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, 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, 2022 , 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. - 77 - --------------------------------------------------------------------------------
Senior Secured Term Loan Facility
OnMarch 2, 2023 , we and certain of our subsidiaries as guarantors (the "Subsidiary Guarantors," and together with us, the "Obligors"), entered into a credit agreement (the "Credit Agreement") withNant Capital, LLC ("Nant Capital "), an affiliate of Dr.Patrick Soon-Shiong , our CEO, andHighbridge Tactical Credit Master Fund, L.P. andHighbridge Convertible Dislocation Fund, L.P. (collectively, "Highbridge Senior Lenders"), as the lenders,GLAS USA, LLC , as administrative agent, andGLAS Americas, LLC , as collateral agent (collectively, "Agent"). The Credit Agreement provides for a senior secured term loan facility in an aggregate principal amount of$22.5 million that was made in a single drawdown by us at closing (the "Senior Secured Term Loan Facility"). The maturity date of the Senior Secured Term Loan Facility isDecember 15, 2023 (the "Maturity Date") and accrues interest at an annual rate of 13% per annum with a 1% original issue discount. Our obligations under the Credit Agreement are guaranteed by the Subsidiary Guarantors and are secured by a security interest in, and lien on, substantially all property (subject to certain exceptions) of the Obligors (the "Collateral"). We have the right to prepay the Senior Secured Term Loan Facility at any time or from time to time on or after the Existing Convertible Senior Notes Security Date (as defined in the Credit Agreement), subject to a prepayment premium. The Credit Agreement includes conditions precedent, representations and warranties, affirmative and negative covenants and post-closing conditions customary for financings of this type and size, such as, among other things, limitations on indebtedness, a minimum liquidity requirement of cash and cash equivalents of not less than$5 million at any time, liens, fundamental changes, asset sales, investments and other matters customarily restricted in such agreements. The Credit Agreement also contains customary events of default, after which the Senior Secured Term Loan Facility may be due and payable immediately, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, judgments against the Company and its subsidiaries, change in control and lien priority. In addition, the Credit Agreement contains certain post-closing conditions requiring, among other things, that the Company use its commercially reasonable efforts to sell certain businesses of the Company. Concurrently with the execution of, and pursuant to, the Credit Agreement, we also entered into (1) a subordination agreement (the "Subordination Agreement") withNant Capital andAirstrip Technologies, Inc. (collectively, the "Affiliated Lenders"), who are holders of certain affiliated debt of the Company, and (2) a letter agreement (the "Letter Agreement") with certain entities affiliated with theHighbridge Senior Lenders and Nant Capital , who are holders of the 2021 Notes (as defined below) issued pursuant to the Indenture, dated as ofApril 27, 2021 , by and among the Company,NaviNet, Inc. andU.S. Bank Trust Company, National Association (as successor in interest toU.S. Bank National Association ) (the "2021 Indenture"). The Subordination Agreement provides, among other things, that any payment of principal of, premium, if any, or interest on certain subordinated debt held by the Affiliated Lenders shall be subordinated and subject in right of payment to the prior payment of the full Senior Secured Term Loan Facility so long as such Senior Secured Term Loan Facility is outstanding. The Letter Agreement provides that, among other things, (1) the holders of the 2026 Notes shall waive compliance with certain provisions of the 2021 Indenture, including, but not limited to, restrictions on borrowings from an affiliate lender of ours and any current or future Default or Event of Default (as each term is defined in the 2021 Indenture) pursuant to any breach of Section 4.10 of the 2021 Indenture arising from any borrowing made by the affiliated lender to us, each such waiver is solely in connection with the Senior Secured Term Loan Facility, (2) prohibit the holders of the 2026 Notes from exercising any right to require us to repurchase any or all of the 2026 Notes upon the occurrence of a Fundamental Change (as defined in the 2021 Indenture) solely in connection with our common stock being delisted from the Nasdaq Global Select Market or a similar securities exchange for a period beginning on the Closing Date (as defined in the Credit Agreement) and ending on the date that is five (5) months after the Closing Date, and (3) restricting the holders of the 2026 Notes from disposing of or otherwise transferring the 2026 Notes to any person other than an affiliate of such holder, until the approval of the Indenture Consent (as defined in the Letter Agreement).
