UpHealth, Inc. - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-38924

UpHealth, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		83-3838045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
14000 S. Military Trail,	Suite 203	33484
Delray Beach,	Florida
(Address of principal executive offices)		(Zip Code)

(312) 618-1322

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

UPH.BC

New York Stock Exchange

Redeemable Warrants, exercisable for one share of Common Stock at an exercise price of $11.50 per share

UPH.WS.BC

New York Stock Exchange

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, 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 filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller 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 August 14, 2022, the registrant had 147,215,675 shares of common stock, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS


			Page

Part I - Financial Information			3
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Statements of Comprehensive Loss			6
Condensed Consolidated Statements of Stockholders’ Equity			7
Condensed Consolidated Statements of Cash Flows			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44

Part II - Other Information			46
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults Upon Senior Securities			50
Item 4. Mine Safety Disclosures			50
Item 5. Other Information			50
Item 6. Exhibits			51
Signatures			52

Part 1 - Financial Information

Item 1. Financial Statements

UPHEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)


	June 30, 2022		December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	40,629	$	58,192
Restricted cash	508		18,609
Accounts receivable, net	28,658		22,761
Inventories	2,966		2,928
Due from related parties	31		40
Prepaid expenses and other current assets	3,785		4,217
Total current assets	76,577		106,747
Property and equipment, net	46,126		56,072
Intangible assets, net	110,563		115,313
Goodwill	284,177		284,268
Other assets	2,768		6,907
Total assets	$	520,211	$	569,307
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	18,160	$	13,604
Accrued expenses	40,065		36,084
Deferred revenue	6,452		2,649
Due to related party	458		47
Income taxes payable	2,731		739
Related-party long-term debt, current	466		657
Long-term debt, current	18,827		22,093
Forward share purchase liability	—		18,051
Other current liabilities	3,069		2,780
Total current liabilities	90,228		96,704
Related-party long-term debt, noncurrent	336		331
Long-term debt, noncurrent	105,243		98,417
Deferred tax liabilities	19,181		28,281
Warrant liabilities, noncurrent	61		252
Derivative liability, noncurrent	1,307		7,977
Other long-term liabilities	2,971		3,502
Total liabilities	219,327		235,464
Commitments and Contingencies (Note 11)
Stockholders’ Equity:
Common stock	15		14
Additional paid-in capital	683,697		665,461
Treasury stock, at cost	(17,000)		—
Accumulated deficit	(373,092)		(343,209)
Accumulated other comprehensive loss	(7,659)		(3,802)
Total UpHealth, Inc., stockholders’ equity	285,961		318,464
Noncontrolling interests	14,923		15,379
Total stockholders’ equity	300,884		333,843
Total liabilities and stockholders’ equity	$	520,211	$	569,307

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue:
Services	$	28,096	$	15,448	$	53,782	$	23,586
Licenses and subscriptions	6,812		9,145		8,593		12,803
Products	8,760		7,289		17,265		8,309
Total revenue	43,668		31,882		79,640		44,698
Cost of goods and services:
Services	14,762		9,590		29,207		14,063
License and subscriptions	217		6,173		450		6,670
Products	6,296		4,727		12,286		5,643
Total cost of goods and services	21,275		20,490		41,943		26,376
Gross margin	22,393		11,392		37,697		18,322
Operating expenses:
Sales and marketing	3,486		1,695		6,212		2,580
Research and development	1,782		2,273		3,369		3,843
General and administrative	14,632		7,306		28,291		11,029
Depreciation and amortization	4,700		2,966		9,936		3,870
Stock-based compensation	1,088		—		2,462		—
Lease abandonment expenses	—		—		75		—
Goodwill and intangible asset impairment	—		—		6,174		—
Acquisition, integration, and transformation costs	6,749		32,653		9,133		35,339
Total operating expenses	32,437		46,893		65,652		56,661
Loss from operations	(10,044)		(35,501)		(27,955)		(38,339)
Other income (expense):
Interest expense	(6,603)		(4,904)		(13,598)		(5,615)
Gain on consolidation of equity method investment	—		—		—		640
Gain on fair value of derivative liability	1,841		—		6,670		—
Gain on fair value of warrant liabilities	95		1,075		190		1,075
Gain on extinguishment of debt	—		151		—		151
Other income (expense), net, including interest income	14		(256)		(2)		(219)
Total other expense	(4,653)		(3,934)		(6,740)		(3,968)
Loss before income tax benefit	(14,697)		(39,435)		(34,695)		(42,307)
Income tax benefit	2,232		6,646		4,525		7,052
Net loss before loss from equity method investment	(12,465)		(32,789)		(30,170)		(35,255)
Loss from equity method investment	—		—		—		(561)
Net loss	(12,465)		(32,789)		(30,170)		(35,816)
Less: net loss attributable to noncontrolling interests	(27)		(6)		(287)		(84)
Net loss attributable to UpHealth, Inc.	$	(12,438)	$	(32,783)	$	(29,883)	$	(35,732)
Net loss per share attributable to UpHealth, Inc.:
Basic	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)
Diluted	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)
Weighted average shares outstanding:
Basic	144,624		94,170		144,581		83,585
Diluted	144,624		94,170		144,581		83,585

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net loss	$	(12,465)	$	(32,789)	$	(30,170)	$	(35,816)
Foreign currency translation adjustments, net of tax	(2,480)		(2,319)		(3,857)		(3,478)
Comprehensive loss	(14,945)		(35,108)		(34,027)		(39,294)
Less: comprehensive loss attributable to noncontrolling interests	(27)		(6)		(287)		(84)
Comprehensive loss attributable to UpHealth, Inc.	$	(14,918)	$	(35,102)	$	(33,740)	$	(39,210)

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, unaudited)


	Common Stock					Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Shares	Amount		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total UpHealth, Inc. Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
Balance at December 31, 2021	144,279	$	14	$	665,461	—	$	—	$	(343,209)	$	(3,802)	$	318,464	$	15,379	$	333,843
Equity award activity, net of shares withheld for taxes	372	—		(67)		—	—		—		—		(67)		—		(67)
Stock-based compensation	—	—		1,374		—	—		—		—		1,374		—		1,374
Net loss	—	—		—		—	—		(17,445)		—		(17,445)		(260)		(17,705)
Foreign currency translation adjustments	—	—		—		—	—		—		(1,377)		(1,377)				(1,377)
Balance at March 31, 2022	144,651	$	14	$	666,768	—	$	—	$	(360,654)	$	(5,179)	$	300,949	$	15,119	$	316,068
Equity award activity, net of shares withheld for taxes	3,901	1		(1,159)		—	—		—		—		(1,158)		—		(1,158)
Stock-based compensation	—	—		1,088		—	—		—		—		1,088		—		1,088
Common stock repurchased in connection with forward share purchase agreement	(1,700)	—		17,000		1,700	(17,000)		—		—		—		—		—
Distribution to noncontrolling interests	—	—		—		—	—		—		—		—		(139)		(139)
Purchase of noncontrolling interest	—	—		—		—	—		—		—		—		(30)		(30)
Net loss	—	—		—		—	—		(12,438)		—		(12,438)		(27)		(12,465)
Foreign currency translation adjustments	—	—		—		—	—		—		(2,480)		(2,480)		—		(2,480)
Balance at Balance at June 30, 2022	146,852	$	15	$	683,697	1,700	$	(17,000)	$	(373,092)	$	(7,659)	$	285,961	$	14,923	$	300,884

	Common Stock					Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Shares	Amount		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total UpHealth, Inc. Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
Balance at December 31, 2020(1)	70,021	$	7	$	222,900	—	$	—	$	(2,186)	$	—	$	220,721	$	—	$	220,721
Issuance of common stock to consummate business combinations(1)	8,749	1		87,408		—	—		—		—		87,409		17,389		104,798
Net loss	—	—		—		—	—		(2,949)		—		(2,949)		(78)		(3,027)
Foreign currency translation adjustments	—	—		—		—	—		—		(1,159)		(1,159)		—		(1,159)
Balance at March 31, 2021(1)	78,771	$	8	$	310,308	—	$	—	$	(5,135)	$	(1,159)	$	304,022	$	17,311	$	321,333
Issuance of common stock to consummate business combinations	26,162	3		243,584		—	—		—		—		243,587		(2,239)		241,348
Merger recapitalization	9,471	1		54,604		—	—		—		—		54,605		—		54,605
PIPE common stock issuance	3,000	—		27,079		—	—		—		—		27,079		—		27,079
Forward share repurchase agreement	—	—		(17,000)		—	—		—		—		(17,000)		—		(17,000)
Issuance of common stock for debt conversion	200	—		1,879		—	—		—		—		1,879		—		1,879
Net loss	—	—		—		—	—		(32,783)		—		(32,783)		(6)		(32,789)
Foreign currency translation adjustments	—	—		—		—	—		—		(2,319)		(2,319)		—		(2,319)
Balance at June 30, 2021(1)	117,605	$	12	$	620,455	—	$	—	$	(37,918)	$	(3,478)	$	579,071	$	15,066	$	594,137

(1)Amounts as of March 31, 2021 and before that date differ from those published in prior consolidated financial statements as they were retrospectively adjusted as a result of the accounting for the Business Combinations (as defined below in Note 1, Organization and Business). Specifically, the number of common shares outstanding during periods before the Business Combinations are computed on the basis of the number of common shares of UpHealth Holdings (accounting acquiror) during those periods multiplied by the exchange ratio established in the stock purchase agreement (1.00 UpHealth Holdings shares converted to 10.28 GigCapital2 shares). Common stock and additional paid-in capital were adjusted accordingly.

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)


	Six Months Ended June 30,
	2022		2021
Operating activities:
Net loss	$	(30,170)	$	(35,816)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,725		4,353
Amortization of debt issuance costs and discount on convertible debt	6,969		1,913
Stock-based compensation	2,462		—
Provision for bad debt expense	(37)		—
Impairment of property, plant and equipment, intangible assets and goodwill	5,459		—
Gain on extinguishment of debt	—		(151)
Loss from equity method investment	—		561
Gain on consolidation of equity method investment	—		(640)
Gain on fair value of warrant liabilities	(190)		(1,075)
Gain on fair value of derivative liability	(6,670)		—
Loss on disposal of property and equipment	—		78
Deferred income taxes	(4,596)		(7,262)
Other	—		(271)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(6,151)		(21,000)
Inventories	(55)		(80)
Prepaid expenses and other current assets	540		5
Accounts payable and accrued expenses	7,913		15,573
Income taxes payable	264		200
Deferred revenue	3,838		5,877
Proceeds from Provider Relief Funds	—		506
Due to related parties	170		28
Other current liabilities	(312)		(27)
Net cash used in operating activities	(7,841)		(37,228)
Investing activities:
Purchases of property and equipment	(3,783)		(669)
Due to related parties	—		265
Net cash acquired in acquisition of businesses	—		4,263
Net cash (used in) provided by investing activities	(3,783)		3,859
Financing activities:
Proceeds from merger and recapitalization transaction	—		83,435
Proceeds from convertible debt	—		164,500
Repayments of debt	(3,234)		(17,333)
Payments of debt issuance costs	—		(8,100)
Repayment of forward share purchase	(18,521)		—
Repayments of seller notes	—		(88,056)
Payments of capital lease obligations	(1,619)		(275)
Payments for taxes related to net settlement of equity awards	(67)		—
Distribution to noncontrolling interest	(139)		(100)
Payments of amount due to member	—		(4,270)
Net cash (used in) provided by financing activities	(23,580)		129,801
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(460)		(99)
Net (decrease) increase in cash, cash equivalents, and restricted cash	(35,664)		96,333
Cash, cash equivalents, and restricted cash, beginning of period	76,801		2,369
Cash, cash equivalents, and restricted cash, end of period	$	41,137	$	98,702
Supplemental cash flow information:
Cash paid for interest	$	5,269	$	233
Cash paid for income taxes	$	521	$	—
Non-cash investing and financing activity:
Property, plant and equipment reclassed from other assets	$	3,751	$	—
Property and equipment acquired through capital lease and vendor financing arrangements	$	1,628	$	—
FIN 48 liability reclassed from deferred tax liabilities	$	1,750	$	—
Unremitted taxes related to net settlement of equity awards	$	1,158
Issuance of common stock for debt conversion	$	—	$	1,879
Issuance of common stock and promissory note to consummate TTC business combination	$	—	$	43,306
Issuance of common stock and promissory note to consummate Glocal business combination	$	—	$	110,421
Issuance of common stock and promissory note to consummate Innovations Group business combination	$	—	$	160,378
Issuance of common stock and promissory note to consummate Cloudbreak business combination	$	—	$	106,284
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	40,629	$	98,116
Restricted cash	508		586
Total cash, cash equivalents, and restricted cash	$	41,137	$	98,702

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in dollars, unaudited)

1.Organization and Business

UpHealth, Inc. (“UpHealth,” “we,” “us,” “our,” “UpHealth,” or the “Company”) is the parent company of both UpHealth Holdings, Inc. (“UpHealth Holdings”) and Cloudbreak Health, LLC (“Cloudbreak”).

GigCapital2, Inc. (“GigCapital2”), the Company’s predecessor, was incorporated in Delaware on March 6, 2019. GigCapital2 was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The Company’s business combinations (the “Business Combinations”) were consummated on June 9, 2021, and in connection with the business combinations, GigCapital2 changed its corporate name to “UpHealth, Inc.”

Our public units began trading on the NYSE under the symbol “GIX.U” on June 5, 2019. On June 26, 2019, we announced that the holders of our units may elect to separately trade the securities underlying such units. On July 1, 2019, the shares, warrants, and rights began trading on the NYSE under the symbols “GIX”, “GIX.WS,” and “GIX.RT,” respectively. On June 9, 2021, upon the completion of the Business Combinations, our units separated into their underlying shares of common stock, warrants, and rights (and the rights were converted into shares of common stock). Our units and rights ceased to trade, and our common stock and warrants now trade under the symbols “UPH.BC” and “UPH.WS.BC,” respectively.

2.Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of UpHealth have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The unaudited condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. The condensed consolidated balance sheets as of December 31, 2021 have been derived from our audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021.

The unaudited condensed consolidated financial statements include the accounts of UpHealth and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Certain amounts included in the prior quarter’s condensed consolidated financial statements have been reclassified to conform to the current quarter’s presentation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes thereto.

Significant estimates and assumptions made by management include the determination of:

•The timing and amount of revenue to be recognized, including standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;

•The identification of and provision for uncollectible accounts receivable;

•The capitalization and useful life of internal-use software development costs;

•The valuation of assets acquired and liabilities assumed for business combinations, including intangible assets and goodwill;

•The estimated economic lives and recoverability of intangible assets;

•The valuation of derivatives and warrants; and

•The recognition, measurement, and valuation of current and deferred income taxes and uncertain tax positions.

Actual results could differ materially from those estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.

