In certain contracts, the Company recognizes its proprietary software, software license, technical support, maintenance, consulting services, sponsored development services, training, 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. 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, and for each promised good or service, the Company evaluates whether it is a principal or an agent. 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. 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 the Company’s 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 the Company's 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 the Company’s 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 the Company's customers. Selling, General and Administrative Expenses Selling, general and administrative expense consists primarily of personnel-related expenses for the Company's sales and marketing, finance, legal, human resources, administrative personnel, stock-based compensation, advertising and marketing promotions of NantHealth solutions, and corporate shared services fees from NantWorks. This includes amortization of deferred commission costs. It also includes trade show and event costs, sponsorship costs, point of purchase display expenses and related amortizationas well as legal costs, facility costs, consulting and professional fees, insurance and other corporate and administrative costs. Research and Development Expenses Research and development (“R&D”) costs incurred to establish the technological feasibility of software to be sold are expensed as incurred. These expenses include the costs of the Company’s proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements. NantHealth, Inc. Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) - 105 -
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