2022 Nant Capital Promissory Note
OnNovember 21, 2022 , the Company entered into an unsecured subordinated promissory note (the "2022 Nant Capital Note") withNant Capital , wherebyNant Capital loaned$7.0 million to the Company. The 2022 Nant Capital Note contains an interest rate equal to the Term Secured Overnight Financing Rate ("SOFR") plus 8.5% per annum, compounded annually and a maturity date ofOctober 31, 2026 . The Nant Capital Note also contains semiannual interest payments due onApril 15th andOctober 15th of each year. The payment of the 2022Nant Capital Note shall be subordinated and subject in right of payment to the prior payment in full of the 2021 Notes (as defined below). - 78 - --------------------------------------------------------------------------------
Airstrip Promissory Note
OnOctober 3, 2022 , we entered into an unsecured subordinated promissory note (the "Airstrip Note") withAirstrip Technologies, Inc. , aDelaware corporation ("Airstrip"), whereby AirStrip loaned$4.0 million to us. The Airstrip Note contains an 8.5% interest rate compounded annually and a maturity date ofOctober 31, 2026 . The payment of the Airstrip Note shall be subordinated and subject in right of payment to the prior payment in full of the 2021 Notes.
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 withDr. Soon-Shiong , 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. Pursuant to the Credit Agreement, the Company is required within forty-five (45) days after the closing of the Senior Secured Term Loan Facility to guarantee the 2021 Notes by the Company and the Subsidiary Guarantors secured by second priority liens on the Collateral and governed by covenants substantially similar to certain negative and affirmative covenants of the Credit Agreement. 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. Nasdaq Delisting OnOctober 31, 2022 , we received a notice (the "MVPHS Notice") from Nasdaq informing us that we are not in compliance with the minimum$15 million market value of publicly held shares requirement for continued listing on the Nasdaq Global Select Market pursuant to Listing Rule 5450(b)(2)(C) (the "Public Float Requirement"). The MVPHS Notice had no immediate effect on our Nasdaq listing or trading of our common stock. In accordance with Listing Rule 5810(c)(3)(D), we have a period of 180 calendar days, or untilMay 1, 2023 , to regain compliance with the Public Float Requirement. If, at any time beforeMay 1, 2023 , the market value of our Publicly Held shares of common stock closes at$15 million or more for at least 10 consecutive business days, Nasdaq will provide written notification to us that we have regained compliance with the Public Float Requirement. If we do not regain compliance with the Public Float Requirement byMay 1, 2023 , Nasdaq will provide written notification to us that our common stock may be delisted. At that time, we may appeal the delisting determination to aNasdaq Listing Qualifications Panel . We expect that our common stock would remain listed pending the panel's decision. However, there can be - 79 - --------------------------------------------------------------------------------
no assurance that, if we receive a delisting notice and appeal the delisting determination to the panel, such appeal would be successful.
We intend to monitor the market value of our common stock and may, if appropriate, consider available options to regain compliance with the Public Float Requirement.
Reverse Stock Split InAugust 2022 , our Board of Directors approved a reverse stock split of our common stock at a ratio of 1-for-15. OnDecember 15, 2022 , we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-15 reverse stock split of our common stock. As a result of the reverse stock split, every 15 shares of our issued or outstanding pre-reverse split common stock was combined into one share of common stock. No fractional shares were issued upon the reverse stock split. OnDecember 16, 2022 , our common stock began trading on a split-adjusted basis on Nasdaq. In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of$0.0001 . All historical per share data, number of shares outstanding and other common stock equivalents for the periods presented in the accompanying Consolidated Financial Statements and Notes thereto and this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, have been adjusted retroactively, where applicable, to reflect the reverse stock split.
