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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020  
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                 to                
Commission file number: 001-37792
NantHealth, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
27-3019889
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9920 Jefferson Blvd.
90232
Culver City,
California
(Zip Code)
(Address of principal executive offices)
(310) 883-1300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per share
NH
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 6, 2020, the registrant had 111,214,133 shares of common stock, par value $0.0001 per share, outstanding.



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

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

We own or have rights to trademarks and service marks that we use in connection with the operation of our business. NantHealth, Inc. and our logo as well as other brands such as GPS Cancer, Omics Core, NaviNet, Eviti, NaviNet Open, Eviti Connect, Eviti | IQ, OpenNMS, and other marks relating to our product lines are used in this Quarterly Report on Form 10-Q. Solely for convenience, the trademarks and service marks referred to in this Quarterly Report on Form 10-Q are listed without the (sm) and (TM) symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. Additionally, we do not intend for our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
- 2 -


SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Quarterly Report, including, without limitation, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors,” contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “project,” “plan,” “outlook,” “target,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
the structural change in the market for healthcare in the United States, including uncertainty in the healthcare regulatory framework and regulatory developments in the United States and foreign countries;
any impact of the COVID-19 pandemic, or responses to the pandemic, on our operations or personnel, or on commercial activity or demand across our and our customers’ businesses;
the evolving treatment paradigm for cancer, including physicians’ use of molecular information and targeted oncology therapeutics and the market size for molecular information products;
physicians’ need for precision medicine products and any perceived advantage of our solutions over those of our competitors, including the ability of our comprehensive platform to help physicians treat their patients’ cancers;
our ability to generate revenue from sales of products enabled by our molecular and biometric information platforms to physicians in clinical settings;
our ability to increase the commercial success and to accelerate commercial growth of our sequencing and molecular analysis solutions and our other products and services;
our plans or ability to obtain reimbursement for our sequencing and molecular analysis solutions, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement from third-party payers, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid;
our ability to effectively manage our growth, including the rate and degree of market acceptance of our solutions;
our ability to offer new and innovative products and services, including new features and functionality for our existing products and services;
our ability to attract new partners and clients;
our ability to estimate the size of our target market;
our ability to maintain and enhance our reputation and brand recognition;
consolidation in the healthcare industry;
competition which could limit our ability to maintain or expand market share within our industry;
restrictions and penalties as a result of privacy and data protection laws;
our use of “open source” software;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;
breaches or failures of our security measures;
our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;
risks related to future acquisition opportunities;
the requirements of being a public company;
our ability to attract and retain key personnel;
our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act, or the JOBS Act;
our ability to obtain and maintain intellectual property protection for our solutions and not infringe upon the intellectual property of others;
our ability to implement our comprehensive restructuring plan that includes a wide range of organizational efficiency initiatives and other cost reduction opportunities;
our financial performance expectations, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability; and
our expectations regarding our ability to comply with Nasdaq continued listing standards.
- 3 -


We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report.
These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These statements are within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Quarterly Report and are statements regarding our intent, belief, or current expectations, primarily based on our current assumptions, expectations and projections about future events and trends that may affect our business, financial conditions, operating results, cash flows or prospects, as well as related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A, “Risk Factors,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report. We undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations, except as required by law.
- 4 -