New Accounting Pronouncements Not Yet Adopted

In May 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. We adopted the amended guidance effective January 1, 2022. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.

In August 2020, the FASB issued ASU 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 ASU simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This ASU will be effective for us on January 1, 2024. Early adoption is permitted, but no earlier than the fiscal year beginning on January 1, 2021, including interim periods within that fiscal year. We are currently evaluating the effect the adoption of this ASU will have on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. This ASU will be effective for us for fiscal year beginning January 1, 2022, and to interim periods within the fiscal year beginning on January 1, 2023, with early adoption permitted. We are currently evaluating the effect the adoption of this ASU will have on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and subsequently issued several supplemental/clarifying ASUs (collectively, “ASC 842”). Among other things, under this ASU, lessees will be required to recognize, at commencement date, a lease liability representing the lessee’s obligation to make lease payments arising from the lease and a right-of-use asset representing the lessee’s right to use or control the use of a specified asset for the lease term for leases greater than 12 months. Under the new guidance, lessor accounting is largely unchanged. This ASU will be effective for us for the fiscal year beginning on January 1, 2022, and the interim periods within the fiscal year beginning on January 1, 2023, using the modified retrospective approach. We anticipate that most of our operating leases will result in the recognition of additional assets and the corresponding liabilities on our condensed consolidated balance sheets. The actual impact will depend on our lease portfolio at the time of adoption. We continue to assess all implications of the standard and related financial disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequently issued several supplemental/clarifying ASUs (collectively, “ASC 326”). This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, other long-term financings including available for sale and held-to-maturity debt securities, and loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASC 326 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with ASC 842. This ASU will be effective for us on January 1, 2023. We are currently evaluating the effect the adoption of this ASU will have on our condensed consolidated financial statements.

3.Business Combinations

Measurement Period

We have included a measurement period table for each acquisition, identifying the line item or line items where an adjustment was deemed necessary and have quantified its impact. We finalized the valuations and completed the purchase price allocations for Thrasys, BHS, TTC, and Innovations Group during the three months ended December 31, 2021. We finalized the valuation and completed the purchase price allocation for Glocal during the three months ended March 31, 2022, and finalized the valuation and completed the purchase price allocation for Cloudbreak during the three months ended June 30, 2022.

Acquisition of TTC

The following table sets forth the allocation of the purchase price to TTC’s identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of January 25, 2022.


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of January 25, 2021
Accounts receivable	$	1,311	$	(462)	$	1,773
Prepaid expenses and other	187		—		187
Identifiable intangible assets	1,125		—		1,125
Property and equipment	531		—		531
Other assets	281		—		281
Goodwill	58,354		780		57,574
Total assets acquired	61,789		318		61,471
Accounts payable	625		—		625
Accrued expenses and other current liabilities	602		—		602
Due to related parties	4,200		2,807		1,393
Debt	11,216		(1,284)		12,500
Deferred tax liabilities	446		(28)		474
Total liabilities assumed	17,089		1,495		15,594
Net assets acquired	$	44,700	$	(1,177)	$	45,877

TTC submitted a request for forgiveness of its PPP loans in 2020 and they were forgiven in full and TTC was legally released from repaying the loans in the amount of $0.9 million and $0.3 million in February and March 2021, respectively. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended March 31, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $1.2 million. During the three months ended June 30, 2021, TTC recorded an accrual in the amount of $2.8 million for amounts owing to a related party as of the acquisition date, with an offsetting increase in goodwill. During the three months ended December 31, 2021, a $0.5 million accounts receivable reserve was recorded as a decrease in accounts receivable and an increase in goodwill.

The acquired intangible assets from TTC and their related estimated useful lives consisted of the following:


	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-life intangible assets – Trade names	$	1,125	3
Total fair value of identifiable intangible assets	$	1,125

Acquisition of Glocal

The following table sets forth the allocation of the purchase price to Glocal's identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of March 26, 2022.


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of March 26, 2021
Accounts receivable, net	$	1,350	$	(5,111)	$	6,461
Inventories	325		—		325
Identifiable intangible assets	45,289		7,250		38,039
Property, equipment, and work in progress	26,767		(13,959)		40,726
Other current assets, including short term advances	15		(1,965)		1,980
Other noncurrent assets, including long term advances	509		—		509
Goodwill	121,913		30,042		91,871
Total assets acquired	196,168		16,257		179,911
Accounts payable	579		—		579
Accrued expenses and other current liabilities	9,692		1,421		8,271
Income tax liability	2,420		2,420		—
Deferred tax liability	8,649		8,649		—
Debt	19,937		(2,275)		22,212
Noncontrolling interest	29,278		11,889		17,389
Total liabilities assumed and noncontrolling interest	70,555		22,104		48,451
Net assets acquired	$	125,613	$	(5,847)	$	131,460

In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $5.8 million during the three months ended June 30, 2021. During the three months ended June 30, 2021, Glocal recorded a deferred tax liability in the amount of $9.9 million relating to identifiable intangible and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended September 30, 2021, Glocal recorded a reserve against its accounts receivable in the amount of $2.0 million and a liability related to redeemable preferred shares as of the acquisition date in the amount of $11.9 million, with offsetting increases in goodwill. During the three months ended December 31, 2021, Glocal recorded reserves against accounts receivable and other assets in the amount of $5.1 million and additions to accrued expenses for unrecorded liabilities in the amount of $1.2 million, with an offsetting increase to goodwill. During the three months ended December 31, 2021, Glocal recorded debt forgiveness in the amount of $2.3 million, with an offsetting decrease to goodwill, as well as a deferred tax liability in the amount of $2.6 million relating to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended March 31, 2022, Glocal recorded a reduction in the fair value of property, equipment, and work in progress in the amount of $15.6 million, an increase in the value of intangible assets in the amount of $7.3 million, and an increase in accrued expenses related to unrecorded liabilities in the amount of $0.2 million, with offsetting increases to goodwill, as well as a reduction to the deferred tax liability in the amount of $2.6 million related to these adjustments, with an offsetting decrease in goodwill.

The acquired intangible assets from Glocal and their related estimated useful lives consisted of the following:


	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Technology and intellectual property	$	45,289	7
Total fair value of identifiable intangible assets	$	45,289

Acquisition of Innovations Group

The following table sets forth the allocation of the purchase price to Innovation’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete, as the measurement period ended as of April 27, 2022.


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of April 27, 2021
Accounts receivable	$	47	$	—	$	47
Inventories	2,693		—		2,693
Prepaid expenses and other	530		—		530
Identifiable intangible assets	29,115		790		28,325
Property and equipment	3,642		(4,295)		7,937
Other assets	—		(22)		22
Goodwill	143,654		(76)		143,730
Total assets acquired	179,681		(3,603)		183,284
Accounts payable	472		—		472
Accrued expenses and other current liabilities	772		(8)		780
Deferred revenue	302		—		302
Deferred tax liability	8,017		180		7,837
Debt	—		(4,069)		4,069
Noncontrolling interests	—		—		—
Total liabilities assumed and noncontrolling interest	9,563		(3,897)		13,460
Net assets acquired	$	170,118	$	294	$	169,824

During the three months ended September 30, 2021, Innovations Group recorded noncontrolling interests related to a VIE as of the acquisition date in the amount of $0.5 million, with an offsetting increase in goodwill. During the three months ended December 31, 2021, Innovations Group determined that the VIE should not be consolidated since it no longer had a variable interest in the VIE, and recorded a $4.3 million decrease to property and equipment, a $22 thousand decrease to other assets, an $8 thousand decrease to accrued expenses and other current liabilities and a $4.1 million decrease to debt, with no change to goodwill. In addition, during the three months ended December 31, 2021, Innovations Group recorded a lease intangible of $0.8 million, with an offsetting decrease in goodwill, as well as a $0.2 million increase in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill.

The acquired intangible assets from Innovations Group and their related estimated useful lives consisted of the following:


	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	10,925	10
Definite-lived intangible assets—Technology and intellectual property	8,075		5 - 7
Definite-lived intangible assets—Customer relationships	9,325		10
Definite-lived intangible assets—Lease	$	790	4.8
Total fair value of identifiable intangible assets	$	29,115

Acquisition of Cloudbreak

The following table sets forth the allocation of the purchase price to Cloudbreak’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete, as the measurement period ended as of June 9, 2022.


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of June 9, 2021
Accounts receivable	$	5,551	$	741	$	4,810
Prepaid expenses and other	921		—		921
Identifiable intangible assets	32,475		—		32,475
Property and equipment	7,065		183		6,882
Other assets	631		(411)		1,042
Goodwill	107,219		(3,749)		110,968
Total assets acquired	153,862		(3,236)		157,098
Accounts payable	2,518		—		2,518
Accrued expenses and other current liabilities	1,267		362		905
Deferred revenue	15		—		15
Deferred tax liability	3,912		(3,994)		7,906
Other long-term liabilities	382		382		—
Debt	3,752		—		3,752
Total liabilities assumed	11,846		(3,250)		15,096
Net assets acquired	$	142,016	$	14	$	142,002

During the three months ended September 30, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net increase in net assets acquired and goodwill of $14 thousand. During the three months ended September 30, 2021, Cloudbreak recorded a lease liability related to its operating leases as of the acquisition date in the amount of $0.4 million, with an offsetting increase in goodwill. During the three months ended December 31, 2021, Cloudbreak recorded a $0.7 million increase to accounts receivable, net of reserve, with an offsetting decrease in goodwill; a $0.2 million increase to property and equipment and a $0.4 million decrease in other assets, with an offsetting increase in goodwill, related to capital lease security deposits; a $0.4 million increase to accrued expenses and other current liabilities, with an offsetting increase to goodwill, related to a payroll accrual and a payable to a customer; and a $3.9 million decrease in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended June 30, 2022, Cloudbreak recorded a $0.1 million decrease in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting decrease in goodwill.

The acquired intangible assets from Cloudbreak and their related estimated useful lives consisted of the following:


	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	12,975	10
Definite-lived intangible assets—Technology and intellectual property	5,825		5
Definite-lived intangible assets—Customer relationships	13,675		10
Total fair value of identifiable intangible assets	$	32,475

Acquisition, Integration and Transformation Costs

For the three and six months ended June 30, 2022, we incurred $6.7 million and $9.1 million, respectively, of acquisition, integration, and transformation costs for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations Group), and Cloudbreak, which are included in the condensed consolidated statements of operations. For the three and six months ended June 30, 2021, we incurred $32.7 million and $35.3 million, respectively, of acquisition, integration, and transformation costs for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations Group), and Cloudbreak, which are included in the condensed consolidated statements of operations.

Combined Pro Forma Results for the Three and Six Months Ended June 30, 2021

The results of operations of UpHealth Holdings and its subsidiaries (BHS, Thrasys, TTC, Glocal, and Innovations Group) and Cloudbreak have been included in the financial statements subsequent to their acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the acquisition of UpHealth Holdings (including all subsidiaries) and Cloudbreak had occurred on January 1, 2021, after giving effect to certain purchase accounting adjustments. These purchase accounting adjustments mainly include incremental depreciation expense related to the fair value adjustment of property and

equipment, amortization expense related to identifiable intangible assets, and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company:


	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2021		2021
Pro Forma
Revenues	$	39,171	$	69,778
Net income (loss)	$	(37,052)	$	(43,627)
Basic earnings per share	$	(0.39)	$	(0.52)
Diluted earnings per share	$	(0.39)	$	(0.52)

4. Revenue

Revenue by geography consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2022		2021		2022		2021
Americas	$	40,073	$	20,126	$	72,736	$	29,352
Europe	—		7,800		—		10,800
Asia	3,595		3,956		6,904		4,546
Total revenue	$	43,668	$	31,882	$	79,640	$	44,698

Our revenue is entirely derived from the healthcare industry. Revenue recognized over-time was approximately 68% and 75% of total revenue during three months ended June 30, 2022 and 2021, respectively. Revenue recognized over-time was approximately 71% and 73% of total revenue during the six months ended June 30, 2022 and 2021, respectively.

Contract Assets

There were no impairments of contract assets, consisting of unbilled receivables, during the three and six months ended June 30, 2022 and 2021.

The change in contract assets was as follows:


	Six Months Ended June 30,
(In thousands)	2022		2021
Unbilled receivables, beginning of period	$	784	$	3,536
Reclassifications to billed receivables	(232)		(1,192)
Revenues recognized in excess of period billings	417		9,783
Unbilled receivables, end of period	$	969	$	12,127

Contract Liabilities

The change in contract liabilities, consisting of deferred revenue, was as follows:


	Six Months Ended June 30,
(In thousands)	2022		2021
Deferred revenue, beginning of period	$	2,649	$	397
Revenues recognized from balances held at the beginning of the period	(1,998)		(397)
Net revenues deferred from period collections on unfulfilled performance obligations	5,801		6,572
Ending balance	$	6,452	$	6,572

Revenue recognized ratably over time is generally billed in advance and includes SaaS internet hosting, subscriptions, construction of digital hospitals and dispensaries, and related consulting, implementation, services support, and advisory services.

Revenue recognized as delivered over time includes professional services billed on a time and materials basis, and fixed fee professional services and training classes that are primarily billed, delivered, and recognized within the same reporting period.

Approximately 1.0% and 2.5% of revenue recognized during the three and six months ended June 30, 2022, respectively, was from the deferred revenue balance existing as of December 31, 2021. Approximately 0.6% and 0.9% of revenue recognized during the three and six months ended June 30, 2021, respectively, was from the deferred revenue balance existing as of December 31, 2020.

Remaining Performance Obligations

The Company's remaining performance obligation is expected to be recognized evenly over the next 36 months and is shown in the table below.

Remaining performance obligations consisted of the following at June 30, 2022:


(In thousands)	Total		Remaining 2022	2023 - 2024
Subscriptions	$	9,518	3,727	5,791
Program management and professional services	5,555		2,812	2,743
Total	$	15,073	6,539	8,534

5. Supplemental Financial Statement Information

Property and equipment consisted of the following:


(In thousands)	June 30, 2022		December 31, 2021
Land	$	4,817	$	15,459
Buildings	15,197		18,086
Leasehold improvements	3,620		3,393
Medical and surgical equipment	2,414		2,953
Electrical and other equipment	408		508
Computer equipment, furniture and fixtures	13,735		12,029
Vehicles	305		185
Internal use software	5,562		3,837
Construction in progress	8,044		4,363
	54,102		60,813
Accumulated depreciation and amortization	(7,976)		(4,741)
Total property and equipment, net	$	46,126	$	56,072

Depreciation expense was $1.8 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, and $3.2 million and $1.0 million for the six months ended June 30, 2022 and 2021, respectively.