2017 Asset Purchase Agreement with
OnAugust 3, 2017 , we entered into an asset purchase agreement (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. 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 10 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$38.6 million and$35.7 million as ofDecember 31, 2022 and 2021, 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. - 80 - -------------------------------------------------------------------------------- Non-GAAP net loss from continuing operations excludes the effects of •Stock-based compensation expense •Loss on exchange and prepayment of the 2016 Notes •Change in fair value of the derivatives liability •Change in fair value of the Bookings Commitment •Impairment of ROU asset •Noncash interest expense related to the convertible notes •Intangible assets amortization •Cyber incident estimated liability •Impacts of certain income tax benefits and provisions from noncash activity 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, 2022 and 2021: Year Ended (Dollars in thousands, except per share amounts)
2022 2021
Net income (loss) from continuing operations attributable to
$
(67,779)
Stock-based compensation expense from continuing operations 4,665 3,879 Loss on Exchange and Prepayment of 2016 Notes - 742 Change in fair value of derivatives liability - (4) Change in fair value of Bookings Commitment 2,889 2,323 Impairment of ROU asset 208 - Noncash interest expense related to convertible notes 147 622 Intangible amortization from continuing operations 8,930 8,880 Cyber incident estimated liability 220 -
Tax (provision) benefit resulting from certain noncash tax items (588)
(60)
Total adjustments to GAAP net loss from continuing operations
attributable to
16,471 16,382
Net income (loss) from continuing operations attributable to
$
(51,308)
Weighted average basic common shares outstanding (1) 7,702,872 7,609,906
Net income (loss) per common share from continuing operations
attributable to
$
(6.66)
(1) Reflects the 1-for-15 reverse stock split that became effective
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--------------------------------------------------------------------------------
The following table reconciles Net loss per common share from continuing
operations attributable to NantHealth to Net loss per common share from
continuing operations attributable to NantHealth - Non-GAAP for the years ended
December 31, 2022 and 2021:
Year Ended
December 31,
2022 2021
Net income (loss) per common share from continuing operations
attributable to
$
(8.80)
Stock-based compensation expense from continuing operations 0.60 0.51 Loss on Exchange and Prepayment of 2016 Notes - 0.10 Change in fair value of derivatives liability - - Change in fair value of Bookings Commitment 0.38 0.30 Impairment of ROU asset 0.03 - Noncash interest expense related to convertible notes 0.02 0.08 Intangible amortization from continuing operations 1.16 1.17 Cyber incident estimated liability 0.03 -
Tax (provision) benefit resulting from certain noncash tax items (0.08)
(0.01)
Total adjustments to GAAP net income (loss) per common share from
continuing operations attributable to
2.14 2.15
Net income (loss) per common share from continuing operations
attributable to
$
(6.66)
- 82 -
--------------------------------------------------------------------------------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.
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--------------------------------------------------------------------------------Selling, general and administrative
Selling, general and administrative expense consists primarily of personnel-related expenses for our sales and marketing, finance, legal, human resources, and administrative associates, stock-based compensation, advertising and marketing promotions ofNantHealth solutions, and corporate shared services fees fromNantWorks . This includes amortization of deferred commission costs. It also includes trade show and event costs, sponsorship costs, point of purchase display expenses and related amortization as well as legal costs, facility costs, consulting and professional fees, insurance and other corporate and administrative costs. We continue to review our other selling, general and administrative investments and expect to drive cost savings through greater efficiencies and synergies across our company. Additionally, we expect to continue to incur additional costs for legal, accounting, insurance, investor relations and other costs associated with operating as a public company including costs associated with other regulations governing public companies as well as increased costs for directors' and officers' liability insurance and an enhanced investor relations function. However, we expect our selling, general and administrative expense to decrease as a percentage of revenue over the long term as our revenue increases and we realize economies of scale.
Research and development
Research and development expenses consist primarily of personnel-related costs for associates working on development of solutions, including salaries, benefits and stock-based compensation. Also included are non-personnel costs such as consulting and professional fees to third-party development resources.
Substantially all our research and development expenses are related to developing new software solutions and improving our existing software solutions.
We expect our research and development expenses to continue to increase in absolute dollars and as a percentage of revenue as we continue to make investments in developing new solutions and enhancing the functionality of our existing solutions. However, we expect our research and development expenses to decrease as a percentage of revenue over the long term as we realize economies of scale from our developed technology.
Amortization of acquisition-related assets
Amortization of acquisition-related assets consists of noncash amortization expense related to our non-revenue generating technology as well as amortization expense that we recognize on intangible assets that we acquired through our investments.
Interest Expense, Net
Interest expense, net primarily consists of interest expense associated with our outstanding borrowings, including coupon interest expense, amortization of debt discounts and amortization of deferred financing offering cost, offset by interest income earned on our cash and cash equivalents.
Other 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.
(Provision for) Benefit from 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. - 84 - --------------------------------------------------------------------------------
Income from Discontinued Operations, Net of Tax, Attributable to
Income from discontinued operations, net of tax, attributable to
Net Loss Attributable to Non-controlling Interests
Net loss attributable to non-controlling interests consists of earnings or losses related to minority ownership of components of our business.