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
- 5 -

NantHealth, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
September 30,
2020
December 31,
2019
(Unaudited)
Assets
Current assets
Cash and cash equivalents$25,908 $5,243 
Accounts receivable, net4,195 6,179 
Related party receivables, net1,577 823 
Prepaid expenses and other current assets4,460 19,341 
Current assets of discontinued operation 6,327 
Total current assets36,140 37,913 
Property, plant, and equipment, net14,232 14,985 
Goodwill98,333 97,307 
Intangible assets, net50,202 51,848 
Investment in related party 31,702 
Related party receivable, net of current612 1,108 
Operating lease right-of-use assets7,604 8,470 
Other assets1,856 1,818 
Noncurrent assets of discontinued operation 21,336 
Total assets$208,979 $266,487 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$2,151 $3,377 
Accrued and other current liabilities14,833 31,988 
Deferred revenue3,276 7,098 
Related party payables, net4,606 4,120 
Notes payable1,065 238 
Current liabilities of discontinued operation 10,680 
Total current liabilities25,931 57,501 
Deferred revenue, net of current715 1,129 
Related party liabilities29,365 24,227 
Related party promissory note112,666 112,666 
Related party convertible note, net9,268 8,864 
Convertible notes, net89,023 84,648 
Deferred income taxes, net1,697 1,669 
Operating lease liabilities8,508 9,728 
Other liabilities24,135 21,542 
Noncurrent liabilities of discontinued operation 1,649 
Total liabilities301,308 323,623 
Commitments and Contingencies (Note 14)
Stockholders' deficit
Common stock, $0.0001 par value per share, 750,000,000 shares authorized; 111,214,133 and 110,619,678 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively11 11 
Additional paid-in capital890,590 889,955 
Accumulated deficit(983,108)(946,884)
Accumulated other comprehensive loss(283)(218)
Total NantHealth stockholders' deficit(92,790)(57,136)
Noncontrolling interests461  
Total stockholders' deficit(92,329)(57,136)
Total liabilities and stockholders' deficit$208,979 $266,487 

The accompanying notes are an integral part of these Consolidated Financial Statements.
- 6 -


NantHealth, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue
Software-as-a-service related$18,355 $18,328 $53,997 $54,421 
Maintenance299  299  
Professional services62  62  
Total software-related revenue18,716 18,328 54,358 54,421 
Sequencing and molecular analysis49 276 172 1,581 
Home health care services   2,863 
Total net revenue18,765 18,604 54,530 58,865 
Cost of Revenue:
Software-as-a-service related5,935 5,638 17,552 17,004 
Maintenance131 121 131 288 
Professional services15  15  
Amortization of developed technologies1,222 1,143 3,508 3,519 
Total software-related cost of revenue7,303 6,902 21,206 20,811 
Sequencing and molecular analysis216 462 827 4,066 
Home health care services   1,471 
Total cost of revenue7,519 7,364 22,033 26,348 
Gross Profit11,246 11,240 32,497 32,517 
Operating Expenses
Selling, general and administrative12,442 13,708 36,864 42,843 
Research and development4,681 3,262 12,446 10,503 
Amortization of acquisition-related assets
958 1,054 2,691 3,162 
Impairment of intangible asset   3,977 
Total operating expenses18,081 18,024 52,001 60,485 
Loss from operations(6,835)(6,784)(19,504)(27,968)
Interest expense, net(4,861)(4,556)(14,291)(13,443)
Other income (expense), net747 (3,586)(2,550)(5,022)
Loss from related party equity method investment
 (1,983)(31,702)(6,401)
Loss from continuing operations before income taxes(10,949)(16,909)(68,047)(52,834)
Provision for (benefit from) income taxes77 (529)174 (659)
Net loss from continuing operations(11,026)(16,380)(68,221)(52,175)
(Loss) income from discontinued operations, net of tax attributable to NantHealth(16)3 31,955 1,162 
Net loss(11,042)(16,377)(36,266)(51,013)
Net loss attributable to noncontrolling interests(42) (42) 
Net loss attributable to NantHealth$(11,000)$(16,377)$(36,224)$(51,013)
Basic and diluted net income (loss) per share attributable to NantHealth:
Continuing operations - common stock$(0.10)$(0.15)$(0.62)$(0.47)
Discontinued operations - common stock$ $ $0.29 $0.01 
Total net loss per share - common stock$(0.10)$(0.15)$(0.33)$(0.46)
Weighted average shares outstanding
Basic and diluted - common stock110,929,357 110,619,905 110,859,611 110,261,279 

The accompanying notes are an integral part of these Consolidated Financial Statements.
- 7 -

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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss$(11,042)$(16,377)$(36,266)$(51,013)
Share in related party equity investment - other comprehensive loss (155) (7)
Other comprehensive income (loss) from foreign currency translation133 (82)(65)(93)
Total other comprehensive income (loss)133 (237)(65)(100)
Comprehensive loss(10,909)(16,614)(36,331)(51,113)
Comprehensive loss attributable to NantHealth$(10,909)$(16,614)$(36,331)$(51,113)

The accompanying notes are an integral part of these Consolidated Financial Statements.
- 8 -

