| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies There have been no significant changes to the accounting policies as disclosed in the Company's Annual Report on Form 10-K, apart from the application of ASC 606, described below. The other accounting policies, including the accounting policy for revenue recognition under ASC 605, Revenue Recognition , and ASC 985, Software , applied to periods before January 1, 2018, are described in the Company’s Annual Report on Form 10-K. 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 in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates. Segment Reporting The chief operating decision maker for the Company is its Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a Condensed 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 Condensed Consolidated unit level. Accordingly, management has determined that the Company operates in one reportable segment. Revenue from Contracts with Customers Transition to FASB ASC 606 On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers , using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported in accordance with the Company’s historic accounting under ASC 605, which are included in Note 2, Summary of Significant Accounting Policies, to the Consolidated and Combined Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017. The Company recorded a decrease of $ 1,263 , net of tax, to the opening accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The most significant changes were to begin recognizing revenues from certain software and hardware implementation projects based on an estimate of percentage of completion, rather than at completion of the contract; to recognize estimated revenues from nursing and therapy services as the services are performed, rather than on final determination of contractual billable amounts; and to capitalize commissions as assets for contracts with performance obligations of more than one year. The adoption also led to certain costs, in relation to Software-as-a-Service ("SaaS") contracts, and previously treated as deferred implementation costs in current and long-term assets, being treated as software developed for internal use. This resulted in an increase of $5,827 of software developed for internal use, being recorded at January 1, 2018 with a corresponding decrease in deferred implementation costs. On implementing ASC 606, the Company has concluded that its accounts receivable should be reported separately from deferred revenue, therefore the outstanding and unpaid invoices for undelivered services, are not excluded from accounts receivable at June 30, 2018. This led to an increase of $5,247 in accounts receivable and a corresponding increase in deferred revenue at January 1, 2018. This table summarizes the impact on the Company’s financial statements due to the adoption of ASC 606: As Reported December 31, 2017 Adjustments due to ASC 606 Balance as at January 1, 2018 Balance Sheet Accounts receivable, net $ 11,491 $ 5,247 $ 16,738 Deferred implementation costs, current 1,960 (1,960 ) — Prepaid expenses and other current assets 5,358 1,117 6,475 Property, plant, and equipment, net 18,517 5,827 24,344 Deferred implementation costs, net of current 3,951 (3,949 ) 2 Other assets 2,195 562 2,757 Deferred revenue, current 10,057 3,184 13,241 Deferred revenue, net of current 7,126 2,030 9,156 Deferred income taxes 5,838 367 6,205 The impact of the adoption of ASC 606 as of June 30, 2018 is presented here: As of June 30, 2018 As Reported Adjustments due to ASC 606 Without new Revenue Standard Balance Sheet Accounts receivable, net $ 18,968 $ (4,456 ) $ 14,512 Deferred implementation costs, current 11 2,368 2,379 Prepaid expenses and other current assets 6,225 (1,359 ) 4,866 Property, plant, and equipment, net 24,366 (5,907 ) 18,459 Deferred implementation costs, net of current 4 3,705 3,709 Other assets 1,874 (640 ) 1,234 Deferred revenue, current 15,218 (2,766 ) 12,452 Deferred revenue, net of current 8,108 (456 ) 7,652 Deferred income taxes 4,419 (578 ) 3,841 The impact of the adoption of ASC 606 during the three and six months ended June 30, 2018 is presented here: Three Months Ended June 30, 2018 As Reported Adjustments due to ASC 606 Without new Revenue Standard Statement of Operations Total net revenue $ 22,047 $ (821 ) $ 21,226 Cost of revenue 10,582 (47 ) 10,535 Operating expenses 25,331 11 25,342 (Benefit from) provision for income taxes (601 ) (120 ) (721 ) Six Months Ended June 30, 2018 As Reported Adjustments due to ASC 606 Without new Revenue Standard Statement of Operations Total net revenue $ 44,311 $ (1,357 ) $ 42,954 Cost of revenue 21,651 (82 ) 21,569 Operating expenses 52,270 484 52,754 (Benefit from) provision for income taxes (1,651 ) (239 ) (1,890 ) The Company's accounting policies under the new standard are applied prospectively and are noted below. Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect 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’s revenue is generated from the following sources: • Software-as-a-service (“SaaS”) related - SaaS related revenue is generated from customers’ access to and usage of the Company’s 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 has the right to access and use the software and receive any software upgrades published during the subscription period. SaaS contracts are accounted for as a single performance obligation, as implementation and hosting services are not distinct. As a result, the Company recognizes all fees, including any up front initial system implementation service fees, or other fees, ratably over time from when the system implementation or deployment services are completed, and where necessary accepted by the customer, over the contract term, as stated, or with consideration of termination for convenience clauses as discussed below . • Software and hardware related - Software and hardware related revenue is generated from the