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--------------------------------------------------------------------------------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,
2022 2021
Revenue
Software-as-a-service related $ 64,826 $ 60,402
Maintenance 1,716 1,717
Professional services 457 507
Total software-related revenue 66,999 62,626
Other 3 23
Total net revenue 67,002 62,649
Cost of Revenue
Software-as-a-service related 21,724 21,503
Maintenance 2,117 1,174
Professional services 9 14
Amortization of developed technologies 4,988 4,988
Total software-related cost of revenue 28,838 27,679
Other 1 128
Total cost of revenue 28,839 27,807
Gross Profit 38,163 34,842
Operating Expenses
Selling, general and administrative 62,501 52,092
Research and development 23,047 19,707
Amortization of acquisition-related assets 3,942 3,942
Total operating expenses 89,490 75,741
Income (loss) from operations (51,327) (40,899)
Interest expense, net (14,119) (14,481)
Other expense, net (2,650) (3,089)
Income (loss) from continuing operations before income taxes (68,096) (58,469)
(Provision for) benefit from income taxes (317) 97
Net income (loss) from continuing operations (67,779) (58,566)
Income (loss) from discontinued operations, net of tax, attributable
to
- 23
Net income (loss) (67,779) (58,543)
Net income (loss) attributable to noncontrolling interests - (284)
Net income (loss) attributable to NantHealth $ (67,779) $ (58,259)
- 86 ---------------------------------------------------------------------------------
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,
2022 2021
Revenue
Software-as-a-service related 96.7 % 96.5 %
Maintenance 2.6 % 2.7 %
Professional services 0.7 % 0.8 %
Total software-related revenue 100.0 % 100.0 %
Other 0.0 % 0.0 %
Total net revenue 100.0 % 100.0 %
Cost of Revenue
Software-as-a-service related 32.4 % 34.3 %
Maintenance 3.2 % 1.9 %
Professional services 0.0 % 0.0 %
Amortization of developed technologies 7.4 % 8.0 %
Total software-related cost of revenue 43.0 % 44.2 %
Other 0.0 % 0.2 %
Total cost of revenue 43.0 % 44.4 %
Gross Profit 57.0 % 55.6 %
Operating Expenses
Selling, general and administrative 93.3 % 83.1 %
Research and development 34.4 % 31.5 %
Amortization of acquisition-related assets 5.9 % 6.3 %
Total operating expenses 133.6 % 120.9 %
Income (loss) from operations (76.6) % (65.3) %
Interest expense, net (21.1) % (23.1) %
Other expense, net (3.9) % (4.9) %
Income (loss) from continuing operations before income taxes (101.6) % (93.3) %
(Provision for) benefit from income taxes (0.4) % 0.2 %
Net income (loss) from continuing operations (101.2) % (93.5) %
Income (loss) from discontinued operations, net of tax, attributable
to
0.0 % 0.0 %
Net income (loss) (101.2) % (93.5) %
Net income (loss) attributable to noncontrolling interests 0.0 % (0.5) %
Net income (loss) attributable to NantHealth (101.2) % (93.0) %
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--------------------------------------------------------------------------------
Comparison of the years ended
Revenue
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Software-as-a-service related $ 64,826 $ 60,402 $ 4,424 7.3 %
Maintenance 1,716 1,717 (1) (0.1) %
Professional services 457 507 (50) (9.9) %
Total software-related revenues 66,999 62,626 4,373 7.0 %
Other 3 23 (20) (87.0) %
Total net revenue $ 67,002 $ 62,649 $ 4,353 6.9 %
Total revenue increased $4.4 million , or 6.9%, from $62.6 million for the year
ended December 31, 2021 to $67.0 million for the year ended December 31, 2022 .
The total increase in revenue was driven primarily by a $5.2 million increase in
our Eviti SaaS revenue, partially offset by a $0.8 million decrease in NaviNet
revenue.
The increase in SaaS revenue was primarily driven by more covered lives with one
of our largest customers which contributed $4.8 million and utilization of our
autoimmune product by another customer, which contributed $0.2 million .
We believe that significant opportunities exist for expanded cross-selling
across our products and across our existing customer base, including Eviti,
Cost of Revenue
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount PercentageSoftware-as-a-service related$ 21,724 $ 21,503 $ 221 1.0 % Maintenance 2,117 1,174 943 80.3 % Professional services 9 14 (5) (35.7) % Amortization of developed technologies 4,988 4,988 - - % Total software-related cost of revenue 28,838 27,679 1,159 4.2 % Other 1 128 (127) (99.2) % Total cost of revenue$ 28,839 $ 27,807 $ 1,032 3.7 % Cost of revenue increased$1.0 million , or 3.7%, from$27.8 million in the year endedDecember 31, 2021 to$28.8 million for the year endedDecember 31, 2022 . The increase in cost of revenue was primarily driven by an increase in maintenance of our SaaS solutions.