Accrued expenses consisted of the following:


(In thousands)	June 30, 2022		December 31, 2021
Accrued professional fees	$	11,108	$	10,238
Accrued products and licenses	17,820		17,889
Accrued interest on debt	2,106		1,227
Accrued payroll and bonuses	5,433		3,939
Accrued taxes in connection with shareholder distribution	120		120
Other accruals	3,478		2,671
Total accrued expenses	$	40,065	$	36,084

6. Intangible Assets

The changes in carrying amounts of intangible assets consisted of the following as of June 30, 2022:


(In thousands)	Trade Names		Technology and Intellectual Property		Customer Relationships		Lease		Total
December 31, 2021	$	29,506	$	54,521	$	30,612	$	674	$	115,313
Additions	—		7,250		—		—		7,250
Amortization	(1,579)		(5,949)		(1,672)		(84)		(9,284)
Impairments	(680)		—		—		—		(680)
Foreign exchange	—		(2,036)		—		—		(2,036)
June 30, 2022	$	27,247	$	53,786	$	28,940	$	590	$	110,563

No impairment charge was recognized during the three months ended June 30, 2022 and an impairment charge of $0.7 million was recognized during the six months ended June 30, 2022 at TTC. No impairment charge was recognized during the three and six months ended June 30, 2021.

The estimated useful lives of trade names are 3-10 years, the estimated useful lives of technology and intellectual property are 5-7 years, and the estimated useful life of customer relationships is 10 years.

Amortization expense was $4.2 million and $2.7 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense was $9.3 million and $3.5 million for the six months ended June 30, 2022 and 2021, respectively.

The estimated amortization expense related to definite-lived intangible assets for the five succeeding years is as follows:


(In thousands)	Trade Name Amortization		Technology and Intellectual Property Amortization		Customer Relationships Amortization		Lease Amortization		Total
Remaining 2022	$	1,672	$	5,120	$	1,641	$	80	$	8,513
2023	2,717		10,273		3,313		165		16,468
2024	2,650		10,273		3,313		165		16,401
2025	2,650		10,273		3,313		165		16,401
2026	2,650		9,622		3,313		15		15,600
Thereafter	14,908		8,225		14,047		—		37,180
	$	27,247	$	53,786	$	28,940	$	590	$	110,563

7. Goodwill

We performed a goodwill impairment assessment as of December 31, 2021, which included both qualitative and quantitative assessments. Our assessment included a comparison of carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded the fair value of all three segments was below the carrying value primarily due to the recent change in our market valuation and financial performance and recorded a goodwill impairment in the amount of $297.9 million. In the three months ended March 31, 2022, as a result of measurement period adjustments, we increased

goodwill in the amount of $5.5 million, which was immediately impaired. There was no impairment of goodwill during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021.

The carrying amount of goodwill consisted of the following:


(In thousands)	Goodwill
Balance at December 31, 2021	$	284,268
Measurement period adjustment	5,403
Goodwill and intangible asset impairment	(5,494)
Balance at June 30, 2022	$	284,177

8. Debt

Debt consisted of the following:


(In thousands)	June 30, 2022		December 31, 2021
Convertible notes	$	160,000	$	160,000
Other debt facilities (various maturities and interest rates)	551		3,847
Provider Relief and EIDL Funds	10		123
Seller notes	18,680		18,680
Total debt	179,241		182,650
Less: unamortized original issue and debt discount	(55,171)		(62,140)
Total debt, net of unamortized original issue and debt discount	124,070		120,510
Less: current portion of debt	(18,827)		(22,093)
Noncurrent portion of debt	$	105,243	$	98,417

Unsecured Convertible Notes and Indenture

On January 20, 2021, GigCapital2 entered into convertible note subscription agreements, each dated January 20, 2021 and amended on June 8, 2021, with certain institutional investors, pursuant to which GigCapital2 agreed to issue and sell unsecured convertible notes in a private placement to close immediately prior to the closing of the Business Combinations.

On June 15, 2021, in connection with the closing of the Business Combinations, we entered into an indenture (the “Indenture”) with Wilmington Trust, National Association, a national banking association, (the “Indenture Trustee”) in its capacity as trustee thereunder, in respect of the $160.0 million of unsecured convertible notes due in 2026 (the “2026 Notes”) that were issued to certain institutional investors. The 2026 Notes bear interest at a rate of 6.25% per annum, payable semi-annually, and are convertible into approximately 15,023,475 shares of common stock at a conversion price of $10.65 in accordance with the terms of the Indenture, and will mature on June 15, 2026. The total proceeds received from the 2026 Notes were $151.9 million, net of debt issuance costs of $8.1 million. In accounting for the 2026 Notes, we bifurcated and accounted for the conversion option as a derivative measured at fair value on the issuance date in accordance with ASC 815, Derivatives and Hedging. The difference between the proceeds allocated to the 2026 Notes at issuance and the fair value of the conversion option was allocated to the host debt contract. At June 30, 2022 and December 31, 2021, the fair value of the derivative was $1.3 million and $8.0 million, respectively, all of which was included in derivative liability, noncurrent, in the condensed consolidated balance sheets. Total interest expense for the three months ended June 30, 2022 was $6.0 million, of which $2.5 million related to contractual interest expense, $3.1 million related to derivative accretion, and $0.4 million related to debt issuance costs amortization and for the six months ended June 30, 2022 was $12.0 million, of which $5.0 million related to contractual interest expense, $6.2 million related to derivative accretion, and $0.8 million related to debt issuance costs amortization. Total interest expense for the three and six months ended June 30, 2021 was $1.4 million, of which $0.6 million related to contractual interest expense, $0.7 million related to derivative accretion, and $0.1 million related to debt issuance costs amortization. Total other income for the three months ended June 30, 2022 included a $1.8 million gain on the fair value of the derivative liability. Total other income for the six months ended June 30, 2022 included a $6.7 million gain on the fair value of the derivative liability.

Revolving Line of Credit and Term Loan

One of our subsidiaries had a loan and security agreement (the “Loan Agreement”) with a bank that allowed for maximum borrowings of $1.8 million on a revolving line of credit and a $10.8 million term loan. On June 9, 2021, in connection with the GigCapital2 merger, we paid off the revolving line of credit and term loan balance of $1.8 million and $9.1 million, respectively, and

terminated the Loan Agreement. There were no unamortized debt issuance costs and thus no gain or loss was recognized on extinguishment.

Glocal Debt Facilities

Glocal’s debt facilities include INR-denominated term loans with an aggregate carrying value of $0.6 million (or INR 48 million) and $0.7 million (or INR 54 million) as of June 30, 2022 and December 31, 2021, respectively. These term loans are primarily utilized for financing the construction of hospitals, administrative offices, equipment, and working capital, and are required to be repaid in monthly and quarterly installments with maturity dates extending to March 31, 2025. The loans are secured by mortgages on real property and personal guarantee of two Glocal Directors. The loans bear interest rates between 11.15% up to 16.25% per annum. During the three and six months ended June 30, 2022, Glocal repaid $0.1 million of the aggregate carrying value of the term loans. At June 30, 2022 and December 31, 2021 accrued interest on Glocal's debt facilities was $21 thousand and $23 thousand, respectively, and is included in accrued expenses in the condensed consolidated balance sheets. For the three and six months ended June 30, 2022, interest expense was $17 thousand and $40 thousand, respectively.

Prior to being acquired, Glocal had been negotiating with its banks to restructure the payment terms of some of the debt facilities above; these negotiations were completed in the fourth quarter of 2021 and Glocal was able to realize a forgiveness of debt of approximately $2.3 million.

Convertible Notes

On March 23, 2021, we issued a $4.1 million principal amount, 15.0% convertible note (the “2021 Note”) of which $0.5 million was to be converted and repaid in UpHealth common stock and the remainder in cash. The 2021 Note bears interest at a fixed rate of 15.0% per year, to begin accruing on June 15, 2021 if not repaid previous to this date. Total proceeds received from the 2021 Note were $3.0 million, net of original issue discount of $1.0 million. Additional debt issuance costs of $0.1 million for a placement fee were accrued, and paid at the closing. The principal and accrued interest of the 2021 Note was due and payable by us to the holder on the earlier of (1) the date that is one business day after the closing of the Business Combinations and we begin public trading, (2) the maturity date, which is nine months from the issuance of the 2021 Note, or (3) November 23, 2021, pursuant to its payment provisions. On June 9, 2021, in connection with the closing of the Business Combinations, we paid the holder of the 2021 Note the sum of $3.6 million and the remaining $0.5 million balance due to the holder was converted and exchanged into 50,000 shares of UpHealth common stock. Original issue discount and debt issuance costs of $0.5 million were written-off and a $31 thousand gain on extinguishment of debt was recognized and included in other income, net, including interest income, in the condensed consolidated statements of operations.

On January 6, 2021, we issued a $1.5 million principal amount, 5.0% convertible note due January 6, 2026 (the “2026 5% Note”). The 2026 5% Note is unsecured and bears interest at a fixed rate of 5.0% per year and, unless earlier converted, the principal and accrued interest of the 2026 5% Note will be due and payable by us at any time on or after the maturity date at our election or upon demand by the holder. On June 9, 2021, in connection with the closing of the Business Combinations, the 2026 5% Note was converted into 150,367 shares of UpHealth common stock, representing the total outstanding principal balance and unpaid accrued interest of $1.5 million and $30 thousand, respectively. A $0.1 million gain on extinguishment was recognized and included in other income, net, including interest income, in the condensed consolidated statements of operations.

Paycheck Protection Program Loans

In April 2020, three of our subsidiaries obtained a U.S. government subsidy of $0.5 million, $1.0 million and $1.9 million (representing five loan agreements), respectively, under the Paycheck Protection Program (“PPP”). The PPP is a U.S. government temporary program created with the intent to provide a subsidy to assist businesses in keeping employees employed during the pandemic. The PPP loan may not need to be repaid if certain requirements are met. Under the Coronavirus Aid, Relief and Economic Security (“CARES Act”), as modified, any amounts not forgiven will be required to be repaid over a term having a minimum of five years and a maximum maturity of 10 years from the date on which the borrower applies for forgiveness. The loans carry a 1.0% interest rate.

One of our subsidiaries applied for forgiveness of its $0.5 million PPP loan during 2020 and it was forgiven in full and the subsidiary legally released from repaying the loan by the SBA in June 2021. The forgiveness was recognized as a measurement period adjustment to goodwill during the three months ended June 30, 2021.

One of our subsidiaries submitted a request for forgiveness of its $1.0 million PPP loans during 2021 and it was forgiven in full and the subsidiary legally released from repaying the loan by the SBA in August 2021. The forgiveness was recognized as a measurement period adjustment to goodwill during the three months ended September 30, 2021.

One of our subsidiaries applied for forgiveness of its $1.9 million PPP loans during 2020, of which three of the loans, totaling $0.7 million, were forgiven in full by the SBA and the subsidiary was legally released from repaying the loans. In February 2021 and March 2021, the remainder of the PPP loans totaling $0.9 million and $0.3 million, respectively, were forgiven by the SBA and the subsidiary was legally released from repaying the loans. We recorded this as a measurement period adjustment to goodwill during the three months ended March 31, 2021.

Provider Relief Funds

Provider Relief Funds (“PRF”) were made available by the U.S. Department of Health and Human Services (“HHS”) as part of a $100 billion appropriation as part of the CARES Act’s Provider Relief Fund. In April and July 2020, one of our subsidiaries received PRF proceeds aggregating $0.2 million, and in January 2021, another subsidiary received PRF proceeds aggregating $0.5 million. The PRF amounts received will not require repayment as long as the subsidiaries comply with certain terms and conditions outlined by HHS. The terms and conditions first require the subsidiaries to identify health care-related expenses attributed to COVID-19 that another source has not reimbursed or is obligated to reimburse. If those expenses do not exceed the funding received, the subsidiaries then apply the funds to patient care lost revenue. On January 15, 2021 HHS released a Post-Payment Notice of Reporting Requirements Notice that provides healthcare providers three options to calculate patient care lost revenue.

During the three months ended March 31, 2022, one subsidiary had used $0.1 million of the PRF funds and returned the remaining $0.1 million to HHS and the other subsidiary had used all $0.5 million of the PRF funds under the terms and conditions and restrictions for the CARES Act relative to these funds.

Related Party Debt

One of our subsidiaries has notes payable to related parties totaling $0.7 million at June 30, 2022 and December 31, 2021. The notes bear interest at rates of 3.50% per annum. Notes totaling $0.7 million are payable in eight quarterly installments starting from October 1, 2022, or upon a liquidity event, as defined in the note agreement. The accrued interest payable was $60 thousand and $39 thousand at June 30, 2022 and December 31, 2021, respectively, and is included in accrued expenses in the condensed consolidated balance sheets. Interest expense was $11 thousand and $7 thousand for the three months ended June 30, 2022 and 2021, respectively, and $21 thousand and $8 thousand for the six months ended June 30, 2022 and 2021, respectively.

Seller Notes

As part of the purchase price consideration for several of UpHealth Holdings’ merger entities, we entered into secured seller notes payable to their former shareholders, of which one secured interest has been perfected. The seller notes accrue interest at specific rates per the respective merger agreements. On June 9, 2021, in connection with the closing of the Business Combination, we paid $88.1 million of the seller notes. In August 2021, we paid an additional $11.1 million of the seller notes and deferred the maturity date to September 2022 for $18.7 million of the seller notes. At June 30, 2022 and December 31, 2021, seller notes totaled $18.7 million.

The accrued interest payable was $1.7 million and $0.7 million at June 30, 2022 and December 31, 2021, respectively, and is included in accrued expenses in the condensed consolidated balance sheets. Interest expense was $0.5 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $0.9 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively.

9. Fair Value of Financial Instruments

We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of June 30, 2022 and December 31, 2021, the fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying values due to the short-term nature of these instruments. Additionally, the fair values of short-term and long-term debt instruments approximate their carrying values.

The fair value hierarchy is as follows:

Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:

•Quoted prices for similar assets/liabilities in active markets;

•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);

•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and

•Inputs that are derived principally from or corroborated by other observable market data.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

The following tables present information about our financial assets and liabilities measured at fair value on are recurring basis:


	June 30, 2022
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	18,451	$	—	$	—	$	18,451
	$	18,451	$	—	$	—	$	18,451
Liabilities:
Derivative liability	$	—	$	—	$	1,307	$	1,307
Warrant liability	—		61		—		61
	$	—	$	61	$	1,307	$	1,368


	December 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents - money market funds	$	45,006	$	—	$	—	$	45,006
	$	45,006	$	—	$	—	$	45,006
Liabilities:
Derivative liability	$	—	$	—	$	7,977	$	7,977
Warrant liability	—		252		—		252
	$	—	$	252	$	7,977	$	8,229

Money Market Funds

At June 30, 2022 and December 31, 2021, our cash equivalents consisted of money market funds which were classified as Level 1. We used observable prices in active markets in determining the classification of our money market funds as Level 1. There were no transfers between the hierarchy levels during the three and six months ended June 30, 2022 and the year ended December 31, 2021.

