UpHealth, Inc. - Quarter Report: 2022 March (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 March 31, 2022
OR
| ☐ | 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 | New York Stock Exchange | ||||||||||||
Redeemable Warrants, exercisable for one share of Common Stock at an exercise price of $11.50 per share | UPH.WS | 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 May 20, 2022, the registrant had 143,840,305 shares of common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| Page | |||||
Part 1 - Financial Information
Item 1. Financial Statements
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UPHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 52,036 | $ | 58,192 | |||||||
| Restricted cash | 18,618 | 18,609 | |||||||||
| Accounts receivable, net | 19,552 | 22,761 | |||||||||
| Inventories | 3,084 | 2,928 | |||||||||
| Due from related parties | 52 | 40 | |||||||||
| Prepaid expenses and other current assets | 4,591 | 4,217 | |||||||||
| Total current assets | 97,933 | 106,747 | |||||||||
| Property and equipment, net | 47,103 | 56,072 | |||||||||
| Intangible assets, net | 116,237 | 115,313 | |||||||||
| Goodwill | 284,268 | 284,268 | |||||||||
| Other assets | 3,195 | 6,907 | |||||||||
| Total assets | $ | 548,736 | $ | 569,307 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 14,755 | $ | 13,604 | |||||||
| Accrued expenses | 37,679 | 36,084 | |||||||||
| Deferred revenue | 1,732 | 2,649 | |||||||||
| Due to related party | 47 | 47 | |||||||||
| Income taxes payable | 2,800 | 739 | |||||||||
| Related-party long-term debt, current | 735 | 657 | |||||||||
| Long-term debt, current | 21,975 | 22,093 | |||||||||
| Forward share purchase liability | 18,479 | 18,051 | |||||||||
| Other current liabilities | 3,341 | 2,780 | |||||||||
| Total current liabilities | 101,543 | 96,704 | |||||||||
| Related-party long-term debt, noncurrent | 328 | 331 | |||||||||
| Long-term debt, noncurrent | 101,808 | 98,417 | |||||||||
| Deferred tax liabilities | 21,958 | 28,281 | |||||||||
| Warrant liabilities, noncurrent | 156 | 252 | |||||||||
| Derivative liability, noncurrent | 3,148 | 7,977 | |||||||||
| Other long-term liabilities | 3,730 | 3,502 | |||||||||
| Total liabilities | 232,671 | 235,464 | |||||||||
| Commitments and Contingencies (Note 18) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred stock, $0.0001 par value, 1,000 shares authorized; none issued or outstanding | — | — | |||||||||
Common stock, $0.0001 par value, 300,000 shares authorized; 144,651 and 144,279 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 14 | 14 | |||||||||
| Additional paid-in capital | 666,767 | 665,461 | |||||||||
| Accumulated deficit | (360,654) | (343,209) | |||||||||
| Accumulated other comprehensive loss | (5,179) | (3,802) | |||||||||
| Total UpHealth, Inc., stockholders’ equity | 300,948 | 318,464 | |||||||||
| Noncontrolling interests | 15,119 | 15,379 | |||||||||
| Total stockholders’ equity | 316,067 | 333,843 | |||||||||
| Total liabilities and stockholders’ equity | $ | 548,738 | $ | 569,307 | |||||||
The accompanying notes are an integral part of these financial statements.
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UPHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Services | $ | 25,686 | $ | 8,138 | |||||||
| Licenses and subscriptions | 1,781 | 3,658 | |||||||||
| Products | 8,505 | 1,020 | |||||||||
| Total revenue | 35,972 | 12,816 | |||||||||
| Cost of goods and services: | |||||||||||
| Services | 14,445 | 4,473 | |||||||||
| License and subscriptions | 233 | 497 | |||||||||
| Products | 5,990 | 916 | |||||||||
| Total cost of goods and services | 20,668 | 5,886 | |||||||||
| Gross margin | 15,304 | 6,930 | |||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 2,726 | 885 | |||||||||
| Research and development | 1,587 | 1,570 | |||||||||
| General and administrative | 13,659 | 3,723 | |||||||||
| Depreciation and amortization | 5,236 | 904 | |||||||||
| Stock-based compensation | 1,374 | — | |||||||||
| Lease abandonment expenses | 75 | — | |||||||||
| Goodwill and intangible asset impairment | 6,174 | — | |||||||||
| Acquisition, integration, and transformation costs | 2,384 | 2,686 | |||||||||
| Total operating expenses | 33,215 | 9,768 | |||||||||
| Loss from operations | (17,911) | (2,838) | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (6,995) | (711) | |||||||||
| Gain on consolidation of equity method investment | — | 640 | |||||||||
| Gain on fair value of derivative liability | 4,829 | — | |||||||||
| Gain on fair value of warrant liabilities | 95 | — | |||||||||
| Other income (expense), net, including interest income | (16) | 37 | |||||||||
| Total other expense | (2,087) | (34) | |||||||||
| Loss before income tax benefit | (19,998) | (2,872) | |||||||||
| Income tax benefit | 2,293 | 406 | |||||||||
| Net loss before loss from equity method investment | (17,705) | (2,466) | |||||||||
| Loss from equity method investment | — | (561) | |||||||||
| Net loss | (17,705) | (3,027) | |||||||||
| Less: net income (loss) attributable to noncontrolling interests | (260) | (78) | |||||||||
| Net loss attributable to UpHealth, Inc. | $ | (17,445) | $ | (2,949) | |||||||
| Net loss per share attributable to UpHealth, Inc.: | |||||||||||
| Basic | $ | (0.12) | $ | (0.42) | |||||||
| Diluted | $ | (0.12) | $ | (0.42) | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 144,539 | 7,089 | |||||||||
| Diluted | 144,539 | 7,089 | |||||||||
The accompanying notes are an integral part of these financial statements.
5
UPHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | (17,705) | $ | (3,027) | |||||||
| Foreign currency translation adjustments, net of tax | (1,377) | (1,159) | |||||||||
| Comprehensive loss | (19,082) | (4,186) | |||||||||
| Less: comprehensive loss attributable to noncontrolling interests | (260) | (78) | |||||||||
| Comprehensive loss attributable to UpHealth, Inc. | $ | (18,822) | $ | (4,108) | |||||||
The accompanying notes are an integral part of these financial statements.
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UPHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | 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 | ||||||||||||||||||||||||||||||||
| Employee stock plan activity, net of shares withheld for employee taxes | 372 | — | 1,306 | — | — | 1,306 | — | 1,306 | |||||||||||||||||||||||||||||||||||||||
| 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 | $ | 666,767 | $ | (360,654) | $ | (5,179) | $ | 300,948 | $ | 15,119 | $ | 316,067 | ||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | 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 | ||||||||||||||||||||||||||||||||
(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). 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.
7
UPHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | (17,705) | $ | (3,027) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 6,605 | 922 | |||||||||
| Amortization of debt issuance costs and discount on convertible debt | 3,485 | 113 | |||||||||
| Stock-based compensation | 1,374 | — | |||||||||
| Provision for bad debt expense | (342) | — | |||||||||
| Impairment of property, plant and equipment, intangible assets and goodwill | 5,459 | — | |||||||||
| Loss from equity method investment | — | 561 | |||||||||
| Gain on consolidation of equity method investment | — | (640) | |||||||||
| Gain on fair value of warrant liabilities | (95) | — | |||||||||
| Gain on fair value of convertible derivative | (4,829) | — | |||||||||
| Loss on disposal of property and equipment | — | 90 | |||||||||
| Deferred income taxes | (2,262) | (415) | |||||||||
| Other | — | 63 | |||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||
| Accounts receivable | 3,472 | (4,383) | |||||||||
| Inventories | (161) | 3 | |||||||||
| Prepaid expenses and other current assets | (577) | — | |||||||||
| Accounts payable and accrued expenses | 3,067 | 2,185 | |||||||||
| Income taxes payable | 317 | — | |||||||||
| Deferred revenue | (907) | 26 | |||||||||
| Due to related parties | 62 | — | |||||||||
| Other current liabilities | (34) | — | |||||||||
| Net cash used in operating activities | (3,071) | (4,502) | |||||||||
| Investing activities: | |||||||||||
| Purchases of property and equipment | (1,663) | (8) | |||||||||
| Net cash acquired in acquisition of businesses | — | 2,726 | |||||||||
| Net cash (used in) provided by investing activities | (1,663) | 2,718 | |||||||||
| Financing activities: | |||||||||||
| Proceeds from convertible debt | — | 4,500 | |||||||||
| Repayments of debt | (151) | (720) | |||||||||
| Proceeds from Provider Relief Funds | — | 506 | |||||||||
| Payments of capital lease obligations | (801) | — | |||||||||
| Net tax withholdings from share-based compensation | (67) | — | |||||||||
| Payments of amount due to member | — | (70) | |||||||||
| Net cash (used in) provided by financing activities | (1,019) | 4,216 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (394) | (22) | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (6,147) | 2,410 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 76,801 | 2,369 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 70,654 | $ | 4,779 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 235 | $ | 89 | |||||||
| Cash paid for income taxes | $ | 521 | $ | — | |||||||
| Non-cash investing and financing activity: | |||||||||||
| Property, plant and equipment reclassed from other assets | 3,833 | — | |||||||||
| Property and equipment acquired through capital lease and vendor financing arrangements | 1,628 | — | |||||||||
| FIN 48 liability reclassed from deferred tax liabilities | 1,750 | — | |||||||||
| Issuance of common stock and promissory note to consummate TTC business combination | — | 48,233 | |||||||||
| Issuance of common stock and promissory note to consummate Glocal business combination | — | 131,831 | |||||||||
| Reconciliation of cash, cash equivalents, and restricted cash: | |||||||||||
| Cash and cash equivalents | 52,036 | 4,202 | |||||||||
| Restricted cash | 18,618 | 576 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 70,654 | $ | 4,779 | |||||||
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UPHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in dollars, unaudited)
1.Organization and Business
UpHealth, Inc.
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. On November 20, 2020, GigCapital2, UpHealth Merger Sub, Inc. (“UpHealth Merger Sub”), and UpHealth Holdings, entered into a business combination agreement (as subsequently amended on January 29, 2021, March 23, 2021, April 23, 2021, and May 30, 2021, the “UpHealth Business Combination Agreement”). In connection with the UpHealth Business Combination Agreement, UpHealth Merger Sub was merged with and into UpHealth Holdings, with UpHealth Holdings surviving the merger. Also on November 20, 2020, GigCapital2; Cloudbreak Health Merger Sub, LLC, a Delaware limited liability company (“Cloudbreak Merger Sub”); Cloudbreak Health; Dr. Chirinjeev Kathuria and Dr. Mariya Pylypiv; UpHealth Holdings; and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative, agent, and attorney-in-fact of the Cloudbreak members, entered into a business combination agreement (as subsequently amended on April 23, 2021 and June 9, 2021, the “Cloudbreak Business Combination Agreement” and, together with the UpHealth Business Combination Agreement, the “Business Combination Agreements”). In connection with the Cloudbreak Business Combination Agreement, Cloudbreak Merger Sub was merged with and into Cloudbreak, with Cloudbreak surviving the merger (the “Cloudbreak Business Combination” and, together with the UpHealth Business Combination, the “Business Combinations”). The Business Combinations were consummated on June 9, 2021. 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" and "UPH.WS," respectively.
UpHealth Holdings
UpHealth Holdings, a Delaware corporation formed on October 26, 2020, was established to raise capital and pursue opportunities for investment and acquisition in various healthcare entities, primarily those that bring technology and services to efficiently and profitably manage chronic and complex care, including behavioral health and substance abuse, while also serving the demands for easy access to personalized primary care. On October 26, 2020, the shareholders of UpHealth Services, Inc. (“UpHealth Services”) contributed their shares of UpHealth Services to UpHealth Holdings in exchange for shares of UpHealth Holdings, resulting in UpHealth Services being a wholly-owned subsidiary of UpHealth Holdings.
UpHealth Services was incorporated in Illinois on November 5, 2019; operations effectively began January 1, 2020 and have continued to date.
On November 20, 2020, UpHealth Holdings completed the acquisition of Thrasys, Inc. (“Thrasys”), a California corporation and a provider of 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.
On November 20, 2020, we also completed the acquisition of Behavioral Health Services, LLC and subsidiaries (“BHS”), a Missouri limited liability company and provider of medical, retail pharmacy, and billing services.
On November 20, 2020, we completed the acquisition of 43.46% of Glocal Healthcare Systems Private Limited and subsidiaries (“Glocal”), an India-based healthcare company, which was presented as an equity method investment. On March 26, 2021, UpHealth Holdings acquired an additional 45.94% of Glocal and recognized a gain of $0.6 million on our equity method investment through the step-acquisition, which is presented as a gain on consolidation of equity method investment in the condensed consolidated statement of operations for the three months ended March 31, 2021. On May 14, 2021, June 21, 2021, and August 27 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8% and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of March 31, 2022. Glocal is included in our condensed consolidated financial statements as of March 26, 2021.
On January 25, 2021, UpHealth Holdings completed the acquisition of TTC Healthcare, Inc. (“TTC”), a Delaware corporation and a provider of medical, retail pharmacy, and billing services for individuals with complex medical and behavioral health needs.
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On April 27, 2021, UpHealth Holdings completed the acquisition of Innovations Group, Inc. (d/b/a MedQuest) (“Innovations”), a Utah corporation and a Utah-based internet pharmacy company.
Cloudbreak
Cloudbreak, a Delaware limited liability company that was formed on May 26, 2015, is a unified telemedicine and video medical interpretation solutions provider. On June 9, 2021, contemporaneous with the GigCapital2 merger with UpHealth Holdings, GigCapital2 completed the acquisition of Cloudbreak.
See Note 3, Business Combinations, for further information.
2.Summary of Significant Accounting Policies
Basis of Presentation and 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 sheet as of December 31, 2021 has 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.