license of the Company’s software, on a perpetual basis, the sale of hardware and professional services that are complementary to the software and may or may not be required for the software to function as desired by the customer. The services are generally provided in the form of implementation and training services and do not include maintenance revenue. The software is installed on the customer’s site or the customer’s designated vendor’s site and is not hosted by the Company or by a vendor contracted by the Company. See the section below “ Contracts with Software, Hardware, and Implementation Services” for details of management’s judgments and recognition of revenue relating to this category. • Maintenance - Maintenance revenue includes ongoing post contract client support (“PCS”) or maintenance on software and hardware during the PCS term. Additionally, PCS includes ongoing development of software updates and upgrades provided to the client on a when-and-if-available basis. Revenue is recognized over the maintenance term. • Sequencing and molecular analysis - Sequencing and molecular analysis revenue is generated by providing customers with reports of the results of performing sequencing and analysis of whole genome DNA, RNA, and proteomic testing under the Company's reseller agreement with NantOmics, LLC ("NantOmics"), and from blood samples via our liquid/blood-based tumor profiling platform through the Company’s subsidiary, NantHealth Labs, Inc. ("NantHealth Labs", previously named Liquid Genomics, Inc.) (see Note 18). Revenue is recognized at a point in time, when reports of results are transferred to the ordering physician, or institution, or when cash is received as described below, or ratably over time for the period of stand-ready obligation to provide blood-based tumor profiling services. The Company's sequencing and molecular analysis revenue is primarily generated from payments received from commercial third-party payers, hospitals and other provider networks and patients. The Company reports revenue from arrangements with these customers on a gross basis in accordance with ASC 606. When reports are transferred to the ordering physician, or institution, but the Company cannot conclude whether there is a contract with a customer, based on the assessment of collectibility, revenue recognition is deferred until non-refundable payment is received or payment is considered probable. • Home health care services - Home health care services revenue includes the sale of nursing and therapy services provided to patients in a home care setting. These revenues are recognized at a point in time or over time, as services are provided. Certain of the Company’s customer contracts allow for termination for convenience, with advanced notice, without substantive termination penalty. In these cases, the Company has concluded the contract term is equal to the remaining noncancellable period. Such termination rights do not allow for refunds other than prepaid PCS or other services. These provisions do not affect when the Company commences revenue recognition. The Company has allocated transaction price of $18,461 to unfulfilled performance obligations that are expected to be fulfilled within three years. Excluded from this amount are contracts of less than one year and variable consideration that relates to the value of services provided. Contracts with Multiple Promises for Goods and Services The Company engages in various contracts with promises for multiple goods and services, which may generate revenue across any of the sources noted above. In certain contracts, the Company recognizes its proprietary software, hardware, PCS, results of sequencing and molecular analysis, certain professional services, and other software-related services as distinct performance obligations. Standalone selling prices (“SSP”) are required to be allocated and revenue recognized for each distinct performance obligation within each contract. 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. Contracts with Software, Hardware, and Implementation Services The Company has some contracts where it provides implementation services involving significant integration of its licensed software and hardware, with customer networks that maintain patient electronic health records. These contracts represent a single performance obligation to the customer for a combined output due to the significant service of integrating the hardware, software and professional services. Revenue for the single performance obligation is recognized over time based on actual, or estimated, direct implementation labor hours, as a measure of progress. In certain of those contracts, the Company’s performance also requires significant customization of its licensed software. For such contracts, the Company will also record revenue over time using the percentage of completion method to estimate the satisfaction of its performance obligations. However, where the Company lacks history and experience with certain projects involving the development of software according to customer specified criteria, the Company may be initially unable to reasonably estimate total direct software development labor hours to be expected under the project. As a result, the Company would not be able to reasonably measure its progress toward complete satisfaction of its single performance obligation. As a result, in these contracts, the Company will commence recognizing revenue when it concludes that it can reasonably measure its progress and determine that costs will be recoverable, which is typically at or near the time of the customers' acceptance of the software and the related professional services. At that point, substantially all of the uncertainty related to its ability to reasonably estimate direct labor hours required to satisfy its performance obligations will have been resolved, and the Company will be able to reasonably measure