Cash equivalents at June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022
(In thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents:
Money market funds	$	18,451	$	—	$	—	$	18,451
Total cash equivalents	$	18,451	$	—	$	—	$	18,451


	December 31, 2021
(In thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents:
Money market funds	$	45,006	$	—	$	—	$	45,006
Total cash equivalents	$	45,006	$	—	$	—	$	45,006

Derivative Liability

At June 30, 2022, the fair value of the derivative was $1.3 million, all of which was included in derivative liability, noncurrent in the condensed consolidated balance sheets. At December 31, 2021, the fair value of the derivative was $8.0 million, all of which was included in derivative liability, noncurrent in the condensed consolidated balance sheets. Total other income for the three months ended June 30, 2022 included a $1.8 million gain on the fair value of the derivative liability. Total other income for the six months ended June 30, 2022 included a 6.7 million gain on the fair value of the derivative liability.

The fair value of the derivative liability is considered a Level 3 valuation and is determined using a Binomial Lattice Option Pricing Model. The significant assumptions used in the model were:


	June 30, 2022	December 31, 2021
Stock price	$0.59	$2.24
Volatility	94.0%	82.5%
Risk free rate	3.00%	1.18%
Exercise price	$10.65	$10.65
Expected life (in years)	3.95	4.44
Conversion periods	2-5 years	2-5 years
Future share price	$0.01-$38.53	$0.01-$34.05

Private Placement Warrants and PIPE Warrants

At June 30, 2022, the fair value of the Private Placement Warrants and the PIPE Warrants was determined to be $0.07 per warrant, totaling $40 thousand and $21 thousand respectively, and are included in warrant liabilities in the condensed consolidated balance sheets. At December 31, 2021, the fair value of the Private Placement Warrants and the PIPE Warrants was determined to be $0.29 per warrant, totaling $0.2 million and $0.1 million respectively, and are included in warrant liabilities in the condensed consolidated balance sheets. During the three and six months ended June 30, 2022, we recorded a gain in the amount of $0.1 million and $0.2 million, respectively, due to the fair value changes in the Private Placement and the PIPE Warrants, which is included in gain in fair value of warrant liabilities in the condensed consolidated statements of operations.

There were no transfers between fair value levels during the three and six months ended June 30, 2022 and year ended December 31, 2021.

10. Capital Structure

Common Stock Reserved for Future Issuance

Shares of common stock reserved for future issuance as of June 30, 2022 were as follows:


(In thousands)			Number of Shares
Restricted stock units outstanding			3,672
Stock options outstanding			1,418
Shares issuable upon conversion of 2026 Notes			15,023
Shares issuable upon conversion of Public Warrants			17,250
Shares issuable upon conversion of Private Warrants			568
Shares issuable upon conversion of PIPE Warrants			300
Shares available for future grant under 2021 EIP			15,759
			53,990

Forward Share Purchase Agreement

On June 3, 2021, we entered into a third-party put option arrangement with Kepos Alpha Fund L.P. (“KAF”), a Cayman Islands

limited partnership, whereby we assumed the obligation to repurchase our common stock at a future date by transferring cash to KAF under certain conditions. Due to its mandatorily redeemable for cash feature, we recorded such obligation as a forward share purchase liability, and the $18.1 million of cash held in escrow as restricted cash, in our condensed consolidated balance sheets at December 31, 2021. In April 2022, in accordance with the Purchase Agreement, KAF transferred the 1,700,000 shares of our common stock to us and we transferred to KAF the $18.5 million in cash previously held in escrow. The 1,700,000 shares of common stock are recorded as treasury stock in our condensed consolidated balance sheets.

2021 Equity Incentive Plan

The following table summarizes our RSU activity under the 2021 EIP:


			Number of Shares			Weighted Average Grant Date Fair Value Per Share


Outstanding at December 31, 2021	10,693	5.63
RSUs granted	598	2.13
RSUs exercised and released	(338)	2.13
RSUs forfeited	(207)	1.93
Outstanding at March 31, 2022	10,746	5.61
RSUs granted	135	1.00
RSUs vested and issued	(5,563)	8.80
RSUs forfeited	(1,645)	1.93
Outstanding at June 30, 2022	3,672	2.27

In July and August 2022, we granted a total of 8,523,783 RSUs to new and existing employees.

11. Commitments and Contingencies

Commitments

We lease various facilities with related parties in accordance with the terms of operating lease agreements that expire at various dates through November 2026. The leases require monthly payments ranging from $3 thousand to $32 thousand.

We lease various facilities and office equipment from third parties in accordance with the terms of operating lease agreements requiring monthly payments ranging from $7 to $60 thousand. The leases expire at various dates through September 2046. In accordance with the lease terms, we may be required to deposit funds with the lessors in the form of a security deposit. The deposits may be returned to us if certain conditions are met, as stated in the lease agreements. Security deposits totaled approximately $0.2 million as of June 30, 2022 and December 31, 2021.

Total rent expense under related party and third-party agreements consisted of the following:


(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Related party	$	218	$	—	$	400	$	—
Third-party	1,106		796		1,976		1,350
Sublease Income	(149)		—		(246)		—
Total, net of sublease income	$	1,473	$	796	$	2,622	$	1,350

During the six months ended June 30, 2022, we recorded lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office lease.

As of June 30, 2022, future minimum lease payments under non-cancelable operating leases were as follows:


(In thousands)	Related Party		Third- Party		Sublease Income		Minimum Lease Payments, Net of Sublease Income
Remaining 2022	$	405	$	1,469	$	(235)	$	1,639
2023	809		2,478		(403)		2,884
2024	809		2,126		(408)		2,527
2025	809		1,464		(420)		1,853
2026	34		1,006		(433)		607
Thereafter	—		430		(72)		358
	$	2,866	$	8,973	$	(1,971)	$	9,868

In March 2022, we entered into a Commercial Agreement (the “Commercial Agreement”) with McKinsey & Company, Inc. United States and its affiliates (“McKinsey”), which provides that McKinsey will assist in implementing a transformation of UpHealth (the “Project”). As consideration for the services performed under the Commercial Agreement, we will pay McKinsey (i) a fixed fee of $3.0 million, (ii) a fee of $1.2 million, reflecting an amount previously expensed and payment deferred from a previously completed project, (iii) up to $3.0 million of fees based on the achievement of certain milestones, and (iv) incentive fees with a target value of

$3.0 million based on the achievement of certain targets. The Commercial Agreement will remain in effect until March 31, 2024, unless earlier terminated by either party in accordance with the terms set forth therein. In the event that the Project is terminated by us, or by McKinsey for cause, we will pay to McKinsey a termination fee in an amount that is to be determined based in part on when the termination occurs and the amount previously paid. As of June 30, 2022, fees accrued under the Commercial Agreement totaled $3.6 million, which is included in accounts payable in the condensed consolidated balance sheets and in acquisition, integration, and transformation costs in the condensed consolidated statements of operations.

Contingencies

From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business, including the previously disclosed tax matter (see Note 12, Income Taxes, for further information) and matters described below. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Advisory Services Agreement Dispute

We are in a services agreement dispute with a third-party advisory firm for fees due under the services agreement. The advisory firm claims $31.0 million, plus interest, is owed in fees. Based on consultation with legal counsel, we previously proposed a settlement in the amount of $8.0 million, which has been accrued for as of June 30, 2022 and December 31, 2021, and is included in accrued expenses in the condensed consolidated balance sheets. The amount of the ultimate loss may range from $8.0 million to $26.3 million.

COVID-19

The COVID-19 pandemic has not had a material adverse impact on the Company’s reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However, UpHealth is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties.

Indemnification

Certain of our agreements require us to indemnify our customers from any claim or finding of intellectual property infringements, as well as from any losses incurred relating to breach of representations, failure to perform, or specific events as outlined within the particular contract. We have not received any claims or estimated the maximum potential amount of indemnification liability under these agreements and have recorded no liabilities for these agreements.

12. Income Taxes

For interim period reporting, we record income taxes using an estimated effective tax rate for the period, including the forecasted permanent tax differences and statutory rates in jurisdictions in which we operate. At the end of each interim period, we update the estimated effective tax rate, and if the estimated tax rate changes based on new information, we make a cumulative adjustment in the period. We record the tax effect of an unusual or infrequently occurring item in the interim period in which it occurs as a discrete item of tax. As a result of not having a reliable forecast of tax expense for Glocal, we excluded Glocal from our estimated effective tax rate for the period and instead computed an income tax provision for Glocal on a year-to-date discrete basis. Excluding Glocal, our estimated effective tax rate for the remainder of our consolidated group was 16.1%, which is lower than the U.S. federal statutory rate of 21% primarily due to the 162(m) permanent addback, the non deductible interest expense on convertible notes and the global intangible low taxed income (GILTI) inclusion, partially offset by the impact of state and local income taxes. In the aggregate, these items reduce the forecasted tax benefit that would otherwise be generated on the forecasted pre-tax loss in the U.S., thereby reducing the estimated annual effective tax rate. The operations in India are generally taxed at rates ranging between 25% and 31%.

The income tax benefit was $2.2 million and $6.6 million for the three months ended June 30, 2022 and 2021, respectively, and $4.5 million and $7.1 million for the six months ended June 30, 2022 and 2021, respectively.

The Internal Revenue Service (“IRS”) audited Thrasys’ 2008 and 2009 tax returns for the proper year of inclusion of approximately $15.0 million long-term capital gain on the sale of certain intellectual property rights. Thrasys originally reported the gain on its 2010 S Corporation tax return, matching the year of inclusion for financial accounting purposes. The corporate level tax was paid to California and Thrasys passed the gain through to its shareholders. The IRS has asserted that Thrasys owes C Corporation tax of approximately $5.0 million for 2008, or in the alternative, Thrasys owes C Corporation tax of approximately $5.0 million for 2009 as a built-in gain. In addition, Thrasys could be assessed additional California franchise tax of approximately $1.3 million. Additionally, if additional income taxes are imposed, interest will be charged at approximately 4% per year, compounded annually, resulting in potential interest of approximately $3.0 million. The IRS has not asked that penalties be imposed.

The matter is currently pending before the U.S. Tax Court, Docket 11565-15. There are related tax cases for some of the shareholders for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment in Thrasys, Inc. v. Commissioner (T.C. Memo 2018-199); however, Thrasys prevailed, and the motion was denied. In January 2020, Thrasys filed a motion for summary judgment arguing that either the gain was properly reported in 2010 and all taxes have been paid or in the alternative it should have been taxable in 2009 with no built-in gains tax. In both cases, there would be no additional income tax due for 2008 or 2009. The IRS filed an objection to Thrasys’ motion. On March 3, 2021, the U.S. Tax Court, without consideration of the merits of the case, issued a very brief court order dismissing Thrasys’ motion. Had the motion been granted, the need for a trial would have been obviated. Counsel for the IRS has contacted counsel for Thrasys and has offered to join Thrasys in a motion to have the case decided without trial. This and other alternatives are now under consideration. It is not likely this case will be resolved before the end of 2022. Thrasys intends to vigorously defend its position in the case and believes it will prevail if the case is taken to trial. Thrasys has accrued $0.2 million, representing probable additional taxes and interest imposed, in other current liabilities in the condensed consolidated balance sheets.

13. Earnings (Loss) Per Share

Basic income (loss) per share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding. Diluted income (loss) per share assumes the conversion of any convertible securities using the treasury stock method or the if-converted method.


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2022		2021		2022		2021
Numerator:
Net loss attributable to UpHealth, Inc.	$	(12,438)	$	(32,783)	$	(29,883)	$	(35,732)
Denominator:
Weighted average shares outstanding(1)	144,624		94,170		144,581		83,585
Weighted average shares outstanding assuming dilution	144,624		94,170		144,581		83,585
Net loss per share attributable to UpHealth, Inc.:
Basic	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)
Diluted	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)

(1) The shares and earnings per share available to our common stock holders, prior to the Business Combinations, have been recast to reflect the exchange ratio established in the Business Combinations (1.0 UpHealth Holdings share to 10.28 GigCapital2 share). See Note 3, Business Combinations, for more information.

For the three months ended June 30, 2022, the calculation of dilutive earnings per share excluded outstanding warrants to purchase 18.1 million shares of common stock at $11.50 per share; 0.2 million of stock options; and senior convertible notes, convertible into 15.0 million shares of common stock at $10.65 per share, because the effect would be anti-dilutive. For the six months ended June 30, 2022, the calculation of dilutive earnings per share excluded outstanding warrants to purchase 18.1 million shares of common stock at $11.50 per share; 0.2 million of stock options; senior convertible notes and convertible into 15.0 million shares of common stock at $10.65 per share; and 1.7 million shares of treasury stock acquired under the terms of the forward share purchase agreement, because the effect would be anti-dilutive.

14. Related Party Transactions

One of our subsidiaries had amounts due to the seller of the subsidiary, in a prior transaction unrelated to the merger with UpHealth Holdings, representing contingent consideration, accrued interest, and accrued preferred dividends totaling $4.2 million. The amount was paid in full during the three months ended June 30, 2021.

The subsidiary also has a management agreement with a related party (our chief financial officer, who is the former shareholder and chairman of the subsidiary). Management fee expenses incurred were none and approximately $0.1 million for the three and six months ended June 30, 2022 and 2021, respectively. There were no unpaid management fees at June 30, 2022 and December 31, 2021.

The consulting firm noted in Note 8, Debt, is a related party through an officer of the Company, who is also a significant shareholder and a member of our board of directors.

See Note 8, Debt, for related party long-term debt.

See Note 11, Commitments and Contingencies, for leases with related parties.

The Company makes guaranteed payments to related parties. Guaranteed payments aggregated $1.4 million and none for the three months ended June 30, 2022 and 2021, respectively and $2.8 million and none for the six months ended June 30, 2022 and 2021, respectively. These amounts are presented in cost of goods and services in the condensed consolidated statements of operations. We had unpaid guaranteed payments of $0.1 million and $0.3 million as of June 30, 2022 and December 31, 2021, respectively, which is included in accrued liabilities on the condensed consolidated balance sheets.

Due to and due from related parties consisted of the following:


In thousands	June 30, 2022	December 31, 2021
Due from related parties	31	40
Due to related parties	458	47

15. Segment Reporting

Our business is organized into three operating business segments and one non-operating business segment:

•Integrated Care Management—through our Thrasys subsidiary;

•Virtual Care Infrastructure—through our Glocal and Cloudbreak subsidiaries;

•Services—through our Innovations Group, BHS, and TTC subsidiaries; and

•Corporate—through UpHealth and our UpHealth Holdings subsidiary.