Certain amounts included in the prior quarter's condensed consolidated financial statements have been reclassified to conform to the current quarter's presentation.
Principles of Consolidation
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.
We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) guidance for identification and reporting of entities over which control is achieved through means other than voting rights. The guidance defines such entities as Variable Interest Entities (“VIEs”). We consolidate VIEs when we have variable interests and are the primary beneficiary. We continually evaluate our involvement with VIEs to determine when these criteria are met.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups (“JOBS”) Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised accounting standard at the time private companies adopt the new or revised standard.
Fiscal Year
Our fiscal year ends on December 31. References to fiscal year 2022 and fiscal year 2021 refer to our fiscal year ending December 31, 2022 and our fiscal year ended December 31, 2021, respectively.
Use of Estimates and Assumptions
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;
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•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.
Foreign Currency Translation Adjustments
Balance sheet assets and liabilities of subsidiaries which do not use the U.S. dollar as their functional currency are translated at the exchange rate at the end of the reporting period. Income statement amounts are translated using a weighted-average exchange rate during the period. Equity accounts and noncontrolling interests are translated using historical exchange rates at the date the entry to shareholder equity was recorded, except for the change in retained earnings during the reporting period, which is translated using the same weighted-average exchange rate used to translate the condensed consolidated statements of operations. The net cumulative translation adjustment is reported in accumulated other comprehensive income (loss), net of tax, in the condensed consolidated balance sheets.
Foreign Currency Transactions
Foreign exchange transactions are recorded at the exchange rate prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at foreign exchange rates in effect at the end of the reporting period. Exchange differences arising on settlements/period-end translations are recognized in the condensed consolidated statements of operations in the period they arise.
Fair Value Measurements
Fair value is measured in accordance with ASC guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. We measure fair value for financial instruments on an ongoing basis. We measure fair value for non-financial assets when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist.
Cash and Cash Equivalents
We consider all cash on deposit, money market funds, and short-term investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents consist of amounts we have on deposit with major commercial financial institutions.
Restricted Cash
At March 31, 2022 and December 31, 2021, we had $18.6 million of restricted cash, of which $18.1 million represented funds held in an escrow account, as agreed in our forward share purchase agreement (see Note 10, Capital Structure, for further information) and $0.5 million of funds held at our Glocal business.
Receivable
For software-as-a-service (“SaaS”) internet hosting, licenses, and subscriptions provided by our integrated care management operations, accounts receivable are carried at original invoice, net of an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by evaluating individual customer receivables on a monthly basis and considering a customer’s financial condition and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At March 31, 2022 and December 31, 2021, the allowance for doubtful accounts was $18.9 million.
For subscription-based medical language interpretation services provided by and the sales of products through our virtual care infrastructure operations, accounts receivable are carried at original invoice, net of an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by evaluating individual customer receivables on a monthly basis and considering a customer’s financial condition and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. At March 31, 2022 and December 31, 2021, the allowance for doubtful accounts was $21 thousand and $0.1 million, respectively.
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For medical services provided through our services operations, accounts receivable are recorded without collateral from patients, most of whom are local residents and are insured under third-party payor agreements. Accounts receivable are based on gross charges, reduced by explicit price concessions provided to third-party payors and implicit price concessions provided primarily to self-pay patients. Estimates for explicit price concessions are based on provider contracts and historical experience adjusted for economic conditions and other trends affecting our ability to collect outstanding amounts. For accounts receivable associated with self-pay patients, we record implicit price concessions in the period of service on the basis of our past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible.
For digital pharmacy prescriptions provided through our services operations, accounts receivable are recorded at net invoice amount from patients. For all prescriptions including compounded and customized medications, substantially all accounts receivable are paid by credit card at the time of shipment. At March 31, 2022 and December 31, 2021, we determined that no allowance for doubtful accounts was necessary.
For the three months ended March 31, 2022, there were no significant customer concentrations. For the three months ended March 31, 2021, two customers accounted for approximately 24% and 16% of total revenues. At December 31, 2021, one customer accounted for approximately 21% of total accounts receivable.
Inventories
Inventories primarily consist of stock of medicines and pharmaceutical products, and are stated at the lower of cost or net realizable value. Cost comprises purchase price and all incidental expenses incurred in bringing the inventory to its present location and condition. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, with a normal margin to sell. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Equity Method Investment
For the period from January 1, 2021 through March 26, 2021, we held an interest in the privately-held equity securities of Glocal in which we did not have a controlling interest, but were able to exercise significant influence. Based on the terms of these privately-held securities, we determined that we exercised significant influence on Glocal, applied the equity method of accounting for our investment in Glocal, and presented our investment in Glocal in equity method investments in the condensed consolidated balance sheets. Any and all gains and losses on privately-held equity securities, realized and unrealized, were recorded in other income (expense) in the condensed consolidated statements of operations. Income recognized in our equity method investments was reduced by the expected amortization from intangible assets recognized through the fair value step-up, until we acquired a controlling financial interest and consolidated Glocal.
Valuations of privately-held securities in which we do not have a controlling financial interest are inherently complex due to the lack of readily available market data and requires the use of judgment. The carrying value is not adjusted for our privately-held equity securities if there are no observable price changes in a similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment. Our impairment analysis encompasses an assessment of both qualitative and quantitative factors, including the investee’s financial metrics, market acceptance of the investee’s product or technology, and the rate at which the investee is using its cash. If the investment is considered impaired, we recognize an impairment in the condensed consolidated statements of operations and establish a new carrying value for the investment.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated economic lives of the assets, which range as follows:
| Land | Indefinite | ||||
| Buildings | 39.5 years | ||||
| Medical and surgical equipment | 13 years | ||||
| Electrical and other equipment | 5-7 years | ||||
| Computer equipment, furniture and fixtures | 3-7 years | ||||
| Vehicles | 5-7 years | ||||
| Internal-use software | 3 years | ||||
Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated economic life of the asset.
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When assets are retired or disposed of, the asset costs and related accumulated depreciation or amortization are removed from the respective accounts and any related gain or loss is recognized in the condensed consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which extend the economic lives of assets, are capitalized.
Software Development Costs
We capitalize our ongoing costs of developing internal-use software during the application development stage, which consists primarily of internal personnel costs and external contractor costs.
Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers.
Intangible Assets
Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for potential impairment when events or circumstances indicate that carrying amounts may not be recoverable. An impairment charge of $0.7 million was recognized during the three months ended March 31, 2022 at TTC. No impairment charge was recognized during the three months ended March 31, 2021.
Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charge was recognized in the three months ended March 31, 2022 or 2021.
Goodwill
Our goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired. We assess goodwill for impairment on an annual basis as of the first day of our fourth quarter, or sooner if events indicate such a review is necessary through a triggering event. An impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than its respective carrying value. The impairment for goodwill is limited to the total amount of goodwill allocated to the reporting unit. Future changes in the estimates used to conduct the impairment review, including revenue projections, market values, and changes in the discount rate used, could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-down of a portion or all of goodwill. The discount rate used is based on independently calculated risks, our capital mix, and an estimated market premium. During the three months ended March 31, 2022, we recorded a goodwill impairment at Glocal in the amount of $5.5 million. During the three months ended December 31, 2021, we recorded a goodwill impairment at each of our three segments in the amount of $297.9 million. There was no impairment of goodwill during the three months ended 2021.
The estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of each acquisition date to estimate the fair value of assets acquired and liabilities assumed. We believe that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are waiting for additional information necessary to finalize those fair values for Cloudbreak. Therefore, the provisional measurements of fair value reflected for Cloudbreak are subject to change and such changes could be significant.
In evaluating whether new information obtained meets the criteria for adjusting provisional amounts, management must consider all relevant factors, including:
• The timing of the receipt of the additional information that management could have used in its evaluation on or after the acquisition date, and
• Whether management can identify a reason that a change to the provisional amounts is warranted and not driven by a discrete independent event occurring subsequent to the acquisition.
Debt Issuance Costs and Original Issue Discounts
The third-party cost of issuing debt results in the recognition of debt issuance costs (“DIC”), which are capitalized and presented as a net reduction to the face amount of the debt. DIC is amortized using the effective interest rate method over the expected life of the debt.
The reduction in gross proceeds from a debt facility by a lender or lenders results in an original issue discount (“OID”), which is amortized using the effective interest rate method over the expected life of the debt. The amortization of OID for the reporting period results in the recognition of additional interest expense.
Warrant Liabilities
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We account for the Private Placement Warrants and PIPE Warrants that are not indexed to our own stock as liabilities at fair value on the condensed consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense) in the condensed consolidated statements of operations. We will continue to adjust the liabilities for changes in fair value until the earlier of the exercise or expiration of the common stock warrants. At that time, the portion of the warrant liability related to the common stock warrants will be reclassified to additional paid-in capital.
Forward Share Purchase Agreement
On June 3, 2021, we entered into a third-party put option arrangement assuming the obligation to repurchase our common stock at a future date by transferring cash to the third-party under certain conditions described in more detail in Note 10, Capital Structure. Due to its mandatorily redeemable for cash feature, we have recorded such obligation as a forward share purchase liability in our condensed consolidated balance sheets.
Stock Based Compensation
Our stock-based compensation primarily consists of stock options and restricted stock units (“RSUs”). Stock-based compensation is recognized in the consolidated statements of operations based on the grant date fair value of the awards. The fair value of stock options is determined on the grant date using a Black-Scholes model. The fair value of RSUs is determined by the grant date market price of our common shares. The compensation expense recognized for stock-based awards is recognized ratably over the service period of the awards.
Revenue Recognition
We recognize revenue in accordance with ASC guidance on revenue from contracts with customers. Revenue is reported at the amount that reflects the consideration to which we expect to be entitled in exchange for providing goods and services.
Contract Assets, Contract Liabilities, and Remaining Performance Obligations
We record a contract asset when revenue recognized on a contract exceeds the billings. Thrasys and Cloudbreak generally invoice customers annually, quarterly or monthly. BHS, TTC, Glocal, and Innovations generally invoice their customers upon providing services as the performance obligations are deemed complete. Contract assets are included in accounts receivable in the condensed consolidated balance sheets.
We record deferred revenue when billed amounts have been invoiced and received in advance of revenue recognition. It is recognized as revenue when transfer of control to customers has occurred or services have been provided. The deferred revenue balance does not represent the remaining contract value of multi-year, non-cancelable subscription agreements. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size, and new business linearity within the period.
The transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unbilled receivables and deferred revenue that will be recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations is influenced by several factors, including seasonality, the timing of renewals, the timing of delivery of software licenses, average contract terms, and foreign currency exchange rates. Unbilled portions of the remaining performance obligations are subject to future economic risks including bankruptcies, regulatory changes, and other market factors.
We exclude amounts related to performance obligations that are billed and recognized as they are delivered. This primarily consists of professional services contracts that are on a time-and-materials basis.
Services Revenues
We derive our services revenues primarily through the provision of professional services through Thrasys; the provision of medical and behavioral health services by accredited medical professionals through BHS, TTC, and Glocal; and the provision of subscription-based medical language interpretation services through Cloudbreak, as follows:
•Services – Professional services for training, set-up, configuration, implementation, and customization services
The majority of our professional services contracts related to SaaS are on a time and materials basis, which may also be independently offered by our competitors. When these services are not combined with other SaaS revenues as a distinct performance obligation, revenue is recognized as the services are rendered for time and materials contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenue and configuration fees are recognized as the services are completed.
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•Services – Medical and behavioral services provided through our clinics and hospitals, digital dispensaries, and behavioral services operations
Performance obligations for medical and behavioral services provided by accredited medical and clinical professionals are satisfied over time as services are provided, and revenue is recognized accordingly. Revenue is based on gross charges, reduced by explicit price concessions provided to third-party payors and implicit price concessions provided primarily to self-pay patients. Estimates for explicit price concessions are based on provider contracts and historical experience, adjusted for economic conditions and other trends affecting our ability to collect outstanding items. Substantially all of our patients are insured under third-party payor agreements.
Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance, which may vary in amount. We also provide services to uninsured patients and may offer those uninsured patients a discount from standard charges. We estimate the transaction price for patients with deductibles and coinsurance, and from those who are uninsured, based on historical experience and market conditions. We determined that the nature, amount, timing, and uncertainty of revenue and cash flows are affected by payors having different reimbursement and payment methodologies, length of the patient’s service, and method of reimbursement.
Estimates of net realizable value are subject to significant judgment and approximation by management. It is possible that actual results could differ from the historical estimates management has used to help determine the net realizable value of revenue. If actual collections either exceed or are less than the net realizable value estimates, we record a revenue adjustment, either positive or negative, for the difference between the estimate of the receivable and the amount actually collected in the reporting period in which the collection occurred. No significant adjustments were recorded in the three months ended March 31, 2022 and 2021.
•Services – Subscription-based medical language interpretation services
Service fees of subscription-based fixed monthly minute medical language interpretation services are recognized monthly on a straight-line basis over the term of the contract due to the stand-ready nature of the services provided. Variable consideration received for medical language interpretation services, information technology services, and for the lease of My Accessible Real-Time Trusted Interpreter (“Martti™”) devices, our language access solution, is based on a fixed per item charge applied to a variable quantity. Variable consideration for these services is recognized over time in accordance with the “right to invoice” practical expedient and therefore is not subject to revenue constraint evaluation. Revenue related to the sale of Martti™ devices is recognized at a point in time upon delivery of the devices to the customer. We may enter into multiple component services arrangements that bundle the pricing for the lease of Martti™ devices with information technology services, but the lease may not always accompany Martti™ services. When an equipment lease is bundled with services, allocation of the transaction price consideration between the lease and nonlease components of the lease is required. We have determined that the consideration allocated to the lease components in its bundled multiple component services arrangements is not material to the financial statements.