Other cost of revenue decreased
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--------------------------------------------------------------------------------Selling, General and Administrative
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Selling, general and administrative $ 62,501 $ 52,092 $ 10,409 20.0 %
Selling, general and administrative expenses increased $10.4 million , or 20.0%,
from $52.1 million for the year ended December 31, 2021 to $62.5 million for the
year ended December 31, 2022 . The increase was primarily attributable to $5.3
million of additional personnel costs attributable to the migration of our
information technology infrastructure to the cloud and our enterprise resource
planning implementation project. Higher legal and consulting costs of $4.6
million also contributed to the overall increase. These overall increases were
partially offset by reductions in marketing and compliance costs.
Research and Development
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Research and development $ 23,047 $ 19,707 $ 3,340 16.9 %
Research and development expenses increased $3.3 million , or 16.9%, from $19.7
million for the year ended December 31, 2021 to $23.0 million for the year ended
December 31, 2022 . The increase was primarily due to higher costs attributable
to cloud migration services and enterprise application services for our
engineering applications.
Amortization of Acquisition-related Assets
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Amortization of acquisition-related assets $ 3,942 $ 3,942 $ - - %
Amortization of acquisition-related assets was flat at
Interest Expense, Net
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Interest expense, net $ 14,119 $ 14,481 $ (362) (2.5) %
Interest expense, net decreased by $0.4 million , from $14.5 million for the year
ended December 31, 2021 to $14.1 million for the year ended December 31, 2022 .
The decrease in interest expense is due to the lower interest on the 2021 Notes
compared to the 2016 Notes that matured at the end of 2021.
Refer to the section entitled "Liquidity and Capital Resources" below and Note 9
and Note 17 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.
- 89 -
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Other Expense, Net
Year Ended
(Dollars in thousands) December 31, Period-To-Period Change
2022 2021 2022 vs. 2021
Amount Amount Amount Percentage
Other expense, net $ 2,650 $ 3,089 $ (439) (14.2) %
Other expense, net decreased by $0.4 million , from $3.1 million for the year
ended December 31, 2021 to $2.7 million for the year ended December 31, 2022 .
The decrease was primarily due to a $0.7 million loss resulting from the
exchange and prepayment of the convertible notes issued in 2016 for the year
ended December 31, 2021 , partially offset by an 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.
- 90 -
--------------------------------------------------------------------------------Liquidity and Capital Resources
Sources of Liquidity
As of
As a result of continuing anticipated operating cash outflows we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or financing.Highbridge and Nant Capital have agreed to consent to amendments to certain of our existing debt agreements in order to enhance our liquidity, and have confirmed their collective intent and ability to make additional loans to us to the extent necessary to support our operations in the manner currently conducted throughMay 17, 2024 . Management believes that this agreement and intent alleviates such substantial doubt.Nant Capital is an affiliate of Dr.Patrick Soon-Shiong , our CEO. 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 delaying our business activities and strategic initiatives, or selling off components of our business. Additionally, we continue to consider all strategic alternatives. We are undertaking a number of actions in order to improve our financial position and stabilize our results of operations including but not limited to, cost cutting, lowering capital expenditures, and implementing hiring freezes.
Related Party Notes
OnOctober 3, 2022 , we entered into an unsecured subordinated promissory note (the "Airstrip Note") withAirstrip Technologies, Inc. , aDelaware corporation ("Airstrip"), whereby AirStrip loaned$4.0 million to us. The Airstrip Note contains an 8.5% interest rate compounded annually and a maturity date ofOctober 31, 2026 . The payment of the Airstrip Note shall be subordinated and subject in right of payment to the prior payment in full of all Senior Debt. OnNovember 21, 2022 , we entered into an unsecured subordinated promissory note (the "2022 Nant Capital Note") withNant Capital , wherebyNant Capital loaned$7.0 million to us. The 2022 Nant Capital Note contains an interest rate equal to the Term Secured Overnight Financing Rate ("SOFR") plus 8.5% per annum, compounded annually and a maturity date ofOctober 31, 2026 .The Nant Capital Note also contains semiannual interest payments due onApril 15th andOctober 15th of each year, which is subordinated and subject in right of payment to the prior payment of the full Senior Secured Term Loan Facility pursuant to the Subordination Agreement. The payment of the 2022 Nant Capital Note shall be subordinated and subject in right of payment to the prior payment in full of the 2021 Notes.