We evaluate performance based on several factors, of which Revenue, Gross Margin, Adjusted EBITDA, and Total Assets are the primary financial measures:

Revenue by segment consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2022		2021		2022		2021
Integrated Care Management	$	7,823	$	11,280	$	10,435	$	17,569
Virtual Care Infrastructure	16,815		6,964		32,445		7,554
Services	19,030		13,638		36,760		19,575
Total revenue	$	43,668	$	31,882	$	79,640	$	44,698

Gross margin by segment consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2022		2021		2022		2021
Integrated Care Management	$	6,894	$	4,504	$	8,531	$	9,723
Virtual Care Infrastructure	8,179		2,634		15,588		2,933
Services	7,320		4,254		13,578		5,666
Total gross margin	$	22,393	$	11,392	$	37,697	$	18,322

Total assets by segment consisted of the following:


In thousands	June 30, 2022		December 31, 2021
Integrated Care Management	$	165,995	156,106
Virtual Care Infrastructure	208,552		217,668
Services	128,861		127,114
Corporate	16,803		68,419
Total assets	$	520,211	$	569,307

Total assets by geography consisted of the following:


In thousands	June 30, 2022		December 31, 2021
Americas	$	446,243	481,705
Asia	73,968		87,602
Total assets	$	520,211	$	569,307

16. Subsequent Events

Management has determined that no material events or transactions have occurred subsequent to the balance sheet date, other than those events noted below, that require disclosure in the condensed consolidated financial statements.

In July and August 2022, we granted a total of 8,523,783 RSUs to new and existing employees under the 2021 EIP (see Note 11, Commitments and Contingencies).

On August 12, 2022, we entered into senior secured convertible note subscription agreements with certain institutional investors, pursuant to which we agreed to issue and sell $67.5 million in aggregate principal amount of a new series of variable rate convertible senior secured notes due December 15, 2025 (the “2025 Notes”) to holders of our 6.25% convertible senior notes due June 15, 2026 (see Note 8, Debt) in a private placement transaction, raising approximately $22.5 million in gross cash proceeds, after paying for a repurchase of $45.0 million of the 2026 Notes, which proceeds will be used in part to fully repay the seller notes. The 2025 Notes are convertible into shares of UpHealth common stock at a conversion price, subject to the occurrence of certain corporate events, of $1.75 per share. The 2025 Notes will be senior secured obligations of UpHealth, secured by substantially all of our assets and those of our domestic subsidiaries, and will accrue interest at a rate equal to the daily secured overnight financing rate (“SOFR”) plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require UpHealth to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that UpHealth sells assets with net proceeds in excess of $15.0 million, then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any. UpHealth may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. UpHealth will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, references in this report (this “Quarterly Report”) to “we,” “our,” “us,” “UpHealth” or the “Company” and other similar terms refer to UpHealth, Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek,” “may,” “might,” “plan,” “possible,” “potential,” “should, “would” and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on April 18, 2022 (our “Annual Report”) and in any more recent filings with the SEC. The company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

UpHealth, Inc. Business Overview

UpHealth Services, Inc. was formed on November 5, 2019, and effectively began operations on January 1, 2020. It was formed for the purpose of effecting a combination of various companies engaged in digital health, and commenced negotiations with a number of companies, including those that are discussed below as having been acquired. UpHealth Holdings, Inc. (“UpHealth Holdings”) became the sole shareholder of UpHealth Services, Inc. through a reorganization with UpHealth Services, Inc.’s original shareholders when UpHealth Holdings was formed on October 26, 2020 as a Delaware corporation. UpHealth Holdings then entered into a series of transactions to develop its business across three segments: (a) Integrated Care Management—through its subsidiary Thrasys, Inc. (“Thrasys”); (b)Virtual Care Infrastructure—through its subsidiary Glocal Healthcare Systems Private Limited (“Glocal”); and (c) Services—through its subsidiaries Innovations Group, Inc. (“Innovations Group”), Behavioral Health Services, LLC (“BHS”) and TTC Healthcare, Inc. (“TTC”). On June 9, 2021, UpHealth (fka GigCapital2, Inc.) acquired UpHealth Holdings and its subsidiaries and Cloudbreak Health, LLC and its subsidiaries (“Cloudbreak”), which added Cloudbreak to the Virtual Care Infrastructure segment.

Integrated Care Management Segment - Thrasys

Thrasys Overview

Thrasys provides its customers with an advanced, comprehensive, and extensible technology platform, marketed under the umbrella “SyntraNetTM,” to manage health, quality of care, and costs, especially for individuals with complex medical, behavioral health, and social needs. Thrasys focuses on both the United States and international markets. SyntraNetTM is offered as a software-as-a-service (“SaaS”) platform. Information, analytics, and applications are delivered to care team members on desktops, tablets, and phones, as needed. An advanced protected health information (“PHI”) framework controls access to information based on roles, rights, policies, and scope of consent. The platform includes innovations in a number of areas: application and information models for connected care communities (an extension of multi-tenant architectures), integration and normalization of heterogeneous data sources, configurable software services and open application programming interfaces (“APIs”), advanced analytics and intelligence, scalable workflows and rules, protected health information management, and user interfaces ready for the proliferation of device types and interaction modes.

Thrasys Key Business Metrics

Revenue

Thrasys derives revenue broadly from the sales of (a) products—with associated license, subscription, and hosting fees and (b) services—largely to implement, configure, and extend the technology, and train and on-board users on the use of the platform and applications.

Licenses and Subscriptions Revenue. License revenues are typically associated with rights granted to customers to deploy the platform to a certain number of care communities of a certain size, usually measured as the total population of patients that can be included within a care community. License revenues are recognized based on the nature of the license provided, either fully on the date license rights are granted to the customer if there are no further performance obligations or ratably over the license term beginning on the effective date of each contract, the date the customer takes possession of the license rights.

Subscription fees are recurring fees charged for access to the platform and applications. Subscription fees are typically pegged to a measure of use, such as population size, number of providers, members enrolled in programs, or number of members managed by applications. Subscription fees can grow as customers subscribe to additional application features or launch additional programs. Revenues from subscription fees are recognized ratably over the subscription term.

Services. The majority of Thrasys’ contracts to provide professional services are priced either on a time and materials basis, whereby revenues are recognized as the services are rendered, or as a fixed monthly retainer based on an estimate of the number of hours of work over the contract term, whereby revenues are recognized on a straight-line basis over the contract term. In some cases, Thrasys enters into professional services contracts where professional services fees are defined for specific milestones, whereby revenues are recognized upon achievement of the milestones.

Cost of Goods and Services

Cost of goods and services for Thrasys include: costs related to hosting SyntraNetTM in a HIPAA-compliant cloud environment; costs of third-party product licenses embedded with SyntraNetTM; costs of a core professional services team, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs. Added compliance requirements for security infrastructure is likely to add some additional costs for hosting services. Thrasys also anticipates added costs for third-party licenses that will be added as the scope and footprint of the technology platform expands.

Hosting Infrastructure. Thrasys’ technology and solutions are designed to be agnostic to any particular cloud services provider. Currently, customer environments are hosted through contracts with two cloud service providers. Thrasys anticipates capabilities of cloud service providers to grow, and costs to become increasingly competitive, and will continue to evaluate offerings in the marketplace to determine the optimum mix of security, reliability, scalability, and performance to meet customer needs. Hosting infrastructure costs for Thrasys are related to the number and size of environments deployed for customers and also on the service level agreements (“SLAs”) negotiated with customers. As the average size of customers continues to grow, hosting infrastructure costs are expected to grow as a percentage of revenue.

Third-Party Product Licenses. SyntraNetTM embeds certain third-party technology components to support some of its technology capabilities. There are multiple vendors for these components, and Thrasys is not dependent on any specific vendor.

Professional Services Team. Thrasys’ professional services team works closely with the product team and is best understood as an “A-team” created to lead showcase implementations. The goal is to keep the professional services team small in order to focus it on deploying reference customers and facilitating the on-boarding and coaching of systems integration partners.

Operating Expenses

Sales and Marketing (“S&M”) Expenses. S&M expenses include an internal sales and marketing team and contracts with business development consultants to generate and qualify leads, and an allocation of facilities, information technology, and depreciation costs.

Research and Development (“R&D”) Expenses. Thrasys continues to invest in R&D. The core R&D team consists of a small team of very experienced software developers. Beginning in 2019, Thrasys added considerable capacity via a consulting group with whom it has been working for over ten years. The team, based in Chicago, functioned much like the Thrasys internal team, until they were brought in-house in June 2021. R&D expenses attributed to internal-use software development are capitalized and amortized to cost of goods and services. R&D expenses also include an allocation of facilities, information technology, and depreciation costs.

General and Administrative (“G&A”) Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services, S&M expenses and R&D expenses.

Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Thrasys.

Virtual Care Infrastructure Segment - Glocal and Cloudbreak

Glocal Overview

Glocal is a technology and process-based healthcare platform providing its customer comprehensive primary care and specialty consultations for a fraction of the cost of traditional healthcare delivery systems, through telemedicine, digital dispensaries, and technology-based hospital centers. Glocal has been awarded by the United Nation’s (“UN”) Innovation Exchange with the Public Appreciation Award 2020 as a cutting-edge technology to meet the sustainable development goals of the UN.

Glocal pioneered the development of a semantic algorithm and AI-based clinical decision support system called LitmusDX, which helps deliver healthcare through telemedicine in its HelloLyf CX digital dispensaries and HelloLyf HX digital hospital, utilizing a telemedicine terminal called LitmusMX and an automated medicine dispenser called LitmusRX.

LitmusMX is used for recording the vitals of the patient, consultations with a doctor over video conferencing from miles away, and routine card-based point-of-care tests, and also contains a fully automatic biochemistry analyzer. The software may also suggest further investigations. If the doctor agrees, they can order further rapid tests, such as for dengue or malaria, for which kits are available. When the doctor selects a prescription, LitmusMX talks to the LitmusRX automated medicine dispensing unit, which delivers the required dosages of the medicines. Theoretically, the algorithm can be fine-tuned to arrive at a final diagnosis and prescription on its own. In addition to these solutions is one of the world’s top end-to-end Clinical Decision Support System (“CDSS”), named LitmusDX, along with a web interface, named HelloLyf, which integrates practice management with diagnostic algorithms, investigation interpretation, treatment protocols, drug safety checks, and electronic medical records.

Glocal’s HelloLyf CX digital dispensary was selected by United Nations AID as a cutting-edge technology solution to reach the UN’s sustainable development goals. Unlike other telemedicine centers seen today, Glocal’s HelloLyf CX digital dispensary is an innovative, hybrid, brick-and-mortar center, which provides complete primary and emergency healthcare solutions, such as consultation, confirmatory tests, and medicines, from a single point through the use of LitmusMX and LitmusRX. During the COVID-19 pandemic, Glocal’s innovative HelloLyf CX digital dispensaries successfully used ultraviolet C light disinfection, acrylic separation, and positive air pressure to create the first line for defense of health workers and patients against all forms of infectious and contagious diseases, including COVID-19.

In September 2021, Glocal delivered its first digital hospital in the Indian state of Nagaland, providing 88 e-ICU beds with connected ventilators and injection syringe pump. This digital hospital utilizes Glocal’s HelloLyf patient management, digital health, and decision support software to provide and coordinate outpatient care, emergency care, radiology and imaging, intensive care, high-dependency care, inpatient care, and dialysis.

While Glocal’s customers are located in regions in India and Southeast Asia, Glocal generates the majority of its revenue in India. Glocal’s telemedicine/HelloLyf CX digital dispensaries have been functional in India mainly through the government and are primarily housed in government facilities, which provide services that are free to the beneficiaries. After successful implementation of projects in the Indian states of Rajasthan, Odisha, and West Bengal, Glocal won a contract to set-up 550+ HelloLyf CX digital dispensaries in the Indian State of Madhya Pradesh, resulting in a total of 750+ government-placed nodes across India.

Glocal has begun focusing on a business-to-business (“B2B”) model where the HelloLyf CX digital dispensaries are sold to B2B partners/customers, who operate them with a revenue-share to Glocal. This results in lower revenues but higher margins.

Glocal also owns nine hospitals, four of which it operates and five of which it has contracted with third parties to operate with Glocal receiving a revenue-share.

Glocal Key Business Metrics

Revenue

Services. Services revenue is generated primarily from operating hospitals and clinics, including pharmacy and medicine sales, and transaction fees per telemedicine consultation.

Products. Products revenue is generated primarily from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.

Cost of Goods and Services

Cost of goods and services consists primarily of costs of building and operating hospitals, including costs for the purchase of medicines, professional/doctor fees, the cost to build HelloLyf CX digital dispensaries and HelloLyf HX digital hospitals, and an allocation of information technology and depreciation costs.

Operating Expenses

Sales and Marketing Expenses. S&M expenses are comprised of compensation and benefits related to Glocal’s sales personnel, travel expenses, and expenses related to advertising, marketing programs, and events, and an allocation of facilities, information technology, and depreciation costs.

General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.

Depreciation and Amortization Expenses. Glocal’s operations are capital intensive. Depreciation expense relates to the depreciation of buildings, computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Glocal.

Cloudbreak Overview

Cloudbreak is a leading provider of unified telemedicine solutions and digital health tools aimed at increasing access to healthcare and resolving health disparities across the care continuum, at each stage of healthcare acuity. Cloudbreak powers its client’s healthcare digital transformation initiatives and provides digital health infrastructure enabling its partners to address healthcare disparities and implement unique, private-label, telehealth strategies customized to their specific needs and markets.

Cloudbreak’s core offering, known as Martti™, is a video remote interpreting solution that puts qualified and certified medical interpreters at the fingertips of clinical care teams nationwide through Cloudbreak’s proprietary software platform. Having one of the largest installed bases of video endpoints in the nation, Cloudbreak has expanded its operations to include other telemedicine use cases as well, including tele-stroke, tele-psychiatry, tele-urology, and tele-quarantine, among others, all over the same infrastructure. Cloudbreak has also recently launched a home health virtual visit platform enabling its healthcare system partners to see their patients remotely on any device, at anytime, anywhere the patient may be, and in any language they may speak. Cloudbreak’s client base spans the entire healthcare continuum including hospitals and health systems, Federally Qualified Healthcare Clinics, urgent care centers, stand-alone clinics and medical practices, employers, and schools.

Cloudbreak’s Telemedicine-as-a-Service (“TaaS”) business model aligns interests between Cloudbreak and its clients, creating a partnership targeted towards forming long-term agreements with sustainable and mutually beneficial growth models for all stakeholders. Cloudbreak has specifically structured itself to not have a captive medical group as it believes that creates a conflict of interest with its client base, as local health systems do not want to suffer patient leakage to a technology partner or be forced to use a provider network. As a result, Cloudbreak has the freedom to match its partners with centers of excellence on its network, who can satisfy their specific needs and strategy without fear of competing for the patient’s attention, and thereby avoid the employment and maintenance of a medical group, which is a lower margin and a more labor intensive activity.