Licenses and Subscriptions Revenues
Software license revenue is recognized by Thrasys based on whether or not the license constitutes a distinct performance obligation. If the license is a distinct performance obligation, separate from a distinct performance obligation for hosting services, it may be fully recognized on the date license rights are granted to the customer and access is granted; otherwise, it is an indistinct performance obligation, which is recognized ratably over the contract term, along with other hosting services beginning on the commencement date of each contract, which is the date license rights are granted to the customer.
Subscription revenue from SaaS hosting access and support and maintenance provided by Thrasys are recognized ratably over the contract term beginning on the commencement date of each contract, which is the date our service is made available to the customer. Our subscription service arrangements are noncancellable and do not contain refund-type provisions.
Product Revenues
We derive product revenue from sales of products through Innovations' digital pharmacy operations, BHS' pharmaceutical operations, and Glocal's construction of clinics and sales of digital dispensaries. Our pharmacy sales are primarily a function of the price per unit for pharmaceutical products sold and the number of prescriptions provided to customers. We recognize revenue for Glocal's construction of clinics and sales of digital dispensaries over time based on the percentage of costs incurred to date relative to the estimated total costs for the contract, as this method best depicts how control of the product is being transferred to the customer.
Contracts with Multiple Performance Obligations and Transaction Prices
From time to time, we may enter into contracts that contain multiple performance obligations, particularly with our SaaS internet hosting, licenses, subscriptions, and services. Additionally, we may enter into contracts that contain multiple performance obligations with our clinics and digital dispensaries, including maintenance and telehealth services. For these arrangements, we
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allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations.
A significant portion of our contracts with customers have fixed transaction prices. For some contracts, the amount of consideration to which we will be entitled is variable. We include variable consideration in a contract’s transaction price only to the extent that we have a relatively high level of confidence that the amounts will not be subject to significant reversals. In determining amounts of variable consideration to include in a contract’s transaction price, we rely on our experience and other evidence that supports our qualitative assessment of whether revenue would be subject to significant reversal.
Cost of Goods and Services (“COGS”)
Cost of services for professional services, medical and behavioral services, and subscription-based medical language interpretation services includes the cost of direct labor, payroll taxes, and direct benefits of those individuals who provide direct services and/or generate billable hours, and an appropriately allocated portion of indirect overhead.
Cost of services for licenses and subscriptions includes all the accumulated costs of providing a hybrid cloud-based hosting arrangement; the cost of direct labor, payroll taxes, and direct benefits of those individuals who provide support and maintenance services; and an appropriately allocated portion of indirect overhead.
Cost of goods for products is the accumulated total of all costs used to create a product, which has been sold to generate revenue. These costs include direct materials (resale products and raw and externally sourced materials for internally manufactured products), direct labor, an appropriately allocated portion of indirect overhead, and ancillary costs, such as freight, delivery, insurance, and non-sales and non-income taxes. Direct labor is the direct provision of activities to manufacture or provide a good or service. Indirect overhead include allocable costs, such as facilities, information technology, and depreciation and amortization costs.
Taxes Collected from Customers and Remitted to Governmental Authorities
We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected from customers. Accordingly, such tax amounts are not included as a component of revenue or cost of goods and services in the condensed consolidated statements of operations.
Research and Development Costs
Research and development costs are expensed as incurred and were $1.6 million for the three months ended March 31, 2022 and 2021.
Advertising, Marketing, and Promotion Expenses
Advertising, marketing, and promotion costs are expensed as incurred. Advertising expense was $1.0 million and $0.9 million for the three months ended March 31, 2022 and 2021, respectively, and are included within sales and marketing expenses in the condensed consolidated statements of operations.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the year in which the differences are expected to affect taxable income. Valuation allowances are established when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for income tax uncertainties in accordance with ASC guidance on income taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock of the Company outstanding during the period. Diluted net earnings (loss) per share is computed by giving effect to all potential shares of common stock, including outstanding stock options, RSUs and convertible notes, to the extent dilutive. Basic and diluted net earnings (loss) per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.
Legal and Other Contingencies
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We are currently involved in various claims and legal proceedings. We review the status of each significant matter and assess our potential financial exposure on a quarterly basis. We accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable, and the amount can be reasonably estimated (see Note 18, Commitments and Contingencies, for further information).
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 to interim periods within the fiscal year beginning on January 1, 2023, using the modified retrospective approach. We are currently evaluating the effect the adoption of this ASU will have on our condensed consolidated financial statements. Management expects the standard to increase long-term assets and lease liabilities upon adoption. The effects on the results of operations are not expected to be significant, as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.
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 consolidated financial statements.
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3.Business Combinations
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired.
Trade Names
A trade name is a legally-protected trade or similar mark. Acquired trade names are valued using an income method approach, generally the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of trade names and applies it to the after-tax discounted free cash flow attributed to the trade name. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.
Technology and Intellectual Property
Technology and intellectual property (“IP”) is a design, work, or invention that is the result of creativity to which one has ownership rights that may be protected through a patent, copyright, trademark, or service mark. IP is valued using the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of IP and applies it to the after-tax discounted free cash flow attributed to the IP. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.
IP is amortized following the pattern in which the expected benefits will be consumed or otherwise used up over each component’s useful life, based on our plans and expectations for the IP going forward, which is generally the underlying IP’s legal expiration dates.
Customer Relationships
Customer relationships are intangible assets that consist of historical and factual information about customers and contacts collected from repeat transactions with customers, with or without any underlying contracts. The information is generally organized as customer lists or customer databases. We have the expectation of repeat patronage from these customers based on the customers’ historical purchase activity, which creates the intrinsic value over a finite period of time and translates into the expectation of future revenue, income, and cash flow.
Customer relationships are valued using projected operating income, adjusted for estimated future existing customer growth, less estimated future customer attrition, net of charges for net tangible assets, IP charge, trade name charge, and work force. The concluded value is the after-tax discounted free cash flow.
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 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 expect to finalize the valuation and complete the purchase price allocation for Cloudbreak during the three months ended June 30, 2022.
The Formation of UpHealth Holdings
UpHealth Holdings was formed on October 26, 2020, as a Delaware corporation, when the shareholders of UpHealth Services, Inc. contributed all of the shares of UpHealth Services to UpHealth Holdings in exchange for outstanding common stock of UpHealth Holdings, resulting in UpHealth Services being a wholly-owned subsidiary of UpHealth Holdings. This was accounted for as a common control transaction with assets and liabilities carried over at book value.
Acquisition of Thrasys
On November 20, 2020, UpHealth Holdings completed the 100% acquisition of Thrasys, in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $167.4 million, net of cash and restricted cash acquired of $2.5 million. The acquisition brings additional software and support synergies to our consolidated digital healthcare offerings.
Under the terms of the merger agreement, shares of common stock held by two officers of Thrasys, with a value of $10.0 million, have been restricted for 12 months from the closing date of the merger, as security for a potential indemnification claim related to a Thrasys tax matter (see Note 12, Income Taxes, for further information).
We identified developed technology and intellectual property, customer relationships, and trade names as definite-lived intangible assets. Developed technology and intellectual property consists of Thrasys' SyntraNetTM platform, which is supported by 24 domestic and international patents. Customer relationships consists of Thrasys' relationships with health plans, health systems and
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hospitals, physician groups, and accountable care organizations that are expected to contribute to recurring revenue and cross sell of our offerings. Trade names consist of the SyntraNetTM trademark.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Thrasys. The goodwill is not deductible for tax purposes.
The following table sets forth the allocation of the purchase price to Thrasys’ 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 November 20, 2021.
| (In thousands) | As of March 31, 2022 | Measurement Period Adjustments | As of November 20, 2020 | ||||||||||||||
| Accounts receivable | $ | 3,491 | $ | — | $ | 3,491 | |||||||||||
| Prepaid expenses and other | 3,001 | — | 3,001 | ||||||||||||||
| Identifiable intangible assets | 27,875 | — | 27,875 | ||||||||||||||
| Property and equipment | 101 | — | 101 | ||||||||||||||
| Other assets | 19 | — | 19 | ||||||||||||||
| Goodwill | 143,964 | (4,124) | 148,088 | ||||||||||||||
| Total assets acquired | 178,451 | (4,124) | 182,575 | ||||||||||||||
| Accounts payable | 1,779 | — | 1,779 | ||||||||||||||
| Accrued expenses and other current liabilities | 3,949 | (1,373) | 5,322 | ||||||||||||||
| Debt | 430 | (531) | 961 | ||||||||||||||
| Deferred tax liabilities | 6,680 | 302 | 6,378 | ||||||||||||||
| Deferred revenue | 700 | — | 700 | ||||||||||||||
| Total liabilities assumed | 13,538 | (1,602) | 15,140 | ||||||||||||||
| Net assets acquired | $ | 164,913 | $ | (2,522) | $ | 167,435 | |||||||||||
Thrasys applied for forgiveness of its $0.5 million PPP loan during 2020 and it was forgiven in full and the subsidiary was legally released from repaying the loan by the SBA in June 2021. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended June 30, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreement, resulting in a decrease in net assets acquired and goodwill of $2.5 million during the three months ended June 30, 2021. During the three months ended December 31, 2021, a $1.4 million decrease in accrued expenses and other current liabilities was recorded related to a shareholder tax liability, with an offsetting increase in goodwill, as well as a $0.3 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 Thrasys and the related estimated useful lives consist of the following:
| Value | Useful Life | ||||||||||
| (In thousands) | (in years) | ||||||||||
| Definite-lived intangible assets - Trade names | $ | 6,925 | 10 | ||||||||
| Definite-lived intangible assets - Technology and intellectual property | 10,825 | 7 | |||||||||
| Definite-lived intangible assets - Customer relationships | 10,125 | 10 | |||||||||
| Total fair value of identifiable intangible assets | $ | 27,875 | |||||||||
Acquisition of BHS
On November 20, 2020, UpHealth Holdings completed the 100% acquisition of BHS in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $15.8 million, net of cash acquired of $1.0 million. The acquisition adds the services segment to our operations and brings additional medical synergies to our consolidated digital healthcare offerings.
We identified trade names as a definite-lived intangible asset.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of BHS. The goodwill is deductible for tax purposes.
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The following table sets forth the allocation of the purchase price to BHS’ 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 November 20, 2021.
| (In thousands) | As of March 31, 2022 | Measurement Period Adjustments | As of November 20, 2020 | ||||||||||||||
| Accounts receivable | $ | 1,257 | $ | — | $ | 1,257 | |||||||||||
| Inventories | 100 | — | 100 | ||||||||||||||
| Prepaid expenses and other | 40 | — | 40 | ||||||||||||||
| Identifiable intangible assets | 225 | — | 225 | ||||||||||||||
| Property and equipment | 53 | — | 53 | ||||||||||||||
| Other assets | 4 | — | 4 | ||||||||||||||
| Deferred tax assets | 19 | — | 19 | ||||||||||||||
| Goodwill | 15,443 | (663) | 16,106 | ||||||||||||||
| Total assets acquired | 17,141 | (663) | 17,804 | ||||||||||||||
| Accounts payable | 374 | — | 374 | ||||||||||||||
| Accrued expenses and other current liabilities | 1,067 | 641 | 426 | ||||||||||||||
| Debt | 113 | (1,121) | 1,234 | ||||||||||||||
| Total liabilities assumed | 1,554 | (480) | 2,034 | ||||||||||||||
| Net assets acquired | $ | 15,587 | $ | (183) | $ | 15,770 | |||||||||||
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 $0.2 million during the three months ended June 30, 2021. During the three months ended June 30, 2021, BHS recorded an accrual in the amount of $0.4 million for amounts owing to providers as of the acquisition date, with an offsetting increase in goodwill. BHS submitted a request for forgiveness of its $1.0 million PPP loans during 2021 and it was forgiven in full and BHS was legally released from repaying the loan by the SBA in August 2021. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended September 30, 2021. During the three months ended December 31, 2021, BHS recorded $0.1 million for the forgiveness of PRF loans as a decrease in debt and goodwill. Additionally, $0.2 million was recorded for customer credit liabilities as an increase to accrued expenses and other current liabilities and goodwill.
The acquired intangible assets from BHS and the related estimated useful lives consist of the following:
| Value | Useful Life | ||||||||||
| (In thousands) | (in years) | ||||||||||
| Definite-lived intangible assets—Trade names | $ | 225 | 3 | ||||||||
| Total fair value of identifiable intangible assets | $ | 225 | |||||||||
Acquisition of TTC
On January 25, 2021, UpHealth Holdings completed the 100% acquisition of TTC in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $45.9 million, net of cash acquired of $2.4 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.
We identified trade names as a definite-lived intangible asset.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of TTC. The goodwill is not deductible for tax purposes.
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.
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| (In thousands) | As of March 31, 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
On November 20, 2020, UpHealth Holdings entered into a stock purchase agreement to acquire 43.46% of Glocal. On March 26, 2021, UpHealth Holdings completed a step acquisition of an additional 45.94% of Glocal, bringing our total ownership to 89.4%. The acquisition resulted in our ownership exceeding 50.0%, requiring consolidation of Glocal as of March 26, 2021. On May 14, 2021, June 21, 2021, and August 27 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8%, and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of March 31, 2022. Total purchase price consideration included a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $131.5 million, net of cash acquired of $0.4 million. The acquisition brings additional software and support synergies to our virtual care infrastructure offerings.
We identified developed technology and intellectual property as definite-lived intangible assets. Glocal has intellectual property and computer software associated with its digital dispensary technology and its telemedicine software. This software platform has historically been used to provide patient care to health populations in India via technology-based hospital centers run by the government in a fee-for-service model based on usage.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Glocal. The goodwill is not deductible for tax purposes.
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.
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| (In thousands) | As of March 31, 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
On April 27, 2021, UpHealth Holdings completed the 100% acquisition of Innovations in exchange for a promissory note for future cash consideration, as defined in the merger agreement, and common stock interests in UpHealth Holdings totaling $169.8 million, net of cash acquired of $0.3 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.