the remaining progress toward complete satisfaction of its remaining professional services obligations. In such cases, the Company will commence recording revenue, at the date of meeting the customer acceptance criteria, with a cumulative catch up for the work performed to date using direct labor hours as a measure of progress consistent with other contracts involving software, hardware and implementation services. Recognition will continue for its performance obligation over the remaining performance period using the same measure of progress. A provision for the entire loss, from such a contract, will be recognized in any period it becomes evident that the contract will not be profitable. Other contracts for perpetual software licenses, hardware, and implementation services do not include a service of software development or significant integration. Therefore, the perpetual software licenses, hardware, and implementation services are considered separate, distinct performance obligations. Software revenue is recognized upon the later of the license term commencement or the date the software is provided to the customer, hardware revenue is recognized upon delivery, and implementation revenue is recognized over time based on actual, or estimated, direct implementation labor hours as a measure of progress. The Company delineates between contracts with, or without, a service of significant integration by considering the complexity of the integration services and whether such services can be performed by the customer or another third party. The Company has both reseller arrangements with gross revenue presentation due to the Company’s control of goods and services before transfer to the customer, and others with net revenue presentation due to the reseller’s control of goods and services before transfer to the customer. The Company assesses control in terms of relevant indicators of performance, inventory, 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. Contract Balances The Company records deferred revenue when cash payments are received, or payment is due, in advance of our fulfillment of performance obligations. There were revenues of $ 3,895 and $ 7,966 recognized during the three and six months ended June 30, 2018 that were included in the deferred revenue balance at the beginning of respective the period. Contract assets are recognized when a contractual performance obligation has been satisfied, but payment is not due until the completion of additional performance obligations, or the right to receive payment becomes unconditional. Contract assets reduced to $ 655 at June 30, 2018 from $ 796 at January 1, 2018, due to payments from customers. Assets Recognized from the Costs to Obtain a Contract with a Customer The Company recognizes an asset for the incremental costs to obtain a contract with a customer, where the stated contract term, with expected renewals, is longer than one year. The Company amortizes these assets over the expected period of benefit. These costs are generally employee sales commissions, with amortization of the balance recorded in selling, general and administrative expenses. The value of these assets was $ 1,343 at June 30, 2018 and $ 866 at January 1, 2018, and amortization during the three and six months ended June 30, 2018 was $ 201 and $240 , respectively. Where management is not able to conclude that the costs of a contract will be recovered, costs to obtain the contract are expensed as incurred. Practical Expedients The Company does not disclose the value of unsatisfied performance obligations for: contracts with an original expected length of one year or less; or where variable consideration, related to the company’s performance, is allocated to goods and services delivered as a series and accounted for as a single performance obligation. 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 client 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 the Company’s revenue sources consists of the following types of costs: • Software-as-a-service related - SaaS cost of revenue includes personnel-related costs, amortization of deferred implementation, and depreciation of internal use software, and other direct costs associated with the delivery and hosting of the Company's subscription services. • Software and Hardware related - Software and hardware related cost of revenue includes third-party software and hardware costs directly associated with solutions, including purchasing and receiving costs and includes direct costs associated with the Company’s software implementation services provided to our customers. Software and hardware related cost of revenue also includes hardware costs directly related to bringing manufactured products to their final selling destination. • Maintenance - Maintenance cost of revenue includes personnel-related costs and other direct costs associated with the ongoing support or maintenance provided to the Company’s customers. • Sequencing and molecular analysis - Sequencing and molecular analysis cost of revenue includes personnel-related costs associated with fulfillment of these services, including those of the Company's subsidiary, NantHealth Labs, and amounts due to NantOmics under the reseller agreement (see Note 18) for the sequencing and analysis of whole genome, DNA, RNA, and proteomic results. It also includes depreciation of internal use software and lab equipment. • Home health care services - Home health care services cost of revenue includes personnel-related, as well as direct expenses relating to the Company’s nursing and therapy services provided to patients in a home care setting. Recent Accounting Pronouncements Effective January 1, 2018, the Company adopted Accounting Standard Update ("ASU") No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , associated with the recognition and measurement of financial assets and liabilities. During the first quarter of 2018, the FASB issued further clarifications with the issuance of ASU No. 2018-03, effective for fiscal years beginning after December 15, 2017 and interim periods beginning after June 15, 2018, and ASU No. 2018-04, effective upon issuance. The Company has early adopted ASU No. 2018-03 and adopted ASU No. 2018-04 effective January 1, 2018 concurrently with ASU No. 2016-01. ASU No. 