Cloudbreak Key Business Metrics

Revenue

Services. Services revenue is generated primarily from the sale of subscription-based fixed monthly minute and variable rate per unit of service medical language interpretation services. Cloudbreak also records ancillary revenue from the rental of Martti™ devices and from the provision of information technology services that include connectivity and ongoing support of the Martti™ software platform. Generally, Cloudbreak’s medical language interpretation and information technology services are invoiced monthly. Fixed monthly minute medical language interpretation subscription and information technology services fees are invoiced in advance in the period preceding the service. Variable rate per unit medical language interpretation and information technology services fees (including overage fees related to minutes used by the customer in excess of the fixed monthly minute subscription) are invoiced monthly in arrears. Martti™ device leases are invoiced monthly in advance in the period preceding the usage. Invoiced amounts are typically due within 30 days of the invoice date.

Products. Products revenue consists of the sale of Martti™ devices to its customers. Sale of Martti™ devices are generally invoiced at contract execution (50%) and upon the delivery of the devices to the customer (50%). Invoiced amounts are typically due within 30 days of the invoice date.

Cost of Goods and Services

Cost of goods and services primarily consists of costs related to supporting and hosting Cloudbreak’s product offerings and delivering services, and include the cost of maintaining Cloudbreak’s data centers, customer support team, and Cloudbreak’s professional services staff, in

addition to third-party service provider costs such as data center and networking expenses, amortization of capitalized internal-use software development costs, the cost of purchased equipment inventory sold to customers, and an allocation of facilities, information technology, and depreciation costs.

Operating Expenses

Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, and an allocation of facilities, information technology, and depreciation costs.

General and Administrative Expenses. G&A expenses consist of compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M.

Services Segment - Innovations Group, TTC and BHS

Innovations Group Overview

Innovations Group is the parent company of the following wholly-owned operating subsidiaries: MedQuest Pharmacy, Inc. (“MedQuest Pharmacy”), WorldLink Medical, Inc (“WorldLink Medical”), Medical Horizons, Inc. (“Medical Horizons”), and Pinnacle Labs, Inc. (doing business as MedQuest Testing Services (“MTS”)).

MedQuest Pharmacy is a full-service retail and compounding pharmacy licensed in 50 states and the District of Columbia that has relationships with both prescribers and patients, dispenses patient-specific medications, and ships directly to patients. The business model is driven by cash-pay and prescription volume-based revenue generated by physician electronic prescription order entry, as well as traditional prescriber-patient-pharmacist interactions, mailed, verbal, and faxed orders. It delivers both compounded and legend (also referred to as manufactured) drugs and is capable of serving as a retail or national fulfillment center, as a personalized medication administration partner with prescribers, and as a lifestyle wellness direct-to-consumer offering. Its proprietary software and operating system, eMedplus, is Electronic Prescribing of Controlled Substances (“EPCS”) certified by the U.S. Drug Enforcement Administration (“DEA”) and provides prescribers with a full-service prescription management system. In January 2020, eMedplus became SureScripts certified (SureScript’s process is to validate that the software meets certain industry standards related to sending and receiving electronic messages and that it is providing open choice for medication selection and dispensing location), allowing any user of the SureScripts platform to prescribe medications dispensed by MedQuest Pharmacy.

MedQuest Pharmacy is accredited and recognized by the Accreditation Commission for Health Care and its Pharmacy Compounding Accreditation Board, among other high-quality providers and suppliers. MedQuest Pharmacy has achieved this elite level of quality by exceeding standards set by national accreditation bodies and quality-centered organizations.

MedQuest Pharmacy is currently working on expanding its prescriber base, through both current prescribers and new prescribers, through the SureScripts platform and testing services with new and existing lab companies and relationships. Medical Horizons is also expanding their sales of supplements through the new NutraScriptives-Direct program, which allows physicians and others to use the NutraScriptives-Direct program to service their patients’ needs and thus expand their services and provide growth opportunities for their practices.

Also under the Innovations Group suite of services is WorldLink Medical, Medical Horizons, and MedQuest Testing Services. WorldLink Medical is the educational services arm of Innovations Group, providing Continuing Medical Education (“CME”) educational courses accredited as a joint provider through the Accreditation Council for Continuing Medical Education (“ACCME”). Medical Horizons specializes in customized formulations and contract dietary supplement and nutraceuticals manufacturing as an own label distributor with its brand NUTRAscriptivesTM, as well as other brands. Its turnkey solutions include label design, printing, and application; custom packaging; daily packs; a selection of capsule sizes and colors; and convenient auto-reorder services. It features a staff of experts that is committed to excellence and outstanding customer service. MedQuest Testing Services focuses specifically on facilitating diagnostic testing between lab companies, such as LabCorp and Quest Diagnostics, patients, and providers.

Innovations Group Key Business Metrics

Revenue

Products. Products revenue is generated primarily from the sale of prescription medications directly to patients, as well as through the sale of supplemental products to providers. The majority of the customer revenue is billed and collected before the medications and products are shipped from the facility. MedQuest Pharmacy is Innovation’s largest subsidiary in terms of revenue and generates approximately 60% of its revenue from sales of compounded medications and approximately 40% of its revenue from sales of manufactured medications and supplements.

Services. Services revenue is generated primarily from CME educational courses provided by WorldLink Medical.

Cost of Goods and Services

Cost of goods and services primarily consists of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs. MedQuest Pharmacy purchases these items through a large industry distributor with many suppliers and also sources products and supplies directly with manufacturers. MedQuest Pharmacy is also able to leverage the size of its operations to purchase larger quantities of certain ingredients and materials at lower prices.

Operating Expenses

Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, an allocation of facilities, information technology, and depreciation costs.

Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, lab equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Innovations Group.

TTC Overview

TTC provides inpatient and outpatient mental health and substance abuse treatment services for individuals with behavioral health issues, including post-traumatic stress disorder and drug and alcohol addiction. TTC offers a complete continuum of care from its detoxification services, residential care, partial hospitalization programs, and intensive outpatient, and outpatient programs. During the COVID-19 pandemic, outpatient programs have been virtual for a majority of visits.

In March 2020, TTC formed Transformations Mending Fences, LLC to provide mental health and substance abuse disorder treatment, including equine therapy, to patients. TTC has an 80% controlling interest in the entity with the remaining 20% interest owned by an unrelated party. Operations began in December 2020, with the admission of the first patient occurring in January 2021.

In addition to inpatient and outpatient substance abuse treatment services, TTC performs screenings, urinalysis, and diagnostic laboratory services, and provides physician services to clients. TTC operates three subsidiaries located in Delray Beach, Florida and one facility in Morriston, Florida. These facilities consist of inpatient substance abuse treatment facilities, standalone outpatient centers, and sober living facilities focused on delivering effective clinical care and treatment solutions.

TTC Key Business Metrics

Revenue

Services. TTC generates revenue primarily through services provided to clients in both inpatient and outpatient treatment settings. TTC bills third-party payors weekly for the services provided in the prior week. Client-related services, such as inpatient and outpatient programs, are generally recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. TTC receives the majority of payments from commercial payors at out-of-network rates. Client service revenue is recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received. A significant or sustained decrease in reimbursement rates could have a material adverse effect on operating results.

Laboratory Testing. TTC provides diagnostic laboratory testing services for its clients, which are recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. Diagnostic laboratory service revenue is recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received.

Cost of Goods and Services

Cost of goods and services consists primarily of the costs of operating the facilities, professional/doctor fees, and an allocation of information technology and depreciation costs.

Operating Expenses

Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events.

Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of TTC.

BHS Overview

BHS operates through Psych Care Consultants, LLC, BHS Pharmacy, LLC, and Reimbursement Solutions, LLC, wholly-owned subsidiaries of BHS. Psych Care Consultants, LLC is a medical group that has four medical offices located in the St. Louis Metropolitan area (Missouri) and provides psychiatric and mental health services. BHS Pharmacy, LLC provides retail pharmacy services specializing in behavioral health through services, such as medication management, screenings, online portals, and delivery. Reimbursement Solutions, LLC provides billing services for Psych Care Consultants, LLC (which has allowed for more efficient payment for BHS clinicians) and third-party customers. Services include billings, collections, verification of benefits, authorization, and credentialing.

BHS provides its patients and providers with a reliable platform where a provider can address their patients’ needs efficiently with an infrastructure built to support the providers and address patient needs. This infrastructure consists of medical offices placed strategically for the convenience of providers and patients and trained staff to assist providers and patients in the delivery of quality health services that is timely and efficient, provide prescription dispensing for patients that is convenient to maintain compliance, and assist providers with billing and collection services through Reimbursement Solutions, LLC.

BHS providers work in collaboration with multiple area hospital systems (both in leadership and clinical positions) to provide and direct inpatient treatment. BHS’ business is generated by various referral sources developed over the years by BHS’ providers and their presence in the market for over twenty-five years. BHS offers in-office, virtual, and in-patient treatment. Common conditions treated by BHS practitioners include depression, bipolar disorder, attention disorders, schizophrenia, substance use disorders, post-traumatic stress disorder, Alzheimer’s disease and related disorders, and personality disorders.

BHS Key Business Metrics

Revenue

Services. Services revenue is generated primarily by providing psychiatric and mental health services and billing services. Although the underlying tasks will vary by service and by patient, medical professionals perform inquiries, obtain vital statistics, perform certain lab tests, administer therapy, and provide any additional goods and services as necessary depending on the information obtained.

Products. Products revenue is generated primarily by providing retail pharmacy services through BHS Pharmacy, LLC.

Cost of Goods and Services

Cost of goods and services consists primarily of provider compensation expenses, the cost of pharmaceutical medications sold to patients, and an allocation of facilities, information technology, and depreciation costs. Provider compensation expenses include consulting payments to BHS’ healthcare providers, including medical doctors in psychiatry, psychologists, nurse practitioners, and clinical social workers. BHS has adopted an incentive-based compensation plan with provider agreements that compensate the providers based upon a percentage of

revenue generated and ultimately collected for services provided. BHS primarily purchases pharmaceutical medications through a large industry distributor with many suppliers, but also purchases some directly from other suppliers.

Operating Expenses

Depreciation Expense. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of BHS.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected.

Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, the following accounting policies and specific estimates involve a greater degree of judgment and complexity:

•Business combinations;

•Goodwill and intangible assets;

•Revenue recognition; and

•Income taxes.

There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a significant impact on our condensed consolidated financial statements and related notes.

UpHealth, Inc. Consolidated Results of Operations

Operating Results

As of June 30, 2022 and for the three and six months then ended, UpHealth’s operating results consist of the results of operations for UpHealth and its subsidiaries Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak. As of June 30, 2021 and for the three and six months then ended, UpHealth’s operating results consist of (1) the results of operations for UpHealth Holdings and its subsidiaries Thrasys, BHS, TTC and Glocal and (2) the results of operations for its subsidiaries Innovations Group and Cloudbreak subsequent to their acquisitions on April 27, 2021 and June 9, 2021, respectively.

The following table sets forth the consolidated results of operations of UpHealth:


(Unaudited, in thousands)	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Revenue:
Services	$	28,096	$	15,448	$	12,648	82	%	$	53,782	$	23,586	$	30,196	128	%
Licenses and subscriptions	6,812		9,145		(2,333)		(26)	%	8,593		12,803		(4,210)		(33)	%
Products	8,760		7,289		1,471		20	%	17,265		8,309		8,956		108	%
Total revenue	43,668		31,882		11,786		37	%	79,640		44,698		34,942		78	%
Cost of goods and services:
Services	14,762		9,590		5,172		54	%	29,207		14,063		15,144		108	%
License and subscriptions	217		6,173		(5,956)		(96)	%	450		6,670		(6,220)		(93)	%
Products	6,296		4,727		1,569		33	%	12,286		5,643		6,643		118	%
Total cost of goods and services	21,275		20,490		785		4	%	41,943		26,376		15,567		59	%
Gross margin	22,393		11,392		11,001		97	%	37,697		18,322		19,375		106	%
Operating expenses:
Sales and marketing	3,486		1,695		1,791		106	%	6,212		2,580		3,632		141	%
Research and development	1,782		2,273		(491)		(22)	%	3,369		3,843		(474)		(12)	%
General and administrative	14,632		7,306		7,326		100	%	28,291		11,029		17,262		157	%
Depreciation and amortization	4,700		2,966		1,734		58	%	9,936		3,870		6,066		157	%
Stock-based compensation	1,088		—		1,088		—	%	2,462		—		2,462		—	%
Lease abandonment expenses	—		—		—		—	%	75		—		75		—	%
Goodwill and intangible asset impairment	—		—		—		—	%	6,174		—		6,174		—	%
Acquisition, integration, and transformation costs	6,749		32,653		(25,904)		(79)	%	9,133		35,339		(26,206)		(74)	%
Total operating expenses	32,437		46,893		(14,456)		(31)	%	65,652		56,661		8,991		16	%
Loss from operations	(10,044)		(35,501)		25,457		(72)	%	(27,955)		(38,339)		10,384		(27)	%
Other income (expense):
Interest expense	(6,603)		(4,904)		(1,699)		35	%	(13,598)		(5,615)		(7,983)		142	%
Gain on consolidation of equity method investment	—		—		—		—	%	—		640		(640)		(100)	%
Gain on fair value of derivative liability	1,841		—		1,841		—	%	6,670		—		6,670		—	%
Gain on fair value of warrant liabilities	95		1,075		(980)		(91)	%	190		1,075		(885)		(82)	%
Gain on extinguishment of debt	—		151		(151)		(100)	%	—		151		(151)		(100)	%
Other income (expense), net, including interest income	14		(256)		270		(105)	%	(2)		(219)		217		(99)	%
Total other expense	(4,653)		(3,934)		(719)		18	%	(6,740)		(3,968)		(2,772)		70	%
Loss before income tax benefit	(14,697)		(39,435)		24,738		(63)	%	(34,695)		(42,307)		7,612		(18)	%
Income tax benefit	2,232		6,646		(4,414)		(66)	%	4,525		7,052		(2,527)		(36)	%
Net loss before loss from equity method investment	(12,465)		(32,789)		20,324		(62)	%	(30,170)		(35,255)		5,085		(14)	%
Loss from equity method investment	—		—		—		—	%	—		(561)		561		(100)	%
Net loss	(12,465)		(32,789)		20,324		(62)	%	(30,170)		(35,816)		5,646		(16)	%
Less: net loss attributable to noncontrolling interests	(27)		(6)		(21)		350	%	(287)		(84)		(203)		242	%
Net loss attributable to UpHealth, Inc.	$	(12,438)	$	(32,783)	$	20,345	(62)	%	$	(29,883)	$	(35,732)	$	5,849	(16)	%

The following table sets forth the consolidated results of operations of UpHealth as a percentage of total revenue:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue:
Services	64	%	48	%	68	%	53	%
Licenses and subscriptions	16	%	29	%	11	%	29	%
Products	20	%	23	%	22	%	19	%
Total revenue	100	%	100	%	100	%	100	%
Cost of goods and services:
Services	34	%	30	%	37	%	31	%
License and subscriptions	—	%	19	%	1	%	15	%
Products	15	%	15	%	15	%	13	%
Total cost of goods and services	49	%	64	%	53	%	59	%
Gross margin	51	%	36	%	47	%	41	%
Operating expenses:
Sales and marketing	8	%	5	%	8	%	6	%
Research and development	4	%	7	%	4	%	9	%
General and administrative	34	%	23	%	36	%	25	%
Depreciation and amortization	11	%	9	%	12	%	9	%
Stock-based compensation	2	%	—	%	3	%	—	%
Lease abandonment expenses	—	%	—	%	—	%	—	%
Goodwill and intangible asset impairment	—	%	—	%	8	%	—	%
Acquisition, integration, and transformation costs	15	%	102	%	11	%	79	%
Total operating expenses	74	%	147	%	82	%	127	%
Loss from operations	(23)	%	(111)	%	(35)	%	(86)	%
Other income (expense):
Interest expense	(15)	%	(15)	%	(17)	%	(13)	%
Gain on consolidation of equity method investment	—	%	—	%	—	%	1	%
Gain on fair value of derivative liability	4	%	—	%	8	%	—	%
Gain on fair value of warrant liabilities	—	%	3	%	—	%	2	%
Gain on extinguishment of debt	—	%	—	%	—	%	—	%
Other income (expense), net, including interest income	—	%	(1)	%	—	%	—	%
Total other expense	(11)	%	(12)	%	(8)	%	(9)	%
Loss before income tax benefit	(34)	%	(124)	%	(44)	%	(95)	%
Income tax benefit	5	%	21	%	6	%	16	%
Net loss before loss from equity method investment	(29)	%	(103)	%	(38)	%	(79)	%
Loss from equity method investment	—	%	—	%	—	%	(1)	%
Net loss	(29)	%	(103)	%	(38)	%	(80)	%
Less: net loss attributable to noncontrolling interests	—	%	—	%	—	%	—	%
Net loss attributable to UpHealth, Inc.	(28)	%	(103)	%	(38)	%	(80)	%

Due to the timing of UpHealth’s acquisitions of TTC, Glocal, Innovations Group, and Cloudbreak, the numbers presented above are not directly comparable between periods.