We identified developed technology and intellectual property, customer relationships, trade names, and a lease as definite-lived intangible assets. Developed technology and intellectual property consists of Innovations' eMedplus software, which is a full-service prescription management system licensed by the U.S. Drug Enforcement Agency and industry groups. Customer relationships consist
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of Innovations' relationships with physician groups, who make up a significant portion of its revenue and continue to use the platform as a prescription management and delivery service without high levels of attrition. Trade names consist of the MedQuest brand, which customers identify as the supplier of the product they use, and which is licensed by the government and industry groups.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Innovations. The goodwill is not deductible for tax purposes.
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 we do not anticipate additional items subject to reevaluation during the remainder of the measurement period.
| (In thousands) | As of March 31, 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 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 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 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 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
On June 9, 2021, UpHealth (fka GigCapital2) completed the Cloudbreak Business Combination in an exchange of cash, notes, and common stock interests in UpHealth totaling $142.0 million, net of cash acquired of $0.9 million. The acquisition brings additional software and support synergies to our virtual care infrastructure offerings.
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We identified developed technology and intellectual property, customer relationships, and trade names as definite-lived intangible assets. Developed technology and intellectual property primarily consists of Martti™, Cloudbreak’s core telehealth offering, which is a remote video enabled interpretation software that puts certified medical interpreters alongside clinical care teams at video endpoints in provider networks nationwide. Customer relationships consist of Cloudbreak's core customers, which are comprised of hospitals and health systems, Federally Qualified Healthcare Clinics, urgent care centers, standalone medical practices, and schools nationwide. Trade names consist of the Martti™ trademark.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Cloudbreak. The goodwill is partially deductible for tax purposes.
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 subject to reevaluation during the measurement period.
| (In thousands) | As of March 31, 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 | 107,310 | (3,658) | 110,968 | ||||||||||||||
| Total assets acquired | 153,953 | (3,145) | 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 | 4,003 | (3,903) | 7,906 | ||||||||||||||
| Other long-term liabilities | 382 | 382 | — | ||||||||||||||
| Debt | 3,752 | — | 3,752 | ||||||||||||||
| Total liabilities assumed | 11,937 | (3,159) | 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.
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 of UpHealth Holdings
On June 9, 2021, GigCapital2 completed the UpHealth Business Combination as disclosed above, in an exchange of cash, notes, and common stock interests in UpHealth for all the shares of UpHealth Holdings' capital stock issued and outstanding immediately prior to the effective date of the acquisition. The acquisition was accounted for as a reverse recapitalization, which is the equivalent of
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UpHealth Holdings issuing stock for the net assets of GigCapital2, accompanied by a recapitalization, with UpHealth Holdings treated as the accounting acquiror. The determination of UpHealth Holdings as the accounting acquiror was primarily based on the fact that subsequent to the acquisition, UpHealth Holdings owns a majority of the voting power of the combined company, UpHealth Holdings comprises 75% of the ongoing operations of the combined entity, UpHealth Holdings controls a majority of the governing body of the combined company, and UpHealth Holdings' senior management comprises most of the senior management of the combined company. The net assets of GigCapital2 were stated at historical cost with no goodwill or other intangible assets recorded. Reported results from operations included herein prior to the acquisition are those of UpHealth Holdings. The shares and corresponding capital amounts and loss per share related to UpHealth Holdings' outstanding common stock prior to the acquisition have been retroactively restated to reflect the exchange ratio (1.0 UpHealth Holdings share to 10.28 GigCapital2 shares) established in the business combination agreement.
Acquisition, Integration and Transformation Costs
For the three months ended March 31, 2022 and 2021, we have incurred $2.4 million and $2.7 million, respectively, of acquisition, integration, and transformation costs for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations), and Cloudbreak, which are included in the condensed consolidated statements of operations.
Combined Pro Forma Results for the Three Months Ended March 31, 2021
The results of operations of UpHealth Holdings and its subsidiaries (BHS, Thrasys, TTC, Glocal, and Innovations), 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 March 31, | |||||
| (In thousands) | 2021 | ||||
| Pro Forma | |||||
| Revenues | $ | 30,608 | |||
| Net income (loss) | $ | (3,872) | |||
| Basic earnings per share | $ | (0.55) | |||
| Diluted earnings per share | $ | (0.55) | |||
4.Property and Equipment
Property and equipment consisted of the following:
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Land | $ | 5,024 | $ | 15,459 | |||||||
| Buildings | 15,849 | 18,086 | |||||||||
| Leasehold improvements | 3,615 | 3,393 | |||||||||
| Medical and surgical equipment | 2,480 | 2,953 | |||||||||
| Electrical and other equipment | 424 | 508 | |||||||||
| Computer equipment, furniture and fixtures | 13,675 | 12,029 | |||||||||
| Vehicles | 291 | 185 | |||||||||
| Internal use software | 4,720 | 3,837 | |||||||||
| Construction in progress | 7,246 | 4,363 | |||||||||
| 53,324 | 60,813 | ||||||||||
| Accumulated depreciation and amortization | (6,221) | (4,741) | |||||||||
| Total property and equipment, net | $ | 47,103 | $ | 56,072 | |||||||
Depreciation expense was $1.5 million and $44 thousand for the three months ended March 31, 2022 and 2021, respectively.
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5. Goodwill and Intangible Assets
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.
The carrying amount of goodwill consisted of the following:
| (In thousands) | Goodwill | ||||
| Balance at December 31, 2021 | $ | 284,268 | |||
| Measurement period adjustment | 5,494 | ||||
| Goodwill and intangible asset impairment | (5,494) | ||||
| Balance at March 31, 2022 | $ | 284,268 | |||
The changes in carrying amounts of intangible assets consisted of the following as of March 31, 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 | (858) | (3,380) | (838) | (43) | (5,119) | ||||||||||||||||||||||||
| Impairments | (680) | — | — | — | (680) | ||||||||||||||||||||||||
| Foreign exchange | — | (527) | — | — | (527) | ||||||||||||||||||||||||
| March 31, 2022 | $ | 27,968 | $ | 57,864 | $ | 29,774 | $ | 631 | $ | 116,237 | |||||||||||||||||||
An impairment charge of $0.7 million was recognized during the three months ended March 31, 2022 at TTC. No impairment charge was recognized during the three months ended March 31, 2021.
The estimated useful lives of trade names are 3-10 years, the estimated useful life of technology and intellectual property is 5-7 years, and the estimated useful life of customer relationships is 10 years.
Amortization expense was $5.1 million and $0.9 million for the three months ended March 31, 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 | $ | 2,393 | $ | 7,701 | $ | 2,718 | $ | 125 | $ | 12,937 | |||||||||||||||||||
| 2023 | 3,149 | 10,394 | 3,313 | 169 | 17,025 | ||||||||||||||||||||||||
| 2024 | 3,083 | 10,394 | 3,313 | 169 | 16,959 | ||||||||||||||||||||||||
| 2025 | 3,083 | 10,394 | 3,313 | 168 | 16,958 | ||||||||||||||||||||||||
| 2026 | 3,083 | 9,743 | 3,313 | — | 16,139 | ||||||||||||||||||||||||
| Thereafter | 13,177 | 9,238 | 13,804 | — | 36,219 | ||||||||||||||||||||||||
| $ | 27,968 | $ | 57,864 | $ | 29,774 | $ | 631 | $ | 116,237 | ||||||||||||||||||||
6.Investment in Unconsolidated Entities
On November 20, 2020, we entered into a stock purchase agreement to acquire 43.46% of Glocal in exchange for a promissory note for future cash consideration, as defined in the stock purchase agreement, and common stock interests in UpHealth, for a purchase price of $57.4 million. Since we did not have a controlling financial interest, this investment was presented as an equity
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method investment in our condensed consolidated balance sheets for the year ended December 31, 2020. For the period from January 1, 2021 through March 25, 2021, our share of the net income (loss) of Glocal included amortization expense of $1.1 million.
We acquired a controlling financial interest in Glocal on March 26, 2021, increasing our ownership to 89.40%, and recognized a fair value gain on the step-acquisition of $0.6 million, prior to consolidation.
On May 14, 2021, June 21, 2021 and August 27, 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8%, and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of March 31, 2022 and December 31, 2021.
See Note 3, Business Combinations, for further information.
7.Accrued Expenses
Accrued expenses consisted of the following:
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Accrued professional fees | $ | 10,770 | $ | 10,238 | |||||||
| Accrued products and licenses | 17,820 | 17,889 | |||||||||
| Accrued interest on debt | 4,186 | 1,227 | |||||||||
| Accrued payroll and bonuses | 2,424 | 3,939 | |||||||||
| Accrued taxes in connection with shareholder distribution | 120 | 120 | |||||||||
| Other accruals | 2,359 | 2,671 | |||||||||
| Total accrued expenses | $ | 37,679 | $ | 36,084 | |||||||
8.Debt
Debt consisted of the following:
| (In thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Convertible notes | $ | 160,000 | $ | 160,000 | |||||||
| Other debt facilities (various maturities and interest rates) | 3,748 | 3,847 | |||||||||
| Provider Relief and EIDL Funds | 10 | 123 | |||||||||
| Seller notes | 18,681 | 18,680 | |||||||||
| Total debt | 182,439 | 182,650 | |||||||||
| Less: unamortized original issue and debt discount | (58,656) | (62,140) | |||||||||
| Total debt, net of unamortized original issue and debt discount | 123,783 | 120,510 | |||||||||
| Less: current portion of debt | (21,975) | (22,093) | |||||||||
| Noncurrent portion of debt | $ | 101,808 | $ | 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 March 31, 2022 and December 31, 2021, the fair value of the derivative was $3.1 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 March 31, 2022 was $6.0 million, of which $2.5 million related to contractual interest expense, $3.1 million related to derivative
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accretion, and $0.4 million related to debt issuance costs amortization. Total other income for the three months ended March 31, 2022 included a $4.8 million gain on the fair value of the derivative liability.
We may, at our election, force conversion of the 2026 Notes after the first anniversary of the issuance of the 2026 Notes, subject to a holder’s prior right to convert, if the last reported sale price of our common stock exceeds 130% of the conversion price for at least 20 trading days during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, and the 30-day average daily trading volume of our common stock ending on, and including, the last trading day of the applicable exercise period is greater than or equal to $2.0 million. Following certain corporate events that occur prior to the maturity date or if we force a mandatory conversion, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or has its notes mandatorily converted, as the case may be. In addition, in the event that a holder of the 2026 Notes elects to convert its 2026 Notes prior to the second anniversary of the issuance of the 2026 Notes, we will be obligated to pay an amount equal to twelve months of interest, or if on or after such second anniversary of the issuance of the 2026 Notes, any remaining amounts that would be owed to, but excluding, the third anniversary of the issuance of the 2026 Notes (the “Interest Make-Whole Payment”). The Interest Make-Whole Payment will be payable in cash or shares of our common stock as set forth in the Indenture.
In addition, we agreed to conduct one or more primary offerings of our equity securities in the aggregate amount of $35.0 million (the “Equity Offering”) and that such equity securities shall be subordinate in right of payment to the 2026 Notes. In the event that such Equity Offering is not consummated by October 9, 2022, the interest rate on the 2026 Notes will increase by an additional 1.0% per annum on the principal amount of the 2026 Notes on and after October 9, 2022 until maturity (unless further increased pursuant to this section), and if the Equity Offering is not consummated by (a) April 9, 2023, (b) October 9, 2023 or (c) April 9, 2024, the interest rate on the 2026 Notes will increase by an additional 1.0% per annum on the principal amount of the 2026 Notes on and after each such date until maturity. For the avoidance of doubt, the interest rate on the 2026 Notes will not exceed 10.25% per annum, and if the Equity Offering is consummated by us prior to any of the above referenced dates, there will be no increase in the interest rate on the 2026 Notes beyond the rate in effect at such time of consummation of the Equity Offering. As discussed in Note 10, Capital Structure, we completed an equity offering in October 2021, which satisfied these requirements.
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 $3.7 million (or INR 283 million) and $3.8 million (or INR 286 million) as of March 31, 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 months ended March 31, 2022, Glocal repaid none of the aggregate carrying value of the term loans. At March 31, 2022 and December 31, 2021 accrued interest on Glocal's debt facilities was $17 thousand and $23 thousand, respectively, and is included in accrued expenses in the condensed consolidated balance sheets. For the three months ended March 31, 2022, interest expense was $25 thousand.
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 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
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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 (see Note 5, Goodwill and Intangible Assets, for further information).
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 (see Note 5, Goodwill and Intangible Assets, for further information).
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 (see Note 5, Goodwill and Intangible Assets, for further information).
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.
As of 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 March 31, 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 $50 thousand and $39 thousand at March 31, 2022 and December 31, 2021, respectively, and is included in accrued expenses in the condensed consolidated balance sheets. Interest expense was $10 thousand and $1 thousand for the three months ended March 31, 2022 and 2021, respectively.
Seller Notes
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As part of the purchase price consideration for several of UpHealth Holdings' merger entities, we entered into seller notes payable to their former shareholders, which 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 March 31, 2022 and December 31, 2021, seller notes totaled $18.7 million.
The accrued interest payable was $1.2 million and $0.7 million at March 31, 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 March 31, 2022 and 2021, respectively.
Senior Debt Facility Fees
In March 2020, we agreed to pay a financial consulting firm, an affiliate of a related party, compensation related to finding and executing a senior financing facility, to be funded at the completion of the Business Combinations (see Note 1, Organization and Business, for further information). On June 9, 2021, in connection with the Business Combinations we paid the financial consulting firm total cash consideration of $0.5 million, for consummation of the senior financing.
Membership Redemptions and Due to Member
In November 2020, one of our subsidiaries entered into a redemption agreement with a member for $0.1 million. Consideration for the redemption agreement is in the form of a note payable that is non-interest bearing, nonsecured, and payable upon demand. The note was repaid in full during the three months ended March 31, 2021.