NantHealth, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands)
(Unaudited)
Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Loss
Total NantHealth Stockholders' DeficitNoncontrolling InterestsTotal Stockholders' Deficit
SharesAmount
Balance at December 31, 2019110,619,678 $11 $889,955 $(946,884)$(218)$(57,136)$ $(57,136)
Stock-based compensation expense
— — 668 — — 668 — 668 
Other comprehensive loss
— — — — (188)(188)— (188)
Net income
— — — 23,065 — 23,065 — 23,065 
Balance at Balance at March 31, 2020110,619,678 11 890,623 (923,819)(406)(33,591) (33,591)
Stock-based compensation expense
— — 408 — — 408 — 408 
Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
309,679 — (739)— — (739)— (739)
Other comprehensive loss
— — — — (10)(10)— (10)
Net loss
— — — (48,289)— (48,289)— (48,289)
Balance at June 30, 2020110,929,357 11 890,292 (972,108)(416)(82,221) (82,221)
Stock-based compensation expense
— — 656 — — 656 — 656 
Shares issued in connection with employee stock plans, net of shares withheld for employee taxes and stock options exercised284,776 — 171 — — 171 — 171 
Assignment of OpenNMS (see Note 19)— — (529)— — (529)503 (26)
Other comprehensive income
— — — — 133 133 — 133 
Net loss
— — — (11,000)— (11,000)(42)(11,042)
Balance at September 30, 2020111,214,133 $11 $890,590 $(983,108)$(283)$(92,790)$461 $(92,329)
- 9 -

NantHealth, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(Dollars in thousands)
(Unaudited)
Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Accumulated Other
Comprehensive Loss
Total Stockholders' Equity (Deficit)
SharesAmount
Balance at December 31, 2018109,491,277 $11 $887,289 $(884,122)$(347)$2,831 
Stock-based compensation expense
— — 707 — — 707 
Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
430,370 — (53)— — (53)
Assignment of NantHealth Labs (see Note 19)
— — 20 — — 20 
Other comprehensive income
— — — — 55 55 
Net loss
— — — (19,923)— (19,923)
Balance at March 31, 2019109,921,647 11 887,963 (904,045)(292)(16,363)
Stock-based compensation expense
— — 707 — — 707 
Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
532,860 — (209)— — (209)
Other comprehensive income
— — — — 82 82 
Net loss
— — — (14,713)— (14,713)
Balance at June 30, 2019110,454,507 11 888,461 (918,758)(210)(30,496)
Stock-based compensation expense
— — 535 — — 535 
Shares issued in connection with employee stock plans, net of shares withheld for employee taxes165,399 — (2)— — (2)
Other comprehensive loss
— — — — (237)(237)
Net loss
— — — (16,377)— (16,377)
Balance at September 30, 2019110,619,906 $11 $888,994 $(935,135)$(447)$(46,577)
    
The accompanying notes are an integral part of these Consolidated Financial Statements.

- 10 -

 NantHealth, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2020 (2)
2019 (2)
Cash flows from operating activities:
Net loss$(36,266)$(51,013)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) loss on sale of businesses(32,211)582 
Depreciation and amortization
12,602 17,543 
Amortization of debt discounts and deferred financing offering cost
4,779 4,207 
Impairment of goodwill and other intangible assets
 3,977 
Change in fair value of derivatives liability
7  
Change in fair value of Bookings Commitment
3,070 4,664 
Stock-based compensation
1,684 1,849 
Deferred income taxes, net
(181)(549)
Provision for bad debt expense
118 17 
Loss from related party equity method investment31,702 6,401 
Changes in operating assets and liabilities:
Accounts receivable, net3,879 3,202 
Inventories(18)294 
Related party receivables, net(258)542 
Prepaid expenses and other current assets14,493 (19,986)
Deferred implementation costs 14 
Accounts payable(1,671)1,259 
Accrued and other current liabilities(17,881)20,096 
Deferred revenue(4,944)(2,411)
Related party payables, net5,416 3,766 
Change in operating lease right-of-use assets and liabilities(228)(297)
Other assets and liabilities(77)(605)
Net cash used in operating activities(15,985)(6,448)
Cash flows from investing activities:
Net proceeds from sale of businesses46,401 300 
Assignment of OpenNMS, net of cash acquired (see Note 19)(5,475) 
Purchases of property and equipment, including internal-use software(4,281)(3,495)
Net cash provided by (used in) investing activities36,645 (3,195)
Cash flows from financing activities:
Proceeds from insurance promissory note1,855 1,647 
Repayments of insurance promissory note and notes payable(1,045)(701)
Proceeds from exercises of stock options171  
Tax payments related to stock issued, net of stock withheld, for vested equity awards(739)(270)
Net cash provided by financing activities242 676 
Effect of exchange rate changes on cash, cash equivalents and restricted cash2 (12)
Net increase (decrease) in cash, cash equivalents and restricted cash20,904 (8,979)
Cash, cash equivalents and restricted cash, beginning of period (1)
6,379 19,441 
Cash, cash equivalents and restricted cash, end of period (1)
$27,283 $10,462 
- 11 -