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU No. 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) are applied prospectively to equity investments that exist as of the date of adoption. Effective January 1, 2018, the Company elected to record its preferred stock equity investment in Innovative Oncology Business Solutions, Inc. (“IOBS”), which does not have a readily determinable fair value using the alternative method. Adoption of the Updates did not have a material effect on the Company’s accounting for equity investments, fair value disclosures and other disclosure requirements. The Company owns non-marketable equity securities that are accounted for as an equity investment at cost minus impairment and plus or minus changes resulting from observable price changes because the preferred stock held by the Company is not considered in-substance common stock and such preferred stock does not have a readily determinable fair value. All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an impairment indicator is present include: the investees’ earning performance, change in the investees’ industry and geographic area in which it operates, offers to purchase or sell the security for a price less than the cost of the investment, issues that raise concerns about the investee's ability to continue as a going concern and any other information that the Company may be aware of related to the investment. Factors considered in determining whether an observable price change has occurred include: the price at which the investee issues equity instruments similar to those of the Company’s investment and the rights and preferences of those equity instruments compared to the Company’s. Effective January 1, 2018, the Company adopted ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments . ASU No. 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. Also, effective January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB’s Emerging Issues Task Force . ASU No. 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. Prior periods were retrospectively adjusted to conform to the current period’s presentation. There was no material impact on the Company’s statement of cash flows on adoption of either update. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting . The amendments in ASU No. 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification unless all of the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award date is modified. ASU No. 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The amendments of this ASU should be applied prospectively to an award modified on or after the adoption date. We adopted the standard beginning in the first quarter of 2018. If we encounter a change to the terms or conditions of any of our share-based payment awards we will evaluate the need to apply modification accounting based on the new guidance. The general treatment for modifications of share-based payment awards is to record the incremental value arising from the change as additional compensation cost. The adoption of this standard did not result in a significant impact to our financial statements during the quarterly reporting period ended March 31, 2018. In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718) : Improvements to Nonemployee Share-Based Payment Accounting, to simplify accounting for nonemployee stock based compensation. Upon adoption of this ASU, in most cases expense recognition for nonemployee stock compensation will be in line with employee stock compensation, using a grant date fair value, without periodic revaluation. This update will become effective for the Company’s annual and interim goodwill impairment tests beginning in the first quarter of 2019, and early adoption is permitted. The Company is still evaluating the impact of this standard update. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This update will become effective for the Company's annual and interim goodwill impairment tests beginning in the first quarter of 2020, and early adoption is permitted. The Company is still evaluating the impact of this standard update. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The update is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance will become effective for interim and annual reporting periods beginning with the year ending December 31, 2019. Early adoption is permitted. The Company expects that this guidance will have a material impact on the Consolidated Balance Sheets when adopted at January 1, 2019. However, it is not expected to have a material impact on the Consolidated Statements of Operations. In July 2018, the FASB issued A SU No. 2018-11, Leases (Topic 842): Targeted Improvements, to provide a new transition method. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. T he Company expects to use this method. The Company continues to assess optional practical expedients available and expects to elect certain of those currently available. From initial evaluation, the Company believes the most significant impacts will relate to operating leases of office space and data centers. The Company is implementing new business processes and controls around the review of lease agreements and expects to have calculated the modified retrospective impact to our Consolidated Financial Statements during fiscal 2018. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission ("SEC") did not have, or are not believed by management to have, a material impact on the Company's present or future Condensed Consolidated Financial Statements. |