Contractual Maturities
At March 31, 2022, long-term debt contractual maturities, excluding unamortized original issue discount, were as follows:
| (In thousands) | |||||
| Remaining 2022 | $ | 21,976 | |||
| 2023 | — | ||||
| 2024 | — | ||||
| 2025 | — | ||||
| 2026 | 160,000 | ||||
| Thereafter | 463 | ||||
| Total | $ | 182,439 | |||
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 March 31, 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.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. Fair value measurements are categorized into one of three levels of the fair value hierarchy based on the lowest level of significant input used. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. These estimates may differ from the actual amounts that we could realize upon settlement.
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.
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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:
| March 31, 2022 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents - money market funds | $ | 34,008 | $ | — | $ | — | $ | 34,008 | |||||||||||||||
| $ | 34,008 | $ | — | $ | — | $ | 34,008 | ||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Derivative liability | $ | — | $ | — | $ | 3,148 | $ | 3,148 | |||||||||||||||
| Warrant liability | — | 156 | — | 156 | |||||||||||||||||||
| $ | — | $ | 156 | $ | 3,148 | $ | 3,304 | ||||||||||||||||
| 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 March 31, 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 months ended March 31, 2022 and the year ended December 31, 2021.
Cash equivalents at March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | |||||||||||||||||||||||
| (In thousands) | Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 34,008 | $ | — | $ | — | $ | 34,008 | |||||||||||||||
| Total cash equivalents | $ | 34,008 | $ | — | $ | — | $ | 34,008 | |||||||||||||||
| 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
In accounting for the 2026 Notes (see Note 8, Debt, for further information), 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. At March 31, 2022, the fair value of the derivative was $3.1 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 March 31, 2022 included a $4.8 million gain on the fair value of the derivative liability.
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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:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Stock price | $1.18 | $2.24 | |||||||||
| Volatility | 88.0% | 82.5% | |||||||||
| Risk free rate | 2.43% | 1.18% | |||||||||
| Exercise price | $10.65 | $10.65 | |||||||||
| Expected life (in years) | 4.19 | 4.44 | |||||||||
| Conversion periods | 2-5 years | 2-5 years | |||||||||
| Future share price | $0.01-$44.37 | $0.01-$34.05 | |||||||||
Private Placement Warrants and PIPE Warrants
We have classified the Private Placement Warrants and PIPE Warrants (see Note 10, Capital Structure) as liabilities at fair value, due to their redemption characteristics, with subsequent changes in their fair values to be recognized in the consolidated financial statements at each reporting date. At March 31, 2022, the fair value of the Private Placement Warrants and the PIPE Warrants was determined to be $0.18 per warrant, totaling $0.1 million and $0.1 million 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 months ended March 31, 2022, we recorded a $0.1 million gain 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 statement of operations.
The fair value of the Private Placement Warrants and PIPE Warrants is considered a Level 1 valuation as we have derived their value by using quoted market prices. The transfer of the Private Placement Warrants and PIPE Warrants to anyone other than the purchasers or their permitted transferees, would result in these Private Placement Warrants and PIPE Warrants having substantially the same terms as the Public Warrants, which are traded in active markets.
There were no transfers between fair value levels during the three months ended March 31, 2022 and year ended December 31, 2021.
10.Capital Structure
The consolidated statements of stockholders’ equity has been retroactively adjusted for all periods presented to reflect the Business Combinations and reverse recapitalization exchange ratio (1.0 UpHealth Holdings shares converted to 10.28 GigCapital2 shares) as discussed in Note 3, Business Combinations.
Preferred Stock
Our Second Amended and Restated Certificate of Incorporation authorizes the issuance of 1,000,000 shares of preferred stock, par value $0.0001 with such designation, rights and preferences as may be determined from time to time by our board of directors. At March 31, 2022 and December 31, 2021, there were no shares of preferred stock outstanding.
Common Stock
Our Second Amended and Restated Certificate of Incorporation, authorizes the issuance of 300,000,000 shares of common stock, par value of $0.0001. As of March 31, 2022 and December 31, 2021, there were 144,650,719 and 144,278,969 shares of common stock issued and outstanding, respectively.
As discussed in Note 3, Business Combinations, we have retroactively adjusted the shares issued and outstanding prior to June 9, 2021 to give effect to the exchange ratio established in the business combinations agreement to determine the number of shares of common stock into which they were converted.
On October 7, 2021, we completed an offering of 23,000,000 shares of our common stock, par value $0.0001 per share, at a public offering price of $1.75 per share, less underwriting discounts and commissions. In addition, during October 2021, the underwriters exercised their 30-day option to purchase 3,450,000 additional shares of our common stock at the public offering price, less underwriting discounts and commissions. The gross proceeds we received from this offering was $46.3 million, before underwriting discounts and commissions and estimated offering expenses of $3.3 million.
Common Stock Reserved for Future Issuance
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Shares of common stock reserved for future issuance as of March 31, 2022 were as follows:
| (In thousands) | Number of Shares | ||||
| Restricted stock units outstanding | 10,746 | ||||
| Stock options outstanding | 1,516 | ||||
| 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 | 12,460 | ||||
| 57,863 | |||||
Public Warrants
Warrants (the “Public Warrants”) issued in connection with GigCapital2's initial public offering are exercisable for $11.50 per share, and the exercise price and number of Public Warrant shares issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or recapitalization, reorganization, merger, or consolidation of GigCapital2 (now UpHealth, Inc.).
Each Public Warrant will become exercisable on the later of 30 days after the completion of the Business Combinations or 12 months from the closing of GigCapital2's initial public offering and will expire five years after the completion of the Business Combinations or earlier upon redemption or liquidation. If UpHealth is unable to deliver registered shares of common stock to the holder upon exercise of the Public Warrants during the exercise period, there will be no net cash settlement of these Public Warrants and the Public Warrants will expire worthless, unless they may be exercised on a cashless basis in the circumstances described in the Public Warrant agreement. Once the Public Warrants become exercisable, UpHealth may redeem the outstanding Public Warrants in whole and not in part at a price of $0.01 per Public Warrant upon a minimum of 30 days’ prior written notice of redemption, only in the event that the last sale price of UpHealth’s shares of common stock equals or exceeds $18.00 per share for any 20 trading days within the 30-trading day period ending on the third trading day before UpHealth sends the notice of redemption to the Public Warrant holders.
Under the terms of the Public Warrant agreement, UpHealth has agreed to use its best efforts to file a new registration statement under the Securities Act, following the completion of the initial business combination, for the registration of the shares of common stock issuable upon exercise of the Public Warrants included in private placement units.
As of March 31, 2022, there were 18,117,494 warrants outstanding, including 17,250,000 Public Warrants, 567,500 Private Placement Warrants, and 299,994 PIPE Warrants (see Private Placement and Pipe Subscription Agreements below).
Founder Shares
During the period from March 6, 2019 (date of GigiCapital2's inception) to March 12, 2019, GigCapital2's sponsor and Northland Gig2 Investment LLC purchased 2,500,000 shares of GigCapital2 common stock (the “Founder Shares”) for an aggregate purchase price of $25,000, or $0.01 per share. In April 2019, GigCapital2 effected a stock dividend of 0.493 shares of common stock for each outstanding share of common stock, resulting in the sponsor and Northland Gig2 Investment LLC holding an aggregate of 3,732,500 shares of its common stock. Subsequently, the sponsor and Northland Gig2 Investment LLC sold 68,041 shares and 31,959 shares, respectively, to EarlyBirdCapital, Inc. and the EarlyBird Group, collectively, for an aggregate purchase price of $670, or $0.0067 per share. In June 2019, GigCapital2 effected a stock dividend of 0.1541 shares of common stock for each outstanding share of common stock, resulting in the sponsor, Northland Gig2 Investment LLC, EarlyBirdCapital, Inc., and the EarlyBird Group holding an aggregate of 4,307,500 shares of its common stock as of March 31, 2022. The Founder Shares are identical to the common stock included in the Units sold in GigCapital2's initial public offering except that the Founder Shares are subject to certain transfer restrictions, as described in more detail below.
Private Placement
The GigCapital2 (now UpHealth, Inc.) founders purchased in a private placement sale (the “Private Placement”), that occurred simultaneously with the completion of the closing of the GigCapital2 initial public offering, an aggregate of 492,500 units (the “Private Placement Units”) at a price of $10.00 per unit. The founders also purchased from GigCapital2 an aggregate of 75,000 private placement units at a price of $10.00 per unit in a private placement that occurred simultaneously with the completion of the second closing of the GigCapital2 initial public offering with the exercise of the over-allotment option, for a total of 567,500 Private Placement Units. Among the Private Placement Units, 481,250 units were purchased by GigCapital2’s sponsor, 29,900 units were purchased by EarlyBirdCapital, Inc., a GigCapital2 underwriter, and 56,350 units were purchased by Northland Gig2 Investment LLC,
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a GigCapital2 underwriter. Each Private Placement Unit consists of one share of GigCapital2’s common stock, $0.0001 par value, one warrant, and one right to receive one-twentieth (1/20) of a share of common stock upon the consummation of GigCapital2’s initial business combination. Warrants (the “Private Placement Warrants”) will be exercisable for $11.50 per share, and the exercise price of the Private Placement Warrants may be adjusted in certain circumstances as described in terms of the Private Placement Warrants agreement.
Northland Gig2 Investment LLC, purchased 100,000 private underwriter shares (the “Private Underwriter Shares”), at a purchase price of $10.00 per share in a private placement that occurred simultaneously with the completion of the initial closing of the GigCapital2 initial public offering. Northland Gig2 Investment LLC also purchased from GigCapital2 an aggregate of 20,000 Private Underwriter Shares at a price of $10.00 per share in a private placement that occurred simultaneously with the completion of the second closing of the GigCapital2 initial public offering with the exercise of the over-allotment option. The Private Underwriter Shares are identical to the shares of common stock included in the Private Placement Units.
GigCapital2’s founders and underwriters have agreed not to transfer, assign, or sell any of their Founder Shares, Private Placement Units, shares, or other securities underlying such Private Placement Units, or Private Underwriter Shares until the earlier of (i) twelve months after the completion of GigCapital2's initial business combination, or earlier if, subsequent to the GigCapital2’s initial business combination, the last sale price of the GigCapital2’s common stock equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 90 days after GigCapital2’s initial business combination, or (ii) the date on which GigCapital2 completes a liquidation, merger, stock exchange, or other similar transaction after GigCapital2's initial business combination that results in all of GigCapital2’s stockholders having the right to exchange their shares of common stock for cash, securities, or other property.
Unlike the Public Warrants included in the units sold in GigCapital2's initial public offering, if held by the original holder or its permitted transferees, the Private Placement Warrants included in the Private Placement Units are not redeemable by GigCapital2 and subject to certain limited exceptions, will be subject to transfer restrictions until one year following the consummation of GigCapital2's initial business combination. If the Private Placement Warrants are held by holders other than the initial holders or their permitted transferees, the Private Placement Warrants will be redeemable by GigCapital2 and exercisable by holders on the same basis as the Public Warrants.
We accounted for the Private Placement Warrants as liabilities at fair value (see Note 9, Fair Value of Financial Instruments) on the condensed consolidated balance sheets, due to their redemption characteristics, with changes in fair value recognized as a component of other income (expense) in the condensed consolidated statements of operations. At March 31, 2022 and December 31, 2021, the fair value of the Private Placement Warrants was $0.1 million and $0.2 million, respectively, which is included in warrant liabilities in the condensed consolidated balance sheets. During the three months ended March 31, 2022, we recorded a $62 thousand gain due to the fair value changes in the Private Placement Warrants, which is included in gain in fair value of warrant liabilities in the condensed consolidated statement of operations.
PIPE Subscription Agreements
On January 20, 2021, GigCapital2 (now UpHealth, Inc.) entered into subscription agreements, each dated January 20, 2021 and amended June 8, 2021 (the “PIPE Subscription Agreements”), with certain institutional investors (collectively, the “PIPE Investors”), pursuant to which GigCapital2 agreed to issue and sell to the PIPE Investors, in private placements to close immediately prior to the closing of the Business Combinations, an aggregate of 3,000,000 shares (the “PIPE Shares”) at $10.00 per share, plus warrants to purchase up to an additional 300,000 shares of common stock (one warrant for every 10 PIPE Shares purchased) at an exercise price of $11.50 per share (the “PIPE Warrants”), for an aggregate purchase price of $30.0 million (collectively the “PIPE Investment”). The PIPE Investment was consummated immediately prior to the closing of the Business Combinations. The total proceeds received from the PIPE Investment were $28.5 million, net of placement fee costs of $1.5 million.
We accounted for the PIPE Warrants as liabilities at fair value (see Note 9, Fair Value of Financial Instruments) in the condensed consolidated balance sheets, due to their redemption characteristics, with changes in fair value recognized in gain (loss) on fair value of warrant liabilities in the condensed consolidated statements of operations. At March 31, 2022 and December 31, 2021, the fair value of the PIPE Warrants was $0.1 million and $0.1 million, respectively, which is included in warrant liabilities in the condensed consolidated balance sheets. During the three months ended March 31, 2022, we recorded a $33 thousand gain due to the fair value changes in the PIPE Warrants, which is included in gain in fair value of warrant liabilities in the condensed consolidated statement of operations.
Forward Share Purchase Agreement
On June 3, 2021, we entered into a forward share purchase agreement (the “Purchase Agreement”) with Kepos Alpha Fund L.P. (“KAF”), a Cayman Islands limited partnership, pursuant to which KAF may elect to sell and transfer to us and we will purchase from KAF, on September 8, 2021 or, in KAF’s sole discretion, any one calendar month anniversary of that date (the “Closing Date”), up to 1,700,000 shares of our common stock that are held by KAF at the closing of the Business Combinations. In August 2021, we entered into an amendment to the Purchase Agreement, which deferred the Closing Date to no earlier than January 9, 2022, provided if (a) we issue any new equity securities, whether of existing or new classes, or (b) an event occurs having a material adverse effect on our
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management operations, KAF will have the right to designate a Closing Date following such issuance or occurrence on three business days' notice to us. The per share price at which KAF has the right to sell the KAF Shares to us is (a) $10.30225 per KAF Share, plus (b) in the event that the Closing Date occurs after September 8, 2021, $0.0846 per KAF Share for each month (prorated for a partial month) following September 8, 2021.