Three months ended June 30, 2022 and 2021

Revenue

In the three months ended June 30, 2022, revenue was $43.7 million, an increase of $11.8 million, or 37%, compared to $31.9 million in the three months ended June 30, 2021. Services revenue increased $12.6 million, primarily due to a $10.6 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Products revenue increased $1.5 million, primarily due to an increase in the Services segment resulting from to a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Licenses and subscriptions revenue declined $2.3 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

We expect revenue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.

Cost of Goods and Services

In the three months ended June 30, 2022, cost of goods and services was $21.3 million, an increase of $0.8 million, or 4%, compared to $20.5 million in the three months ended June 30, 2021. Cost of services increased $5.2 million, primarily due to a $4.5 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Cost of products increased $1.6 million, primarily due to an increase in the Services segment resulting from a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Cost of licenses and subscriptions declined $6.0 million, primarily due to Thrasys' loss of a contract with a European customer.

We expect cost of goods and services to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect cost of goods and services to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of goods and services may fluctuate as a percentage of our total revenue (gross margin %) from period to period due to the changes in the percentage of revenue contributed by each of our segments.

Operating Expenses

Sales and Marketing. In the three months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $3.5 million, compared to $1.7 million in the three months ended June 30, 2021. The increase in S&M expenses was largely due to a $1.6 million increase in S&M expenses at Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as corporate S&M expenses related to additional headcount.

We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect our S&M expenses to increase for the foreseeable future as we invest in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities.

Research and Development. In the three months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $1.8 million compared to $2.3 million in the three months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.

We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021, and for the foreseeable future, as we continue to invest in the development and integration of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as software development costs.

General and Administrative. In the three months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $14.6 million, compared to $7.3 million in the three months ended June 30, 2021. The increase in G&A expenses of $7.3 million was largely due an increase of approximately $5.8 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.

We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021, and an increase in expenses at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to increase for the foreseeable future as we continue to grow our business. Our G&A expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our G&A expenses.

Depreciation and Amortization. In the three months ended June 30, 2022, depreciation and amortization expenses were $4.7 million, primarily consisting of $4.2 million of amortization of intangible assets and $0.7 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the three months ended June 30, 2021 depreciation and amortization expenses

were $3.0 million, primarily consisting of $2.7 million of amortization of intangible assets and $0.3 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.

We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of amortization of intangibles assets and depreciation of property, plant, and equipment related to TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021.

Stock-Based Compensation. In the three months ended June 30, 2022, stock-based compensation expenses were $1.1 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the three months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.

Acquisition, Integration and Transformation Costs. In the three months ended June 30, 2022, acquisition, integration and transformation costs were $6.7 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the three months ended June 30, 2021, acquisition, integration and transformation costs were $32.7 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.

Other Expense

In the three months ended June 30, 2022, other expense was $4.7 million, primarily consisting of $6.6 million of interest expense, partially offset by a $1.8 million of gain on fair value of derivative liability and a $0.1 million gain on fair value of warrant liabilities. In the three months ended June 30, 2021, other expense was $3.9 million, primarily consisting of $4.9 million of interest expense and $0.3 million of other expense, net, partially offset by a $1.1 million gain on fair value of warrants and a $0.2 million gain on extinguishment of debt.

Income Tax Benefit

In the three months ended June 30, 2022, the income tax benefit was $2.2 million. In the three months ended June 30, 2021, the income tax benefit was $6.6 million.

Income tax benefit reflects management’s best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements.

Six months ended June 30, 2022 and 2021

Revenue

In the six months ended June 30, 2022, revenue was $79.6 million, an increase of $34.9 million, or 78%, compared to $44.7 million in the six months ended June 30, 2022. Services revenue increased $30.2 million, primarily due to an increase of $25.4 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $7.7 million in the Services segment resulting from a period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Products revenue increased $9.0 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Licenses and subscriptions revenue declined $4.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

We expect revenue to continue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.

Cost of Goods and Services

In the six months ended June 30, 2022, cost of goods and services was $41.9 million, an increase of $15.6 million, or 59%, compared to $26.4 million in the six months ended June 30, 2021. Cost of services increased $15.1 million, primarily due to an increase of $12.3 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $2.6 million in the Services segment resulting from a full period of operations in the six months ended June 30,

2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Cost of products increased $6.6 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Cost of licenses and subscriptions revenue declined $6.2 million, primarily due to Thrasys' loss of a contract with a European customer.

Operating Expenses

Sales and Marketing. In the six months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $6.2 million, compared to $2.6 million in the six months ended June 30, 2021. The increase in S&M expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

Research and Development. In the six months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $3.4 million compared to $3.8 million in the six months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.

General and Administrative. In the six months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $28.3 million, compared to $11.0 million in the six months ended June 30, 2021. The increase in G&A expenses of $17.3 million was largely due an increase of approximately $12 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

Depreciation and Amortization. In the six months ended June 30, 2022, depreciation and amortization expenses were $9.9 million, primarily consisting of $9.3 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the six months ended June 30, 2021 depreciation and amortization expenses were $3.9 million, primarily consisting of $3.5 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

Stock-Based Compensation. In the six months ended June 30, 2022, stock-based compensation expenses were $2.5 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the six months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.

Lease Abandonment Expenses. In the six months ended June 30, 2022, we recorded a lease abandonment accrual in the amount of $0.1 million related to office spaces we vacated during the period. There were no lease abandonment expenses in the six months ended June 30, 2021.

Goodwill and Intangible Asset Impairment. In the six months ended June 30, 2022, we recorded a goodwill and intangible asset impairment of $6.2 million, primarily consisting of a $5.5 million measurement period adjustment at Glocal that was immediately impaired, and a $0.7 million trade name intangible asset impairment at TTC. No impairment charge was recognized in the six months ended June 30, 2021.

Acquisition, Integration and Transformation Costs. In the six months ended June 30, 2022, acquisition, integration and transformation costs were $9.1 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the six months ended June 30, 2021, acquisition, integration and transformation costs were $35.3 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.

Other Expense

In the six months ended June 30, 2022, other expense was $6.7 million, primarily consisting of $13.6 million of interest expense, partially offset by a $6.7 million of gain on fair value of derivative liability and a $0.2 million gain on fair value of warrant liabilities. In the six months ended June 30, 2021, other expense was $4.0 million, primarily consisting of $5.6 million of interest expense, partially offset by a $1.1 million gain on fair value of warrant liabilities and a $0.6 million gain on consolidation of equity method investment.

Income Tax Benefit

In the six months ended June 30, 2022, the income tax benefit was $4.5 million. In the six months ended June 30, 2021, the income tax benefit was $7.1 million.

Segment Information

We evaluate performance based on several factors, of which revenue and gross margin by operating segment are the primary financial measures.

Revenue

Revenue by segment consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2022		2021		2022		2021
Integrated Care Management	$	7,823	$	11,280	$	10,435	$	17,569
Virtual Care Infrastructure	16,815		6,964		32,445		7,554
Services	19,030		13,638		36,760		19,575
Total revenue	$	43,668	$	31,882	$	79,640	$	44,698

Three Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care Infrastructure segment increased $9.9 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Revenue from the Services segment increased $5.4 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Revenue from the Integrated Care Management segment decreased $3.5 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

Six Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care Infrastructure segment increased $24.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which were acquired in the first half of 2021. Revenue from the Services segment increased $17.2 million, primarily due to a full year of operations at Innovations Group and TTC, which were acquired in the first half of 2021. Revenue from the Integrated Care Management segment decreased $7.1 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

Gross margin

Gross margin by segment consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2022		2021		2022		2021
Integrated Care Management	$	6,894	$	4,504	$	8,531	$	9,723
Virtual Care Infrastructure	8,179		2,634		15,588		2,933
Services	7,320		4,254		13,578		5,666
Total gross margin	$	22,393	$	11,392	$	37,697	$	18,322

Three Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care Infrastructure segment increased $5.5 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Gross margin from the Services segment increased $3.1 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Gross margin from the Integrated Care Management segment increased $2.4 million, primarily due to Thrasys' increased revenue with minimal cost from an amended contract with an existing customer, net of the loss of a contract with a European customer.

Six Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care Infrastructure segment increased $12.7 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which was acquired in the first half of 2021. Gross margin from the Services segment increased $7.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Gross margin from the Integrated Care Management segment decreased $1.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue with minimal cost from an amended contract with an existing customer.

Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021, we had free cash on hand of $40.6 million and $58.2 million, respectively. As of June 30, 2022, we had restricted cash of $0.5 million, representing funds held at our Glocal business. As of December 31, 2021, we had restricted cash of $18.6 million, representing $18.1 million of funds held in an escrow account as agreed in a forward share purchase agreement (see Note 10, Capital Structure, for further information) and $0.5 million of funds held at our Glocal business.

We believe our current cash, restricted cash, and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q.

Cash Flows

The following tables summarize cash flows for the six months ended June 30, 2022 and 2021 (unaudited):


	Six Months Ended June 30,
(In thousands)	2022		2021
Net cash used in operating activities	$	(7,841)	$	(37,228)
Net cash (used in) provided by investing activities	(3,783)		3,859
Net cash (used in) provided by financing activities	(23,580)		129,801
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(460)		(99)
Net (decrease) increase in cash, cash equivalents, and restricted cash	$	(35,664)	96,333

As UpHealth Holdings effectively began operations on January 1, 2020 and operations from UpHealth’s subsidiaries are included from their dates of acquisition, as described above, the numbers presented above are not directly comparable between periods.

In the six months ended June 30, 2022, cash used in operating activities was $7.8 million, primarily attributed to the net loss of $30.2 million and gain on fair value of derivative liability, gain on fair value of warrant liabilities, partially offset by $16.1 million of non-cash items

(impairments, depreciation, intangible amortization, debt issuance cost amortization, and stock-based compensation) and the changes in operating assets and liabilities, net of effects of acquisitions, of $6.2 million. The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to a decrease in accounts receivable of $6.2 million due to net collections of receivables and an increase in accounts payable and accrued expenses of $7.9 million due to delayed payments to vendors. In the six months ended June 30, 2021, cash used in operating activities was $37.2 million, primarily attributed to the net loss of $35.8 million and the changes in operating assets and liabilities, net of effects of acquisitions, of $1.1 million, partially offset by $2.5 million of non-cash items (depreciation, deferred tax adjustments, gain on extinguishment of debt, loss on fair value of warrant liabilities, and debt issuance cost amortization). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts receivable of $21.0 million due to billed and unbilled receivables from two customers during the quarter that were not collected as of June 30, 2021, partially offset by an increase in accounts payable and accrued expenses of $15.6 million due to delayed payments to vendors, and proceeds from Provider Relief Funds of $0.5 million.

In the six months ended June 30, 2022, cash used in investing activities was $3.8 million, primarily consisting of purchases of property and equipment. In the six months ended June 30, 2021, cash provided by investing activities was $3.9 million, primarily consisting of net cash acquired in acquisition of businesses.

In the six months ended June 30, 2022, cash used in financing activities was $23.6 million, primarily consisting of the repayment of the forward share purchase of $18.5 million, payments of capital lease obligations of $1.6 million and repayments of debt obligations of $3.2 million. In the six months ended June 30, 2021, cash provided by financing activities was $129.8 million, primarily consisting of proceeds from convertible debt of $164.5 million and proceeds from merger and recapitalization transaction of $83.4 million, partially offset by repayments of seller notes of $88.1 million, repayments of debt of $17.3 million and payments of amounts due to members of $4.3 million.

Long-Term Debt

See Note 8, Debt, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for our long-term debt.

Contractual Obligations and Commitments

See Note 11, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.

Off-Balance Sheet Arrangements

As of June 30, 2022, we have not entered into any off-balance sheet financing arrangements, established any additional special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for the recently issued accounting standards that could have an effect on us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure.

Evaluation of Our Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of June 30, 2022, because of the material weaknesses in our internal control over financial reporting described below.

Our management concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as of June 30, 2022 due to the following material weaknesses:

•Lack of appropriately designed entity-level controls impacting the control environment and monitoring activities to prevent or detect material misstatements to the condensed consolidated financial statements;

•Lack of appropriately designed information technology general controls in the areas of user access and segregation of duties, including controls over the recording of journal entries and safeguarding of assets, related to certain information technology systems that support our financial reporting process; and

•Lack of appropriately designed and implemented controls over the following:

◦ Recording of revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers at certain subsidiaries. Specifically, we had errors in our revenue recognition pertaining to the determination of whether a contract exists, the identification of performance obligations, and the timing and amount of revenue to be recognized;

◦ Completeness of accruals in the purchase to disbursement process and the payroll process at certain subsidiaries;

◦ Segregation of duties and monitoring controls over the treasury cycle at certain subsidiaries;

◦ Financial statement close process at certain subsidiaries to ensure the consistent execution, accuracy, and timely review of account reconciliations; and

◦ Financial statement preparation process that involves the use of a spreadsheet and manually consolidating all subsidiaries.