NantHealth, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
20202019
Supplemental disclosure of cash flow information:
Income taxes paid
$151 $3 
Interest paid
2,961 2,958 
Noncash investing and financing activities:
Purchases of property and equipment including internal use software
$297 $105 
(1) Cash and cash equivalents included restricted cash of $1,136 and $1,375 at December 31, 2019 and September 30, 2020, respectively, and $1,136 and $1,136 at December 31, 2018 and September 30, 2019, respectively. Restricted cash is included in other assets and consists of funds that are contractually restricted as to usage or withdrawal related to the Company's security deposits in the form of standby letters of credit for leased facilities and funds held in an escrow account related to the sale of the Connected Care Business (see Note 4). No amounts have been drawn upon the letters of credit as of September 30, 2020.
(2) The statements for the nine months ended September 30, 2020 and 2019 include the Connected Care Business (see Note 4).
The accompanying notes are an integral part of these Consolidated Financial Statements.
- 12 -

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

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

On June 7, 2019, the Company sold its home health care services business (see Note 4).

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

These divestitures will enable the Company to focus on its core competencies of genomic sequencing, clinical decision support, payer engagement, and data analytics.

On July 22, 2020, the Company acquired The OpenNMS Group, Inc. ("OpenNMS") pursuant to an assignment agreement with Cambridge Equities, L.P. ("Cambridge"), a related party (see Note 19).

The Company intends to integrate OpenNMS with NantHealth’s software portfolio and service offerings, as well as expand the Company’s capabilities in cloud, SaaS, and AI technologies, providing customers with services to maintain reliable network connections for critical data flows that enable patient data collaboration and decision making at the point of care. At the same time, this transaction will allow the Company to expand penetration of OpenNMS services in the healthcare industry.

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

However, in light of the uncertainties regarding economic, business, social, health and geopolitical conditions, the Company’s revenues, earnings, liquidity, and cash flows could be adversely affected, whether on an annual or quarterly basis. Continued impacts of the COVID-19 pandemic could materially adversely affect the Company’s current and long-term accounts receivable collectibility, as its negatively impacted customers from the pandemic may request temporary relief, delay, or not make scheduled payments. In addition, the deployment of the Company’s solutions may represent a large portion of its customers' investments in software technology. Decisions to make such an investment are impacted by the economic environment in which the customers operate. Uncertain global geopolitical, economic and health conditions and the lack of visibility or the lack of financial resources may cause some customers to reduce, postpone or terminate their investments, or to reduce or not renew ongoing paid services, adversely impacting the Company’s revenues or timing of revenue. Health conditions in some geographic areas where the Company’s customers operate could impact the economic situation of those areas. These conditions, including the COVID-19 pandemic, may present risks for health and limit the ability to travel for Company employees, which could further lengthen the Company’s sales cycle and delay revenue and cash flows in the near-term.
For information on the CARES Act, refer to Note 15.
- 13 -