On January 7, 2022, we entered into a second amendment to the Purchase Agreement, which deferred the Closing Date to no earlier than April 9, 2022, provided if (a) we issue any new equity securities, whether of existing or new classes, or (b) an event occurs having a material adverse effect on our management operations, KAF will have the right to designate a Closing Date following such issuance or occurrence on three business days' notice to us. The per share price at which KAF has the right to sell the KAF Shares to us is (a) $10.64065 per KAF Share, plus (b) in the event that the Closing Date occurs after January 9, 2022, $0.0846 per KAF Share for each month (prorated for a partial month) following January 9, 2022.
Notwithstanding anything to the contrary in the Purchase Agreement, KAF is allowed at its election to sell any or all of the KAF Shares in the open market commencing after the closing of the Business Combinations, as long as the sales price is above $10.10 per Share. Nothing in the Purchase Agreement prohibits or restricts KAF with respect to the purchase or sale of our warrants. In exchange for our commitment to purchase the KAF Shares on the Closing Date, KAF agreed to continue to hold, and not offer, sell, contract to sell, pledge, transfer, assign, or otherwise dispose of, directly or indirectly, or hedge (including any transactions involving any derivative securities and including any Short Sales (as defined below) involving any of our securities) the KAF Shares prior to Closing Date. “Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Securities and Exchange Act of 1934 (the “Exchange Act”), whether or not against the box, and all types of direct and indirect stock pledges, forward sales contracts, options, puts, calls, short sales, swaps, “put equivalent positions” (as defined in Rule 16a-1(h) under the Exchange Act) and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker dealers or foreign regulated brokers. KAF is permitted to pledge the KAF Shares in connection with a bona fide margin agreement (and such a pledge is not considered to be a transfer, sale or assignment of the KAF Shares).
Due to its mandatorily redeemable for cash feature, we have recorded the Purchase Agreement as a forward share purchase liability in our condensed consolidated balance sheets for up to the 1,700,000 shares, at $10.00 per share, of our common stock that KAF may elect to sell and transfer to us and we will repurchase from KAF, plus imputed interest. In October 2021, as agreed with KAF, we transferred $18.1 million to an escrow account.
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.
Equity Plans
Thrasys' 2019 Stock Incentive Plan
Contemporaneous with its merger with UpHealth Holdings on November 20, 2020, Thrasys entered into stock compensation agreements with employees pursuant to the Thrasys 2019 Stock Incentive Plan, a Restricted Stock Award (“RSA”) agreement, and a Restricted Stock Unit (“RSU”) award agreement, and awarded 536,184 RSA shares and 3,427,316 RSU shares to employees. On June 9, 2021, in connection with the Business Combinations, the RSAs and RSUs were settled with a combination of shares of UpHealth common stock and proceeds from the seller notes. As of March 31, 2022, there were no outstanding awards under the Thrasys 2019 Stock Incentive Plan.
Cloudbreak 2015 Incentive Plan
On June 19, 2015, Cloudbreak created the 2015 Unit Incentive Plan (the “Cloudbreak Plan”), which had a maximum aggregate number of 2,200,000 common units. Cloudbreak measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period.
Upon completion of the Business Combinations, UpHealth assumed 1,576,670 options, with a fair value of $99.0 million, which were included in purchase consideration, and 134,943 unvested options with a fair value of $0.6 million, which are subject to continued vesting and will be recorded as stock-based compensation prospectively; and Cloudbreak ceased granting awards under the Cloudbreak Plan.
The following table summarizes stock option activity under the Cloudbreak Plan:
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| (In thousands, except per share amounts) | Number of Stock Options | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value(1) | ||||||||||
| Outstanding as of December 31, 2021 | 1,515,870 | $ | 4.81 | 4.16 | ||||||||||
| Options granted | — | — | ||||||||||||
| Options exercised | — | — | ||||||||||||
| Options forfeited or expired | — | — | ||||||||||||
| Outstanding at March 31, 2022 | 1,515,870 | 4.81 | 3.92 | $ | 138 | |||||||||
| Vested and expected to vest as of March 31, 2022 | 1,515,870 | 4.81 | 3.92 | $ | 138 | |||||||||
| Exercisable as of March 31, 2022 | 1,418,817 | $ | 4.64 | 3.63 | $ | 138 | ||||||||
(1) The aggregate intrinsic value amounts are computed based on the difference between the exercise price of the stock options and the fair market value of our common stock of $1.18 per share as of March 31, 2022 for all in-the-money stock options outstanding.
As of March 31, 2022, there was $0.4 million of unrecognized stock-based compensation expense related to stock options, expected to be recognized over a weighted-average period of 2.13 years.
2021 Equity Incentive Plan
On June 4, 2021, the GigCapital2 stockholders considered and approved the 2021 Equity Incentive Plan (“2021 EIP”) and reserved 16,420,813 shares of UpHealth common stock for issuance thereunder. The 2021 EIP was previously approved, subject to stockholder approval, by the Board of Directors of GigCapital2 on February 7, 2021. The 2021 EIP became effective immediately upon the closing of the Business Combinations. The number of shares of common stock reserved for issuance under the 2021 EIP will automatically increase on January 1 of each year, beginning on January 1, 2022 and each anniversary thereof during the effectiveness of the 2021 EIP, by an amount equal to the lesser of (i) five percent (5%) of the total number of shares of our common stock outstanding on such date, and (ii) such lesser number of shares as may be determined by our Board of Directors. On January 1, 2022, the number of shares of common stock reserved for issuance under the 2021 EIP was automatically increased by 7,213,948 shares.
In conjunction with the approval of the 2021 EIP, our Board of Directors also adopted a form of Restricted Stock Units Agreement (the “RSU Agreement”) and a form of Stock Option Agreement (the “Stock Option Agreement”) that we will generally use for grants under our 2021 EIP. The RSU Agreement provides that restricted stock units will vest over a fixed period and be paid as shares of common stock, and that the unvested restricted stock units will expire upon certain terminations of the grantees’ employment or other service relationship with us. The Stock Option Agreement provides that stock options will vest over a fixed period, and that the unvested options will expire upon certain terminations of the grantees’ employment or other service relationship with us.
In August 2021, under the terms of the merger agreement with Thrasys, upon the filing of a Form S-8 with the SEC on August 12, 2021, we granted 4,660,266 RSUs to two officers of Thrasys, which will fully vest on June 9, 2022. These RSUs had a fair value of $46.6 million, which was included in purchase consideration. In September 2021, we issued 28,616 shares of restricted stock to a consultant.
We had 12,460,258 shares available for grant as of March 31, 2022.
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 | 10,693,371 | $ | 5.63 | |||||
| RSUs granted | 597,712 | 2.13 | ||||||
| RSUs exercised and released | (337,764) | 2.13 | ||||||
| RSUs forfeited | (207,254) | 1.93 | ||||||
| Outstanding at March 31, 2022 | 10,746,065 | 5.61 | ||||||
As of March 31, 2022, there was $9.3 million of unrecognized stock-based compensation expense related to RSUs, expected to be recognized over a weighted-average period of 2.41 years.
Stock-based Compensation
During the three months ended March 31, 2022, we recorded stock-based compensation expense totaling $1.4 million, all of which was attributed to our general and administrative function.
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11.Revenue
Disaggregation of Revenue
Revenue by service offering consisted of the following:
| (In thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Services | $ | 25,686 | $ | 8,138 | |||||||
| Licenses and subscriptions | 1,781 | 3,658 | |||||||||
| Products | 8,505 | 1,020 | |||||||||
| Total revenue | $ | 35,972 | $ | 12,816 | |||||||
Revenue by geography consisted of the following:
| (In thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Americas | $ | 32,663 | $ | 9,226 | |||||||
| Europe | — | 3,000 | |||||||||
| Asia | 3,309 | 590 | |||||||||
| Total revenue | $ | 35,972 | $ | 12,816 | |||||||
Our revenue is entirely derived from the healthcare industry. Revenue recognized over-time was approximately 71% and 69% of total revenue during the three months ended March 31, 2022 and 2021.
Contract Assets
There were no impairments of contract assets, consisting of unbilled receivables, during the three months ended March 31, 2022 and 2021.
The change in contract assets was as follows:
| (In thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Unbilled receivables, beginning of period | $ | 784 | $ | 3,536 | |||||||
| Reclassifications to billed receivables | (232) | (1,192) | |||||||||
| Revenues recognized in excess of period billings | 285 | 4,082 | |||||||||
| Unbilled receivables, end of period | $ | 837 | $ | 6,426 | |||||||
Contract Liabilities
The change in contract liabilities, consisting of deferred revenue, was as follows:
| (In thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Deferred revenue, beginning of period | $ | 2,649 | $ | 397 | |||||||
| Revenues recognized from balances held at the beginning of the period | (1,581) | (201) | |||||||||
| Net revenues deferred from period collections on unfulfilled performance obligations | 664 | 227 | |||||||||
| Ending balance | $ | 1,732 | $ | 423 | |||||||
Revenue recognized ratably over time is generally billed in advance and includes SaaS internet hosting, subscriptions, construction of digital dispensaries, and related consulting, implementation, services support, and advisory services.
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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 4% of revenue recognized during the three months ended March 31, 2022 was from the deferred revenue balance existing as of December 31, 2021. Approximately 2% of revenue recognized during the three months ended March 31, 2021 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 March 31, 2022:
| (In thousands) | Total | Remaining 2022 | 2023 - 2024 | ||||||||||||||
| Subscriptions | $ | 6,583 | 1,819 | 4,763 | |||||||||||||
| Total | $ | 6,583 | 1,819 | 4,763 | |||||||||||||
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 15.1%, which is lower than the U.S. federal statutory rate of 21% primarily due to 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 $2.3 million and $0.4 million for the three months ended March 31, 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.
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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 March 31, | ||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | ||||||||||||
| Numerator: | ||||||||||||||
| Net loss attributable to UpHealth, Inc. | $ | (17,445) | $ | (2,949) | ||||||||||
| Denominator: | ||||||||||||||
Weighted average shares outstanding(1) | 144,539 | 7,089 | ||||||||||||
| Weighted average shares outstanding assuming dilution | 144,539 | 7,089 | ||||||||||||
| Net loss per share attributable to UpHealth, Inc.: | ||||||||||||||
| Basic | $ | (0.12) | $ | (0.42) | ||||||||||
| Diluted | $ | (0.12) | $ | (0.42) | ||||||||||
(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 March 31, 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, convertible into 15.0 million shares of common stock at $10.65 per share; and 1.7 million shares of common stock under the terms of the forward share purchase agreement, because the effect would be anti-dilutive.
14.Employee Benefit Plans
In connection with the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations, and Cloudbreak, we have six defined contribution plans, which cover substantially all employees. The plans provide for discretionary matching and profit-sharing contributions. For the three months ended March 31, 2022 and 2021, there were no significant employer matching or employer profit sharing contributions to the plans.
In addition, with the acquisition of Glocal, we acquired a defined benefit plan, which entitles an employee, who has rendered at least five years of continuous service, to receive one-half month’s salary for each year of completed service at the time of retirement/exit. As of March 31, 2022 and December 31, 2021, the unfunded status of the defined benefit plan was $3 thousand and $6 thousand, respectively. For the three months ended March 31, 2022 and 2021, the net periodic pension cost of the defined benefit plan was $0.2 million.
15.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 months ended March 31, 2022 and 2021, respectively. There were no unpaid management fees at March 31, 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 18, 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 March 31, 2022 and 2021, respectively. These amounts are presented in cost of goods and services in the
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consolidated statement of operations. We had unpaid guaranteed payments of $0.1 million and $0.3 million as of March 31, 2022 and December 31, 2021, respectively, which is included in accrued liabilities on the consolidated balance sheet.
16.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, BHS, and TTC subsidiaries; and
•Corporate—through UpHealth and our UpHealth Holdings subsidiary.
The reportable segments are consistent with how management views our services and products and the financial information reviewed by the chief operating decision makers. We manage our businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and assess performance.
In the Integrated Care Management segment, we provide our 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.
In the Virtual Care Infrastructure segment, we provide technology and process-based healthcare platforms providing our customers comprehensive primary care, specialty consultations, and translation services, through telemedicine, digital dispensaries, and technology-based hospital centers.
In the Services segment, we provide custom compounded medications for the unique needs of every patient and prescriber. We are a full-service pharmacy filling prescriptions from our inventory of compounded medications, as well as drugs purchased from manufacturers. Additionally, we provide inpatient and outpatient substance abuse and mental health treatment services for individuals with drug and alcohol addiction and other behavioral health issues. We offer a complete continuum of care from detoxification services, residential care, partial hospitalization programs, and intensive outpatient and outpatient programs.
In the Corporate segment, we perform executive, administrative, finance, human resources, legal, and information technology services for UpHealth, Inc. and for its subsidiaries, managed in a corporate shared services environment. Since they are not the responsibility of segment operating management, they are not allocated to the operating segments and instead reported within Corporate.