No misstatements have been identified in the condensed consolidated financial statements as a result of these material weaknesses.

Changes in Internal Control Over Financial Reporting

As of June 30, 2022, we are engaged in the process of the design, documentation, and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations post-Business Combinations. As of June 30, 2022, all of the US entities are live on a new Enterprise Resource Planning (“ERP”) system and we have implemented additional controls as a result. We have also commenced implementation of the ERP system at our subsidiary in India. Additionally, we are hiring additional accounting staff to assist with the preparation of account reconciliations, the implementation and performance of monitoring controls, and the remediation of segregation of duties issues.

Remediation of the Material Weaknesses

During the year ended December 31, 2021, we began remediation efforts to address the material weaknesses identified, including enhancing our internal and external technical accounting resources and engaging third party consultants for the formalization of our internal procedures, the implementation of Section 404 of the Sarbanes-Oxley Act, and the implementation of a new ERP system. As of June 30, 2022, all of the US entities are live on the ERP system and we have commenced implementation of the ERP system at our subsidiary in India. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Our objective is to complete remediation efforts by the end of 2022.

Part II - Other Information

Item 1. Legal Proceedings

From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows. Except as set forth below, our material legal proceedings are described in the Notes to Condensed Consolidated Financial Statements in Note 11, Commitments and Contingencies.

Jeffery R. Bray and Chirinjeev Kathuria v. Avi Katz, et al., and UpHealth, Inc., C.A. No. 2022-0489-LWW

As further described in the Current Report on Form 8-K that the Company filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 10, 2022, on June 6, 2022, the then Co-Chairman of the Board, Dr. Chirinjeev Kathuria, and the Company’s Chief Legislative Affairs Officer, Jeffery R. Bray, filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) against the Company as nominal defendant, and as defendants, the following members of the Company’s Board – the Company’s then‑other Co Chairman of the Board, and now, sole Chairman of the Board, Dr. Avi Katz, and directors Dr. Raluca Dinu, Neil Miotto, Agnès Rey Giraud, Nate Locke and Moshe Bar-Siman-Tov (who has since resigned from the Board as disclosed in the Current Report on Form 8-K that the Company filed on July 12, 2022), entitled Jeffery R. Bray and Chirinjeev Kathuria v. Avi Katz, et al., and UpHealth, Inc., C.A. No. 2022-0489-LWW (the “Complaint”). The Complaint sought declaratory and injunctive relief to require the Company to schedule and hold a special meeting of the Company’s stockholders on August 4, 2022 and to enjoin the 2022 Annual Meeting of Stockholders then scheduled to occur on June 28, 2022, until after the special meeting of stockholders is held. As discussed in more detail in the Current Report on Form 8-K filed with the SEC on June 10, 2022, the Complaint alleged that the defendant directors breached their fiduciary duties.

On June 24, 2022, the Court declined to enter preliminary injunctive relief to require the Company to schedule and hold a special meeting, but did rule to delay the 2022 Annual Meeting of Stockholders then scheduled to occur on June 28, 2022 to a later date to allow the Court to conduct a trial. The purpose of the trial was to address issues that would enable the Company to determine the quorum threshold to be used by the Company for the 2022 Annual Meeting of Stockholders when the 2022 Annual Meeting of Stockholders occurs.

Notwithstanding the foregoing, and as described in the Current Report on Form 8-K filed with the SEC on August 2, 2022, the trial will not occur as on August 2, 2022, the Court, at the request of the plaintiffs, dismissed the Complaint with prejudice.

Item 1A. Risk Factors

As of the date of this Quarterly Report on Form 10-Q, we supplement the risk factors disclosed in our Annual Report with the following risk factors. Any of these factors disclosed in our Annual Report or herein could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

It remains unclear how the ongoing coronavirus (COVID-19) pandemic may impact our business, financial condition, results of operations and growth.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, initially leading to an economic downturn, followed by supply chain disruptions and inflationary pressures and increased market volatility. The continued duration and severity of this pandemic remains unknown, and the extent of the business disruption and financial impact depend on factors beyond our knowledge and control, making it difficult for us to accurately predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations or financial condition at this time, but such effects may be material.

Continued shelter-in-place, quarantine, hospital requisitions, or related measures to combat the spread of COVID-19 or any variants thereof, as well as the perceived need by individuals to continue such practices to avoid infection, among other factors, could harm our results of operations and revenue, business and financial condition. These measures and practices have resulted in temporary and

permanent closures of some of our offices, and the offices and practices of our customers, and may also result in delays in entry into new markets and expansion in existing markets. In addition, customers who utilize our services or products in connection with in-office healthcare procedures, as well as our businesses that provide in-office healthcare procedures, may experience a loss in revenue associated with such measures and practices, potentially negatively impacting their ability or willingness to pay us. In addition, due to the shelter-in-place orders across the globe, several of our businesses have implemented work-from-home policies for many employees which may impact productivity and disrupt our business operations. Generally, we have seen our businesses rebound from an initial negative impact at the start of the pandemic. However, given the unpredictable nature of the COVID-19 pandemic, we may in the future experience additional negative impacts on our operations, revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity and overall financial condition by disrupting or delaying delivery of materials and products in the supply chain for our offices, causing staffing shortages, or increasing capital expenditures due to the need to buy incremental hardware.

Healthcare organizations around the world have faced and will continue to face, substantial challenges in treating patients with COVID-19, such as the diversion of hospital staff and resources from ordinary functions to the treatment of patients with COVID-19, supply, resource and capital shortages and overburdening of staff and resource capacity. In the United States, governmental authorities have also recommended, and in certain cases required, that elective, specialty and other procedures and appointments, including certain primary care services, be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of patients with COVID-19. These measures may divert patients away from our businesses that provide products and services direct to consumers and from procedures in healthcare facilities that utilize our products and services, which could harm our results of operations and revenue.

Our continued access to sources of liquidity also depend on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing and our operating performance. There is no guarantee that debt or equity financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding.

Unstable market and economic conditions may have series adverse consequences on our business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme volatility and disruptions over the past several months, including declines in consumer confidence, concerns about declines in economic growth, increases in the rate of inflation, increases in borrowing rates and changes in liquidity and credit availability, and uncertainty about economic stability, including most recently in connection with the military conflict in Ukraine, the continuing effects of the COVID-19 pandemic and supply chain disruptions. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. Our business could also be impacted by volatility caused by geopolitical events, such as the conflict in Ukraine. A significant downturn in the economic activity attributable to any particular industry may cause organizations to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on healthcare matters. In addition, our customers may delay or cancel healthcare projects or seek to lower their costs by renegotiating vendor contracts. Such delays or reductions in general healthcare spending may disproportionately affect our revenue. In addition, if the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or scale back on our growth plans. We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, of any industry in particular. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and results of operations could be materially adversely affected.

Our business, results of operations and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.

The operating results of our six subsidiary company businesses have in the past varied, and our operating results in the future could vary, significantly from quarter-to-quarter and year-to-year. We may fail to match past performance, our projections or the expectations of securities analysts because of a variety of factors, many of which are outside of our control. As a result, we may not be able to accurately forecast our operating results and growth rate. Any of these events could cause the market price of our Common Stock to fluctuate. Factors that may contribute to the variability of our operating results include:

•the addition or loss of large customers, including through acquisitions or consolidations of such customers;

•seasonal and other variations in the timing of our sales and implementation cycles, especially in the case of our large customers;

•travel restrictions, shelter in place orders and other social distancing measures implemented to combat the COVID-19 pandemic, and their respective impact on economic, industry and market conditions, customer spending budgets and our ability to conduct business;

•the timing of recognition of revenue, including possible delays in the recognition of revenue due to unpredictable implementation timelines;

•the timing and success of introductions of new products and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, hospital and healthcare system customers or strategic partners;

•the amount of operating expenses and timing related to the maintenance and expansion of our business, operations and infrastructure;

•our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our customers;

•customer renewal rates and the timing and terms of such renewals;

•technical difficulties or interruptions in our services;

•breaches of information security or privacy;

•our ability to hire and retain qualified personnel;

•changes in the structure of healthcare provider and payment systems;

•changes in the legislative or regulatory environment, including with respect to healthcare, privacy or data protection, or enforcement by government regulators, including fines, orders or consent decrees;

•the cost and potential outcomes of ongoing or future regulatory investigations or examinations, or of future litigation;

•political, economic and social instability, including recessions, inflation, interest rates, fuel prices, international currency fluctuations, acts of war (such as the recent Russian invasion of Ukraine), terrorist activities and health epidemics (including the COVID-19 pandemic), and any disruption these events may cause to the global economy; and

•changes in business or macroeconomic conditions.

The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.

In order to support the growth of our business, we may need to seek capital through new equity or debt financings, and such sources of additional capital may not be available to us on acceptable terms or at all.

The prior operations of our subsidiary companies consumed substantial amounts of cash since their respective inceptions. We intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new applications and services, enhance our existing solutions and services, enhance our operating infrastructure and potentially acquire complementary businesses and technologies. For the six months ended June 30, 2022 and 2021, for all acquired or to be acquired subsidiaries, aggregate net cash used in operating activities was $7.8 million and $37.2 million, respectively.

Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, both organically and through acquisitions, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services and the continuing market acceptance of digital health. Accordingly, we may need to engage in additional equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Common Stock. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, including as a result of the COVID-19 pandemic, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing on terms satisfactory to us, it could have a material adverse effect on our business, financial condition and results of operations.

We recently acquired a total of six subsidiaries in conjunction with or through the Business Combinations, and we may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations, and we may have difficulty successfully integrating any such acquisitions or realizing the anticipated benefits of them, any of which could have an adverse effect on our business, financial condition and results of operations.

Our subsidiary companies have in the past sought, and we in the future may seek, to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

In addition, both with respect to the recent or pending acquisitions of our subsidiaries and additional businesses we may choose to acquire, we may not be able to successfully integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited to:

•management’s lack of experience in acquiring and integrating business;

•inability to integrate or benefit from acquired technologies or services in a profitable manner;

•unanticipated costs or liabilities, including legal liabilities, associated with the acquisition;

•entry into new markets and locations in which we have little operating experience or experience with government rules, regulations and restrictions;

•difficulty integrating the accounting systems, operations and personnel of the acquired business;

•difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

•difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenue, licensing, support or professional services model of the acquired company;

•diversion of management’s attention from other business concerns;

•adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;

•the potential loss of key employees or contractors;

•use of resources that are needed in other parts of our business; and

•use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of businesses we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations. We performed a goodwill impairment assessment as of December 31, 2021, which included both qualitative and quantitative assessments. Our assessment included a comparison of carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded the fair value of all three segments was below the carrying value primarily due to the recent change in our market valuation and financial performance and recorded a goodwill impairment in the amount of $297.9 million. In the three months ended June 30, 2022, we recorded no measurement period adjustments and no impairment of goodwill or intangible assets. In the six months ended June 30, 2022, as a result of measurement period adjustments, we increased goodwill in the amount of $5.5 million, which was immediately impaired. In addition, in the six months ended June 30, 2022, we impaired intangible assets in the amount of $0.7 million.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition and results of operations may suffer.

The Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and stock price, which could cause you to lose some or all of your investment.

Although the Company conducted due diligence on UpHealth Holdings and Cloudbreak in connection with the Business Combinations, the Company cannot assure you that this diligence revealed all material issues that may be present in UpHealth Holdings’ or Cloudbreak’s business, as applicable, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the Company’s, UpHealth Holdings’ and Cloudbreak’s control will not later arise. As a result, the Company may be forced to write-down or write-off assets in the future, restructure its operations, or incur impairment or other charges that could result in losses. Even if the Company’s due diligence successfully identified certain risks, unexpected risks

may arise and previously known risks may materialize in a manner not consistent with the Company’s preliminary risk analysis. Even though these charges may be non-cash items and may not have an immediate impact on the Company’s liquidity, the fact that the Company reports charges of this nature could contribute to negative market perceptions about it or its securities. During the fourth quarter of 2021, we recorded a goodwill impairment in the amount of $297.9 million, and in the three months ended March 31, 2022, we recorded a goodwill impairment related to measurement period adjustments in the amount of $5.5 million, as well as an intangible asset impairment in the amount of $0.7 million. In addition, charges of this nature may cause the Company to be unable to obtain future financing on favorable terms or at all.

There can be no assurance that UpHealth will be able to comply with the continued listing standards of the NYSE.

UpHealth’s Common Stock and warrants are listed on the NYSE under the symbols “UPH.BC” and “UPH.WS.BC” respectively. If the NYSE delists UpHealth’s shares from trading on its exchange for failure to meet the listing standards, UpHealth and its stockholders could face significant material adverse consequences including:

•a limited availability of market quotations for UpHealth’s securities;

•a determination that UpHealth Common Stock is a “penny stock” which will require brokers trading in UpHealth Common Stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of UpHealth Common Stock;

•a limited amount of analyst coverage; and

•a decreased ability to issue additional securities or obtain additional financing in the future.

Resales of our shares of Common Stock could depress the market price of our Common Stock.

We have approximately 147,215,675 shares of Common Stock outstanding at August 14, 2022. The shares held by the Company’s public stockholders are freely tradable. In addition, the Company registered shares of Common Stock issued as merger consideration (none of which remain subject to a contractual lockup period), and will be registering shares for resales by its officers, directors and other affiliates, as well as shares underlying the warrants and convertible notes issued by the Company, which shares will become available for resale following the exercise or conversion of the warrants or convertible notes, respectively. Rule 144 also became available for the resale of shares of our Common Stock on June 14, 2021. Such sales of shares of Common Stock or the perception of such sales may depress the market price of our Common Stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.						Description


3.1*						Amended and Restated Bylaws of UpHealth, Inc., as amended by the Amendment to the Amended and Restated Bylaws of UpHealth, Inc. effective May 31, 2022.

10.1#*						Employment Agreement, dated May 10, 2022, by and between UpHealth, Inc. and Samuel J. Meckey.

10.2						Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2022).

10.3						Form of Indenture (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2022).

10.4†						Form of Security Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2022 ).

10.5						Form of Note Purchase Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2022).

31.1*						Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*						Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*						Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*						Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104						Cover Page Interactive Data File (embedded within the Inline XBRL document).


*			Filed herewith.

†			Certain exhibits and schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish a copy of the omitted exhibits and schedules to the SEC on a supplemental basis upon its request.

#			Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 15, 2022.



UPHEALTH, INC.

By:						/s/ Samuel J. Meckey
Name:						Samuel J. Meckey
Title:						Chief Executive Officer (Principal Executive Officer)

By:						/s/ Martin S. A. Beck
Name:						Martin S. A. Beck
Title:						Chief Financial Officer (Principal Financial and Accounting Officer)