NantHealth, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Basis of Presentation and Principles of Consolidation
The accompanying unaudited Consolidated Financial Statements include the accounts of NantHealth and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company's financial position and results of operations. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission ("SEC"), these Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2019. The results of operations of the entities disposed of are included in the unaudited Consolidated Financial Statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. The accompanying Consolidated Balance Sheet as of December 31, 2019 has been derived from the audited Consolidated Financial Statements at that date. Assets and liabilities of the discontinued operations are presented separately in the asset and liability sections of the prior period balance sheet. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The Company believes its existing cash, cash equivalents, and its ability to borrow from affiliated entities will be sufficient to fund operations through at least 12 months following the issuance date of the financial statements. The Company continues to have its Chairman and CEO’s intent and ability to support the Company’s operations with additional funds as required. The Company may also seek to sell additional equity, through one or more follow-on public offerings or in separate financings, or sell additional debt securities, or obtain a credit facility. However, the Company may not be able to secure such financing in a timely manner or on favorable terms. The Company may also consider selling off components of its business. Without additional funds, the Company may choose to delay or reduce its operating or investment expenditures. Further, because of the risk and uncertainties associated with the commercialization of the Company's existing products as well as products in development, the Company may need additional funds to meet its needs sooner than planned. To date, the Company's primary sources of capital have been the private placement of membership interests prior to its IPO, debt financing agreements, including the promissory note with Nant Capital, LLC (“NantCapital”) and its convertible notes, its IPO, and proceeds from the sale of components of its business.

Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Revenue from Contracts with Customers

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized net of sales taxes collected from customers, which are subsequently remitted to governmental authorities.

The Company acquired OpenNMS on July 22, 2020 (see Note 19). OpenNMS sells products and services directly to end-users and through resellers and generates revenue from the following sources:

Maintenance - Maintenance revenue includes technical support and maintenance on OpenNMS software during the contract term. Revenue is recognized over the maintenance or support term.

The Company’s 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. The Company has determined that its promises to transfer the software license and the related maintenance are not separately identifiable because the licensed software and the software updates and upgrades are highly interdependent and highly interrelated, working together to deliver a continuously updated networking monitoring solution. The Company therefore considers the software license and related maintenance obligations to represent a single, combined performance obligation with revenue recognized over the subscription period.

- 14 -

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

Revenue is recognized for most of our contracts over time as performance obligations are satisfied, as the Company is continuously transferring control to the customer. Typically, revenue is recognized over time using direct labor hours as a measure of progress. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled.

Customers are generally billed as the Company satisfies its performance obligations. Billings under certain fixed-price contracts may be based upon the achievement of specified milestones.

Management assesses whether contracts entered into at, or near, the same time, should be combined, based on evaluation of the commercial objectives of the contracts.

Contracts with Multiple Promises for Goods and Services

The Company engages in various contracts with promises for multiple goods and services.

In certain contracts, the Company recognizes software license, technical support, maintenance, consulting services, sponsored development services, and training as distinct performance obligations.

Standalone selling prices (“SSP”) are required to be allocated and revenue recognized for each distinct performance obligation within each contract. Judgment is required to determine the SSP for each distinct performance obligation. The SSP for each performance obligation is determined by considering contracts in which the good or service is sold separately and other factors, including market conditions and the Company’s experience selling similar goods and services, as well as costs and margins achieved. In some cases, to estimate the SSP, the Company first estimates the selling price of each performance obligation for which an SSP is observable and then estimates the SSP of the remaining performance obligation as the residual contractual amount.

Generally, consulting and sponsored development professional services do not involve significant integration or customization of the OpenNMS software. As such, consulting and sponsored development are considered distinct performance obligations.

The Company has reseller arrangements with gross revenue presentation due to the Company’s control of goods and services before transfer to the customer. The Company assesses control in terms of relevant indicators of performance and pricing risk, such as which party negotiates pricing with the end customer and which party is ultimately responsible for fulfilling services, transferring goods and services, and ensuring support.
Segment Reporting
The chief operating decision maker for the Company is its Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results, or plans for levels or components below the consolidated unit level. Accordingly, management has determined that the Company operates in one reportable segment.
Recently Adopted Accounting Pronouncements

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

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

- 15 -

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

In August 2020, the FASB issued 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). This update simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models which require separate accounting for embedded conversion features. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. ASU No. 2020-06 is effective for fiscal periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the effects of this ASU.