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:
| In thousands | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Integrated Care Management | $ | 2,612 | $ | 6,289 | |||||||
| Virtual Care Infrastructure | 15,630 | 590 | |||||||||
| Services | 17,730 | 5,937 | |||||||||
| Total revenue | $ | 35,972 | $ | 12,816 | |||||||
Gross margin by segment consisted of the following:
| In thousands | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Integrated Care Management | $ | 1,637 | $ | 5,219 | |||||||
| Virtual Care Infrastructure | 7,261 | 299 | |||||||||
| Services | 6,406 | 1,412 | |||||||||
| Total gross margin | $ | 15,304 | $ | 6,930 | |||||||
Total assets by segment consisted of the following:
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| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Integrated Care Management | $ | 155,757 | 156,106 | ||||||||
| Virtual Care Infrastructure | 210,962 | 217,668 | |||||||||
| Services | 125,988 | 127,114 | |||||||||
| Corporate | 56,029 | 68,419 | |||||||||
| Total assets | $ | 548,736 | $ | 569,307 | |||||||
Total assets by geography consisted of the following:
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Americas | $ | 469,861 | 481,705 | ||||||||
| Asia | 78,875 | 87,602 | |||||||||
| Total assets | $ | 548,736 | $ | 569,307 | |||||||
17. Capital Leases
Capital Lease Transactions
Within our Virtual Care Infrastructure segment, we have capital leases for certain computer devices and network equipment. In addition to purchasing Martti™ units for use as inventory, we also lease units through an arrangement with third-party lessors to be used as equipment. Leased units are used as part of our promotional program whereby we loan out Martti™ units for trial purposes to various customers.
As of March 31, 2022 and December 31, 2021, capital lease asset and liabilities are as follows:
| March 31, 2022 | ||||||||||||||
| (In thousands) | ||||||||||||||
| Assets | Liabilities | |||||||||||||
| Leased property under capital leases, less accumulated amortization | $ | 5,973 | Current: obligations under capital leases | $ | 2,974 | |||||||||
| Noncurrent: obligations under capital leases | 2,902 | |||||||||||||
| Total | $ | 5,876 | ||||||||||||
| December 31, 2021 | ||||||||||||||
| (In thousands) | ||||||||||||||
| Assets | Liabilities | |||||||||||||
| Leased property under capital leases, less accumulated amortization | $ | 5,013 | Current: obligations under capital leases | $ | 2,404 | |||||||||
| Noncurrent: obligations under capital leases | 2,644 | |||||||||||||
| Total | $ | 5,048 | ||||||||||||
As of March 31, 2022 and December 31, 2021, future minimum lease payments under non-cancelable capital leases are as follows:
| Year | Capital Lease Obligations | |||||||
| Remaining 2022 | $ | 2,507 | ||||||
| 2023 | 2,309 | |||||||
| 2024 | 1,381 | |||||||
| 2025 | 37 | |||||||
| Less: Interest | (358) | |||||||
| $ | 5,876 | |||||||
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18. 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 $79 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 March 31, 2022 and December 31, 2021.
Total rent expense under related party and third-party agreements was approximately $0.2 million and $1.2 million, respectively, for the three months ended March 31, 2022. Total rent expense under both related party and third-party agreements was approximately $0.6 million for the three months ended March 31, 2021.
Total sublease revenue under third-party agreements was approximately $0.2 million and zero for the three months ended March 31, 2022 and 2021, respectively.
During the three months ended September 30, 2021, we recorded lease abandonment expense of $0.9 million related to the cost to exist five office leases. During the three months ended March 31, 2022, we recorded additional lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office lease.
As of March 31, 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 | $ | 599 | $ | 2,375 | $ | (354) | $ | 2,620 | |||||||||||||||
| 2023 | 814 | 2,609 | (403) | 3,020 | |||||||||||||||||||
| 2024 | 848 | 2,300 | (408) | 2,740 | |||||||||||||||||||
| 2025 | 855 | 1,539 | (420) | 1,974 | |||||||||||||||||||
| 2026 | 383 | 779 | (433) | 729 | |||||||||||||||||||
| Thereafter | — | 1,298 | (72) | 1,226 | |||||||||||||||||||
| $ | 3,499 | $ | 10,900 | $ | (2,090) | $ | 12,309 | ||||||||||||||||
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 March 31, 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
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, and on March 25, 2020, the U.S. government reached a stimulus package deal. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report, and likewise, the full impact of the pandemic on our consolidated financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the impact of the global situation on our consolidated financial condition, liquidity, operations, vendors, industry, and workforce. Despite the daily evolution of the COVID-19 outbreak and the global responses to curb
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its spread, we have not experienced any material impact on our consolidated results of operations, financial condition, or liquidity during the year ended December 31, 2021 or the three months ended March 31, 2022.
On March 27, 2020, the CARES Act, was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, provides for non-income tax-related relief such as refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes. We continue to evaluate the various provisions of the CARES Act and their impact on our condensed consolidated financial statements as a whole. See Note 8, Debt, for further information.
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.
19. Subsequent Events
Management has determined that material events or transactions have occurred subsequent to the balance sheet date through May 23, 2022, other than those events noted below, that require disclosure in the condensed consolidated financial statements.
In April 2022, in accordance with the forward share purchase agreement (see Note 10, Capital Structure, for further information), 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.
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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.
Formation
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 became the sole shareholder of with 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”); (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) acquired UpHealth Holdings and its subsidiaries, which added Cloudbreak Health, LLC (“Cloudbreak”) to the Virtual Care Infrastructure segment.
Completed Business Combinations
On November 20, 2020, UpHealth Holdings acquired BHS, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and BHS, in exchange for consideration in the form of a promissory note in the amount of $1.2 million and shares of UpHealth Holdings. The operating results for BHS for the three months ended March 31, 2022 are included in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
On November 20, 2020, UpHealth Holdings acquired Thrasys pursuant to the terms of an Amended and Restated Plan of Merger between the parties, in exchange for consideration in the form of a promissory note in the amount of $20.0 million and shares of UpHealth Holdings common stock. The operating results for Thrasys for the three months ended March 31, 2022 and 2021, respectively, are included in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
On January 25, 2021, UpHealth Holdings acquired TTC, which became a wholly-owned subsidiary, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and TTC, in exchange for consideration in the form of a promissory note in the amount of $12.1 million and shares of UpHealth Holdings common stock. Beginning January 25, 2021, the results of operations of TTC are consolidated with those of UpHealth Holdings in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
Glocal is now a controlled (but not wholly owned) subsidiary of UpHealth Holdings. The acquisition of Glocal by UpHealth Holdings was structured to occur in multiple steps. Pursuant to the terms and conditions of a Share Purchase Agreement between UpHealth Holdings, Glocal, and certain Glocal shareholders, the first step concluded on November 20, 2020, when UpHealth Holdings acquired approximately 43.46% of the outstanding equity share capital of Glocal and delivered shares of UpHealth Holdings common stock. As part of the second step, on March 26, 2021, UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 89.4% of
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the outstanding equity of Glocal, by way of capital investment into Glocal, with $3.0 million paid in March 2021. On May 14, 2021, UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 90.4% of the outstanding equity of Glocal, and delivered shares of UpHealth Holdings common stock. The third step concluded on June 21, 2021, when UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 92.2% of the outstanding equity of Glocal, and delivered $9.2 million in cash to the selling shareholders. The fourth step concluded on August 27, 2021, when UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 94.81% of the outstanding equity of Glocal, and delivered $20.0 million in cash to the selling shareholders. UpHealth Holdings, as the majority shareholder, will, in conjunction with the remaining Glocal shareholders, increase UpHealth Holdings’ ownership in Glocal through the acquisition of remaining shares, and/or any other manner acceptable to UpHealth Holdings and permitted under India law.
UpHealth Holdings accounted for its ownership in Glocal using the equity method from November 20, 2020 through March 25, 2021. Beginning March 26, 2021, the results of operations of Glocal are consolidated with those of UpHealth Holdings in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
On April 27, 2021, UpHealth Holdings acquired Innovations, which became a wholly-owned subsidiary, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and Innovations, in exchange for consideration in the form of a promissory note in the amount of $30.0 million and shares of UpHealth Holdings common stock. Subsequent to April 27, 2021, the results of operations of Innovations are consolidated with those of UpHealth Holdings in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
On June 9, 2021, UpHealth acquired Cloudbreak, which became a wholly-owned subsidiary, pursuant to the terms of a Business Combination Agreement between UpHealth and Cloudbreak, in exchange for consideration in the form of a promissory note in the amount of $36.6 million and shares of UpHealth common stock. Subsequent to June 9, 2021, the results of operations of Cloudbreak are consolidated with those of UpHealth in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
On June 9, 2021, UpHealth acquired UpHealth Holdings and its subsidiaries, which became a wholly-owned subsidiary, in an exchange of cash, notes, and shares of UpHealth common stock for all the shares of UpHealth Holdings’ capital stock issued and outstanding immediately prior to the effective time of the acquisition. The acquisition was accounted for as a reverse recapitalization, which is the equivalent of UpHealth Holdings issuing stock for the net assets of UpHealth, accompanied by a recapitalization, with UpHealth treated as the accounting acquiree. The determination of UpHealth as the accounting acquiree was primarily based on the fact that subsequent to the acquisition, UpHealth Holdings owns a majority of the voting power of the combined company, UpHealth Holdings will comprise 75% of the ongoing operations of the combined entity, UpHealth Holdings will control a majority of the governing body of the combined company, and UpHealth Holdings’ senior management will comprise most of the senior management of the combined company. Subsequent to June 9, 2021, the results of operations of UpHealth are consolidated with those of UpHealth Holdings in the UpHealth, Inc. condensed consolidated financial statements provided with this Quarterly Report.
Factors Affecting Comparability of Results
COVID-19
The current COVID-19 pandemic has affected and will continue to affect economies and business around the world. To date, various governmental authorities and private enterprises have implemented numerous measures to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns, which have led to severe disruptions to the global economies that may continue for a prolonged duration and trigger a recession or a period of economic slowdown. The magnitude and duration of the resulting decline in business activity and operations cannot be measured with any degree of certainty. At this stage, the extent and duration of the pandemic, and its foreseeable unfolding following the worldwide vaccine campaigns, is still uncertain and difficult to predict, also considering the severity of the second wave of the COVID-19 pandemic currently hitting the Indian regions. UpHealth is actively monitoring and managing its response and assessing actual and potential impacts to its operating results and financial condition, which could also impact trends and expectations.
UpHealth, Inc. Business Overview
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
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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 on a time and materials basis, whereby revenues are recognized as the services are rendered. 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, 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 also includes an allocation of facilities, information technology, and depreciation costs.
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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.
Factors Affecting the Industry and Comparability of Results
COVID-19
Glocal’s revenues dipped during COVID-19, particularly during the April to June 2020 quarter, due to a reduction in physical touch points resulting from the lockdowns; however, those stabilized during the July to September 2020 quarter. In addition, between April and
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December 2020, four of Glocal’s hospitals were requisitioned temporarily by the respective state government for Covid-19 response. All of the requisitioned hospitals were released by September 2021. The relevant governments are required to compensate Glocal for this period and the impact to revenues, costs and expenses has not been material. Currently, Glocal does not anticipate these or any future requisitions will have a material impact. For the HelloLyf CX digital dispensaries, there has been a delay in shipping orders due to a logistics slowdown. While the contracts are covered by force majeure clauses, the risk of cancellation of contracts has not risen, but revenue growth has been delayed. Glocal’s order book has seen a significant increase which Glocal believes will continue; however, the impact of COVID-19 remains fluid and order fulfillment for HelloLyf CX digital dispensaries may be impacted by continued logistics bottlenecks.
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
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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.
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 Cloudbreak.
Services Segment - Innovations, TTC and BHS
Innovations Overview
Innovations 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 Certified (“EPCS”) 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.
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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 allowing 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 suite of services is WorldLink Medical, Medical Horizons, and MedQuest Testing Services. WorldLink Medical is the educational services arm of Innovations, 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 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 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.
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. 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.
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.
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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.
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. 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.
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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
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.
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 Consolidated Financial Statements, the following accounting policies and specific estimates involve a greater degree of judgments 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 on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 18, 2022, that have had a significant impact on our condensed consolidated financial statements and related notes.
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UpHealth, Inc. Consolidated Results of Operations
Operating Results
As of March 31, 2022 and for the three months then ended, UpHealth’s operating results consist of the results of operations for UpHealth and its subsidiaries Thrasys, BHS, TTC, Glocal, Innovations, and Cloudbreak. As of March 31, 2021 and for the three months then ended, UpHealth’s operating results consist of (1) the results of operations for UpHealth Holdings and its subsidiaries Thrasys and BHS, and (2) the results of operations for its subsidiaries TTC and Glocal subsequent to their acquisitions on January 25, 2021 and March 26, 2021, respectively.