On
Concurrently with the execution of, and pursuant to, the Credit Agreement, we also entered into (1) a subordination agreement (the "Subordination Agreement") withNant Capital and Airstrip (collectively, the "Affiliated Lenders"), who are holders of certain affiliated debt, including the 2022 Nant Capital Note and Airstrip Note, respectively, and (2) a letter agreement (the "Letter Agreement") with certain entities affiliated withHighbridge and Nant Capital , who are holders of the 2021 Notes issued pursuant to the 2021 Indenture. The Subordination Agreement provides, among other things, that any payment of principal of, premium, if any, or interest on certain subordinated debt held by the Affiliated Lenders shall be subordinated and subject in right of payment to the prior payment of the full Senior Secured Term Loan Facility so long as such Senior Secured Term Loan Facility is outstanding. The Letter Agreement provides that, among other things, (1) the holders of the 2021 Notes shall waive compliance with certain provisions of the 2021 Indenture, including, but not limited to, restrictions on borrowings from an affiliate lender of ours and any current or future Default or Event of Default (as each term is defined in the 2021 Indenture) pursuant to any breach of Section 4.10 of the 2021 Indenture arising from any borrowing made by the affiliated lender to the Company, each such waiver is solely in connection with the Senior Secured Term Loan Facility, (2) prohibit the holders of the 2021 Notes from exercising any right to require us to repurchase any or all of the 2021 Notes upon the occurrence of a Fundamental Change (as defined in the 2021 Indenture) solely in connection with our common stock being delisted from the Nasdaq Global Select Market or similar securities exchange for a period beginning on the Closing Date (as defined in the Credit Agreement) and ending on the date that is five (5) months after the Closing Date, and (3) restricting the holders of the 2021 Notes from disposing of or otherwise transferring the 2021 Notes to any person other than an affiliate of such holder, until the approval of the Indenture Consent (as defined in the Letter Agreement). - 91 - --------------------------------------------------------------------------------
As of
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 us granting a security interest in some or all of our assets, 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 consider strategic alternatives or delay the development, commercialization and marketing of our products and scale back our business and operations. 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 we 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 . 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.
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 9, Note 10, Note 11, and Note 17, respectively, to the accompanying Consolidated Financial Statements. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures and ultimately, generate significant revenue growth. Our plans to raise additional capital, including our ability to consummate any transaction as a result of our strategic review, or take other actions to address the doubt regarding our ability to continue as a going concern, may not be successful. There can be no assurance that the Company would be able to obtain additional liquidity when needed or under acceptable terms, if at all. Refer to "Risk Factors - As disclosed in Note 1 of our consolidated audited financial statements, we believe that our current level of cash, cash equivalents and marketable securities, together with committed financing facilities, are not sufficient to fund ongoing operations for at least the twelve-month period after the financial statements were issued without additional funding or financing. The existence of these conditions raises substantial doubt about our ability to continue as a "going concern" for at least the twelve month period following the date the financial statements were issued."
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet arrangements.
- 92 -
--------------------------------------------------------------------------------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,
2022 2021
Cash provided by (used in):
Operating activities $ (32,264) $ (27,689)
Investing activities (6,471) (5,637)
Financing activities 10,801 40,577Effect of exchange rate changes on cash, cash equivalents and restricted cash
91 (11)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(27,843)
Our net cash flows from operating activities decreased$4.6 million from the year endedDecember 31, 2021 toDecember 31, 2022 primarily driven by increased net losses of$9.2 million from the year endedDecember 31, 2021 toDecember 31, 2022 , partially offset by increased working capital from the year endedDecember 31, 2021 toDecember 31, 2022 of$4.7 million . The working capital increase was primarily driven by increases in trade payables and accrued and other current liabilities, partially offset by slower growth in related party payables. Our net cash flows from investing activities decreased$0.8 million primarily driven by additional investment in internally developed software and purchases of property and equipment for the years endedDecember 31, 2022 and 2021.
Our net cash flows from financing activities have decreased
See the accompanying Consolidated Statements of Cash Flows for additional
details around sources and uses of cash for the years ended
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 17 to the accompanying Consolidated Financial Statements for a discussion of related party transactions.
- 93 -
--------------------------------------------------------------------------------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. - 94 -
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