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

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

Note 3. Revenue Recognition
Contract Balances
The Company records deferred revenue when cash payments are received, or payment is due, in advance of its fulfillment of performance obligations. During the three months ended September 30, 2020 and 2019, there were revenues of $2,089 and $1,760 recognized, respectively, that were included in the deferred revenue balance at the beginning of the period. During the nine months ended September 30, 2020 and 2019, there were revenues of $5,633 and $5,905 recognized, respectively.
Assets Recognized from the Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs to obtain a contract with a customer, where the stated contract term, with expected renewals, is longer than one year. The Company amortizes these assets over the expected period of benefit. These costs are generally employee sales commissions, with amortization of the balance recorded in selling, general and administrative expenses. The value of these assets was $858 at September 30, 2020 and $1,455 at December 31, 2019. During the three months ended September 30, 2020 and 2019, the Company recorded amortization of $233 and $190, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded amortization of $701 and $558, respectively.
Performance Obligations
As of September 30, 2020, the Company has allocated a total transaction price of $4,769 to unfulfilled performance obligations that are expected to be fulfilled within nine years. Excluded from this amount are contracts of less than one year and variable consideration that relates to the value of services provided.

- 16 -

NantHealth, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 4. Discontinued Operations and Divestitures
Discontinued Operations
Sale of Connected Care Business

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

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

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

The total gain on sale of the Connected Care Business consisted of the following:
Cash received as consideration$47,250 
Less: Carrying value of net assets sold(14,190)
Less: Costs to sell(849)
Gain on sale of the Connected Care Business$32,211 

The carrying amounts of the major classes of assets and liabilities of the Company's discontinued operation as of December 31, 2019 were as follows:
December 31,
2019
Accounts receivable, net$4,739 
Inventories798 
Prepaid expenses and other current assets790 
Current assets of discontinued operation6,327 
Property, plant, and equipment, net1,110 
Goodwill18,623 
Operating lease right-of-use assets1,603 
Total assets of discontinued operation$27,663 
Accounts payable$574 
Accrued and other current liabilities456 
Deferred revenue9,650 
Current liabilities of discontinued operation10,680 
Deferred revenue, net of current157 
Deferred income taxes, net210 
Operating lease liabilities$1,282 
Total liabilities of discontinued operation$12,329 

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NantHealth, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
The operating results of the Company's discontinued operation are as follows:
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
Major classes of line items constituting pretax income (loss) of discontinued operations
Net revenue$ $3,752 $1,165 $12,906 
Cost of revenue (1,008)(467)(3,130)
Selling, general and administrative1 (1,428)(525)(4,259)
Research and development(18)(1,306)(601)(3,729)
Other expense, net (2)(5)(17)
Pretax income (loss) from discontinued operations related to major classes of pretax income (loss)(17)8 (433)1,771 
Pretax gain on sale of the Connected Care Business  32,211  
Total pretax income (loss) from discontinued operations(17)8 31,778 1,771 
Provision for (benefit from) income taxes(1)2 (217)491 
Total income (loss) from discontinued operations, net of tax$(16)$6 $31,995 $1,280 

The significant operating and investing cash and noncash items of the discontinued operation included on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 were as follows:
Nine Months Ended
September 30,
20202019
Cash flows from operating activities:
Depreciation and amortization$10 $352 
Gain on sale of the Connected Care Business32,211  
Cash flows from investing activities:
Net proceeds from sale of the Connected Care Business$46,401 $ 
Purchases of property and equipment, including internal-use software76 152 
Divestitures
Sale of Home Health Care Services Business

On June 7, 2019, the Company completed the divestiture of its home health care services business in exchange for cash proceeds of $300, which resulted in a loss on sale of business of $582. The home health care services business does not qualify as a discontinued operation as its divestiture does not represent a strategic shift that has had a major impact on the Company's operations or financial results.
Note 5. Accounts Receivable, net
Accounts receivable are included on the Consolidated Balance Sheets, net of the allowance for doubtful accounts. The allowance for doubtful accounts at September 30, 2020 and December 31, 2019 was $113 and $95, respectively.

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NantHealth, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 6. Prepaid Expenses and Other Current Assets and Accrued and Other Current Liabilities
Prepaid expenses and other current assets as of September 30, 2020 and December 31, 2019 consisted of the following:
September 30,
2020
December 31,
2019
Prepaid expenses$3,624 $1,794 
Securities litigation insurance receivable242 16,627 
Other current assets594 920 
Prepaid expenses and other current assets$