The following table sets forth the consolidated results of operations of UpHealth:
| (Unaudited, in thousands) | Three Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Services | $ | 25,686 | $ | 8,138 | $ | 17,548 | 216 | % | |||||||||||||||
| Licenses and subscriptions | 1,781 | 3,658 | (1,877) | (51) | % | ||||||||||||||||||
| Products | 8,505 | 1,020 | 7,485 | 734 | % | ||||||||||||||||||
| Total revenue | 35,972 | 12,816 | 23,156 | 181 | % | ||||||||||||||||||
| Cost of goods and services: | |||||||||||||||||||||||
| Services | 14,445 | 4,473 | 9,972 | 223 | % | ||||||||||||||||||
| License and subscriptions | 233 | 497 | (264) | (53) | % | ||||||||||||||||||
| Products | 5,990 | 916 | 5,074 | 554 | % | ||||||||||||||||||
| Total cost of goods and services | 20,668 | 5,886 | 14,782 | 251 | % | ||||||||||||||||||
| Gross margin | 15,304 | 6,930 | 8,374 | 121 | % | ||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 2,726 | 885 | 1,841 | 208 | % | ||||||||||||||||||
| Research and development | 1,587 | 1,570 | 17 | 1 | % | ||||||||||||||||||
| General and administrative | 13,659 | 3,723 | 9,936 | 267 | % | ||||||||||||||||||
| Depreciation and amortization | 5,236 | 904 | 4,332 | 479 | % | ||||||||||||||||||
| Stock-based compensation | 1,374 | — | 1,374 | — | % | ||||||||||||||||||
| Lease abandonment expenses | 75 | — | 75 | — | % | ||||||||||||||||||
| Goodwill and intangible asset impairment | 6,174 | — | 6,174 | — | % | ||||||||||||||||||
| Acquisition, integration, and transformation costs | 2,384 | 2,686 | (302) | (11) | % | ||||||||||||||||||
| Total operating expenses | 33,215 | 9,768 | 23,447 | 240 | % | ||||||||||||||||||
| Loss from operations | (17,911) | (2,838) | (15,073) | 531 | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (6,995) | (711) | (6,284) | 884 | % | ||||||||||||||||||
| Gain on consolidation of equity method investment | — | 640 | (640) | (100) | % | ||||||||||||||||||
| Gain on fair value of derivative liability | 4,829 | — | 4,829 | — | % | ||||||||||||||||||
| Gain on fair value of warrant liabilities | 95 | — | 95 | — | % | ||||||||||||||||||
| Other income (expense), net, including interest income | (16) | 37 | (53) | (143) | % | ||||||||||||||||||
| Total other expense | (2,087) | (34) | (2,053) | 6,038 | % | ||||||||||||||||||
| Loss before income tax benefit | (19,998) | (2,872) | (17,126) | 596 | % | ||||||||||||||||||
| Income tax benefit | 2,293 | 406 | 1,887 | 465 | % | ||||||||||||||||||
| Net loss before loss from equity method investment | (17,705) | (2,466) | (15,239) | 618 | % | ||||||||||||||||||
| Loss from equity method investment | — | (561) | 561 | (100) | % | ||||||||||||||||||
| Net loss | (17,705) | (3,027) | (14,678) | 485 | % | ||||||||||||||||||
| Less: net income (loss) attributable to noncontrolling interests | (260) | (78) | (182) | 233 | % | ||||||||||||||||||
| Net loss attributable to UpHealth, Inc. | $ | (17,445) | $ | (2,949) | $ | (14,496) | 492 | % | |||||||||||||||
The following table sets forth the consolidated results of operations of UpHealth as a percentage of total revenue:
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Services | 71 | % | 63 | % | |||||||
| Licenses and subscriptions | 5 | % | 29 | % | |||||||
| Products | 24 | % | 8 | % | |||||||
| Total revenue | 100 | % | 100 | % | |||||||
| Cost of goods and services: | |||||||||||
| Services | 40 | % | 35 | % | |||||||
| License and subscriptions | 1 | % | 4 | % | |||||||
| Products | 17 | % | 7 | % | |||||||
| Total cost of goods and services | 58 | % | 46 | % | |||||||
| Gross margin | 43 | % | 54 | % | |||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 8 | % | 7 | % | |||||||
| Research and development | 4 | % | 12 | % | |||||||
| General and administrative | 38 | % | 29 | % | |||||||
| Depreciation and amortization | 15 | % | 7 | % | |||||||
| Stock-based compensation | 4 | % | — | % | |||||||
| Lease abandonment expenses | — | % | — | % | |||||||
| Goodwill and intangible asset impairment | 17 | % | — | % | |||||||
| Acquisition, integration, and transformation costs | 7 | % | 21 | % | |||||||
| Total operating expenses | 92 | % | 76 | % | |||||||
| Loss from operations | (50) | % | (22) | % | |||||||
| Other income (expense): | |||||||||||
| Interest expense | (19) | % | (6) | % | |||||||
| Gain on consolidation of equity method investment | — | % | 5 | % | |||||||
| Gain on fair value of derivative liability | 13 | % | — | % | |||||||
| Gain on fair value of warrant liabilities | — | % | — | % | |||||||
| Other income (expense), net, including interest income | — | % | — | % | |||||||
| Total other expense | (6) | % | — | % | |||||||
| Loss before income tax benefit | (56) | % | (22) | % | |||||||
| Income tax benefit | 6 | % | 3 | % | |||||||
| Net loss before loss from equity method investment | (49) | % | (19) | % | |||||||
| Loss from equity method investment | — | % | (4) | % | |||||||
| Net loss | (49) | % | (24) | % | |||||||
| Less: net income (loss) attributable to noncontrolling interests | (1) | % | (1) | % | |||||||
| Net loss attributable to UpHealth, Inc. | (48) | % | (23) | % | |||||||
Due to the timing of UpHealth’s acquisitions of TTC, Glocal, Innovations, and Cloudbreak, the numbers presented above are not directly comparable between periods.
Three months ended March 31, 2022 and 2021
Revenue
In the three months ended March 31, 2022, revenue was $36.0 million, comprised of $25.7 million of services revenue, $1.8 million of licenses and subscriptions revenue, and $8.5 million of products revenue. There was $12.8 million revenue in the three months ended March 31, 2021. The increase in revenue in the three months ended March 31, 2022 was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
We expect revenue to increase in fiscal 2022 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
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In the three months ended March 31, 2022, cost of goods and services was $20.7 million, primarily consisting of $14.4 million of costs of services, $0.2 million of costs of licenses and subscriptions, and $6.0 million of costs of products. There was $5.9 million cost of goods and services in the three months ended March 31, 2021. The increase in cost of goods sold in the three months ended March 31, 2022 was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
We expect cost of goods and services to increase in fiscal 2022 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 March 31, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $2.7 million, compared to $0.9 million in the three months ended March 31, 2021. The increase in S&M expenses was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
We expect S&M expenses to increase in fiscal 2022 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 March 31, 2022, research and development expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $1.6 million compared to $1.6 million in the three months ended March 31, 2021.
We expect our R&D expenses to increase in fiscal 2022, 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 March 31, 2022, G&A expenses were $13.7 million, 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. In the three months ended March 31, 2021, G&A expenses were $3.7 million, consisting of deferred compensation and benefits expense. The increase in G&A expenses was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
We expect G&A expenses to increase in fiscal 2022 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021, 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 general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our general and administrative expenses.
Depreciation and Amortization. In the three months ended March 31, 2022, depreciation and amortization expenses were $5.2 million, primarily consisting of $5.1 million of amortization of intangible assets related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations, and Cloudbreak, and $0.1 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the three months ended March 31, 2021 depreciation and amortization expenses were $0.9 million. 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 Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 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, plan, and equipment related to TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021.
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Stock-Based Compensation. In the three months ended March 31, 2022, stock-based compensation expenses were $1.4 million related to grants under equity plans. There were no stock-based compensation expenses in the three months ended March 31, 2021.
Lease Abandonment Expenses. In the three months ended March 31, 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 three months ended March 31, 2021.
Goodwill and Intangible Asset Impairment. In the three months ended March 31, 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.
Acquisition, Integration and Transformation Costs. In the three months ended March 31, 2022, acquisition, integration and transformation costs were $2.4 million, primarily consisting of consulting and severance costs incurred to integrate and transform the businesses. In the three months ended March 31, 2021, acquisition, integration and transformation costs were $2.7 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations, and Cloudbreak and UpHealth Holding's 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 Income (Expense)
In the three months ended March 31, 2022, other income (expense) was $(2.1) million, primarily consisting of $7.0 million of interest expense and $(16) thousand of other income, net, partially offset by a $4.8 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 March 31, 2021, other income (expense) was $(34) thousand.
Income Tax Benefit
In the three months ended March 31, 2022, the income tax benefit was $2.3 million. In the three months ended March 31, 2021, the income tax benefit was $0.4 million, this difference is caused by the change in pretax book income.
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.
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:
| In thousands | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||
| Integrated Care Management | $ | 2,612 | $ | 6,289 | |||||||
| Virtual Care Infrastructure | 15,630 | 590 | |||||||||
| Services | 17,730 | 5,937 | |||||||||
| Total revenue | $ | 35,972 | $ | 12,816 | |||||||
Three Months Ended March 31, 2022. Revenue from the integrated care management segment consisted of $0.8 million of services revenue and $1.8 million of licenses and subscriptions revenue. Revenue from the virtual care infrastructure segment consisted of $15.4 million of services revenue and $0.2 million of products revenue. Revenue from the services segment consisted of $8.3 million of products revenue and $9.4 million of services revenue.
Three Months Ended March 31, 2021.
Revenue from the integrated care management segment consisted of $2.6 million of services revenue and $3.7 million of licenses and subscriptions revenue. Revenue from the virtual care infrastructure segment consisted of $0.6 million of services revenue. Revenue from the services segment consisted of $4.9 million of products revenue and $1.0 million of services revenue.
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The increase in revenue in the three months ended March 31, 2022 was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
Gross margin
Gross margin by segment consisted of the following:
| In thousands | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2022 | |||||||||
| Integrated Care Management | $ | 1,637 | $ | 5,219 | |||||||
| Virtual Care Infrastructure | 7,261 | 299 | |||||||||
| Services | 6,406 | 1,412 | |||||||||
| Total gross margin | $ | 15,304 | $ | 6,930 | |||||||
Three Months Ended March 31, 2022. Gross margin from the integrated care management segment consisted of $0.1 million from services and $1.5 million from licenses and subscriptions. Gross margin from the virtual care infrastructure segment consisted of $7.2 million from services and $0.1 million from products. Gross margin from the services segment consisted of $2.4 million from products and $4.0 million from services.
Three Months Ended March 31, 2021. Gross margin from the integrated care management segment consisted of $2.1 million from services and $3.2 million from licenses and subscriptions. Gross margin from the virtual care infrastructure segment consisted of $0.3 million from services. Gross margin from the services segment consisted of $1.3 million from products and $0.1 million from services.
The increase in gross margin in the three months ended March 31, 2022 was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as a full period of operations for TTC and Glocal, which were acquired on January 25, 2021 and March 26, 2021, respectively, compared to a partial period for the three months ended March 31, 2021.
Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, UpHealth, Inc. had free cash on hand of $52.0 million and $58.2 million, respectively, and restricted cash of $18.6 million and $18.6 million, respectively. As of both March 31, 2022 and December 31, 2021, $18.1 million of restricted cash represented funds held in an escrow account, as agreed in our Forward Share Purchase Agreement (see Note 10, Capital Structure, for further information) and $0.5 million represented 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 three months ended March 31, 2022 and 2021 (unaudited):
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Net cash used in operating activities | $ | (3,071) | $ | (4,502) | |||||||
| Net cash (used in) provided by investing activities | (1,663) | 2,718 | |||||||||
| Net cash (used in) provided by financing activities | (1,019) | 4,216 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (394) | (22) | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (6,147) | 2,410 | ||||||||
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 three months ended March 31, 2022, cash used in operating activities was $3.1 million, primarily attributed to the net loss of $17.7 million and gain on fair value of derivatives, gain on fair value of warrants, partially offset by $9.4 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 $5.2 million. The changes in operating assets and liabilities, net of effects of acquisitions,
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was primarily due to a decrease in accounts receivable of $3.5 million due to net collections of receivables and an increase in accounts payable and accrued expenses of $3.1 million due to delayed payments to vendors. In the three months ended March 31, 2021, cash used in operating activities was $4.5 million, primarily attributed to the net loss of $3.0 million and the changes in operating assets and liabilities, net of effects of acquisitions, of $2.2 million, partially offset by $0.7 million of non-cash items.
In the three months ended March 31, 2022, cash used in investing activities was $1.7 million, primarily consisting of purchases of property and equipment. In the three months ended March 31, 2021, cash provided by investing activities was $2.7 million, primarily consisting of net cash acquired in acquisition of businesses.
In the three months ended March 31, 2022, cash used in financing activities was $1.0 million, primarily consisting of payments of capital lease obligations of $0.8 million and repayments of debt of $0.2 million. In the three months ended March 31, 2021, cash provided by financing activities was $4.2 million, primarily consisting of proceeds from convertible debt of $4.5 million and proceeds from Provider Relief Funds of $0.5 million, partially offset by repayments of debt of $0.7 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 18, 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 March 31, 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.
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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 March 31, 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 March 31, 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 March 31, 2022, we are engaged in the process of the design and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations post-Business Combinations. There have been no changes in the internal control over financial reporting of UpHealth that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of the Material Weaknesses
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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 resource and engaging third party consultants for the formalization of our internal procedures, Section 404 of the Sarbanes-Oxley Act implementation, and a new Enterprise Resource Planning system. 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.
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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. Our material legal proceedings are described in the Notes to Consolidated Financial Statements in Note 18, Commitments and Contingencies.
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 on Form 10-K that was filed with the SEC on April 18, 2022 with the following risk factors. Any of these factors disclosed in our Annual Report on Form 10‑K 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.
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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 be 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;
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•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 three months ended March 31, 2022 and 2021, for all acquired or to be acquired subsidiaries, aggregate net cash used in operating activities was $3.1 million and $4.5 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;
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•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 March 31, 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 three months ended March 31, 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” and “UPH.WS.” 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.
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We have approximately 143,840,305 shares of Common Stock outstanding at May 20, 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, 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 expiration of any applicable lockup period (with regard to the merger consideration and the shares held by officers, directors and other affiliates) or the exercise or conversion of the warrants or convertible notes, respectively. Rule 144 will also become available for the resale of shares of our Common Stock that are not registered for resale once one year has elapsed from June 14, 2021, which is the date that we filed the Current Report on Form 8-K following the closing of the Business Combinations that included the required Form 10 information that reflected that we are no longer a shell company. 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.
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 10.1** | Amendment No. 2 to Forward Share Purchase Agreement, dated January 7, 2022, by and between UpHealth, Inc. (formerly known as GigCapital2, Inc.) and Kepos Alpha Master Fund L.P. (incorporated by reference to Exhibit 10.1 to UpHealth, Inc.’s Current Report on Form 8-K, filed with the SEC on January 11, 2022). | |||||||
| 10.2#** | ||||||||
| 10.3†** | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 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. | ||||
| ** | Previously filed. | ||||
| † | 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. | ||||
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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 May 23, 2022.
| UPHEALTH, INC. | ||||||||
| By: | /s/ Dr. Ramesh Balakrishnan | |||||||
| Name: | Dr. Ramesh Balakrishnan | |||||||
| 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) | |||||||
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