliance expenses as we are not subject to the requirement to obtain an auditor's report on internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002, and •An opportunity to utilize the non-accelerated filer time-line requirements beginning with our annual report for the year endingDecember 31, 2021 and quarterly filings thereafter. For as long as we continue to be a smaller reporting company, we expect that we will take advantage of both the reduced internal control audit requirements and the disclosure obligations available to us as a result of this classification. - 89 -
--------------------------------------------------------------------------------
© Edgar Online, source
