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 toUpHealth, Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated 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 Part II Item 1A. of this in this Quarterly Report, the "Risk Factors" section in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSEC onApril 18, 2022 (our "Annual Report") and in any more recent filings with theSEC . The company's securities filings can be accessed on the EDGAR section of theSEC's website at www.sec.gov. Except as expressly required by applicable securities law, the company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
UpHealth Services, Inc. was formed onNovember 5, 2019 , and effectively began operations onJanuary 1, 2020 . It was formed for the purpose of effecting a combination of various companies engaged in digital health, and commenced negotiations with a number of companies, including those that are discussed below as having been acquired.UpHealth Holdings, Inc. ("UpHealth Holdings ") became the sole shareholder ofUpHealth Services, Inc. through a reorganization withUpHealth Services, Inc.'s original shareholders whenUpHealth Holdings was formed onOctober 26, 2020 as aDelaware corporation.UpHealth Holdings then entered into a series of transactions to develop its business across three segments: (a)Integrated Care Management -through its subsidiaryThrasys, Inc. ("Thrasys"); (b)Virtual Care Infrastructure-through its subsidiaryGlocal Healthcare Systems Private Limited ("Glocal"); and (c) Services-through its subsidiariesInnovations Group, Inc. ("Innovations Group "),Behavioral Health Services, LLC ("BHS") andTTC Healthcare, Inc. ("TTC"). OnJune 9, 2021 ,UpHealth (fkaGigCapital2, Inc. ) acquiredUpHealth Holdings and its subsidiaries andCloudbreak Health, LLC and its subsidiaries ("Cloudbreak"), which added Cloudbreak to the Virtual Care Infrastructure segment. As a result of events which occurred during the three months endedSeptember 30, 2022 , as described in Dispute and Litigation Regarding Control of Glocal Board of Directors of Item 1. Legal Proceedings in Part II of this Quarterly Report, we determined that a reconsideration event occurred inJuly 2022 , which required us to reassess whether Glocal was a Variable Interest Entity ("VIE") and whether we continued to have a controlling financial interest inGlocal Healthcare Systems Private Limited ("Glocal"). Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effectiveJuly 2022 , we deconsolidated Glocal and recorded a$37.7 million loss on deconsolidation of equity investment in our unaudited condensed consolidated statements of operations, measured as the difference between the probability-weighted fair value of Glocal of$21.2 million and the carrying amount of Glocal's assets and liabilities as ofJune 30, 2022 . The probability-weighted fair value of Glocal is included in equity investment in our unaudited condensed consolidated balance sheets. Further, we assessed the prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the ASC 621 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment. In addition, we derecognized$14.3 million of noncontrolling interests related to Glocal. If through the legal processes discussed in Dispute and Litigation Regarding Control of Glocal Board of Directors of Item 1. Legal Proceedings in Part II of this Quarterly Report, we are able to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to achieve such a result, then we will further reassess the appropriate accounting treatment of our investment in Glocal.
Integrated Care Management Segment – Thrasys
Thrasys Overview
35 -------------------------------------------------------------------------------- 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 boththe United States and international markets. SyntraNetTM is offered as a software-as-a-service ("SaaS") platform. Information, analytics, and applications are delivered to care team members on desktops, tablets, and phones, as needed. An advanced protected health information ("PHI") framework controls access to information based on roles, rights, policies, and scope of consent. The platform includes innovations in a number of areas: application and information models for connected care communities (an extension of multi-tenant architectures), integration and normalization of heterogeneous data sources, configurable software services and open application programming interfaces ("APIs"), advanced analytics and intelligence, scalable workflows and rules, protected health information management, and user interfaces ready for the proliferation of device types and interaction modes.
Thrasys Key Business Metrics
Revenues
Thrasys derives revenues broadly through technology licenses and subscriptions revenues, including hosting fees, and services provided to implement, configure, and extend the technology, and train and on-board users on the use of the platform and applications. Licenses and Subscriptions. 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 revenues are recurring fees charged for access to the platform and applications. Subscription fees are typically pegged to a measure of use, such as population size, number of providers, members enrolled in programs, or number of members managed by applications. Subscription fees can grow as customers subscribe to additional application features or launch additional programs. Revenues from subscription fees are recognized ratably over the subscription term. Services. The majority of Thrasys' contracts to provide professional services are priced either on a time and materials basis, whereby revenues are recognized as the services are rendered, or as a fixed monthly retainer based on an estimate of the number of hours of work over the contract term, whereby revenues are recognized on a straight-line basis over the contract term. In some cases, Thrasys enters into professional services contracts where professional services fees are defined for specific milestones, whereby revenues are recognized upon achievement of the milestones.
Cost of Revenues
Cost of revenues for Thrasys include: costs related to hosting SyntraNetTM in a
HIPAA-compliant cloud environment, costs of third-party product licenses
embedded with SyntraNetTM, costs of a core professional services team,
amortization of capitalized internal-use software development costs, and an
allocation of facilities, information technology, and depreciation costs. Added
compliance requirements for security infrastructure is likely to add some
additional costs for hosting services. Thrasys also anticipates added costs for
third-party licenses that will be added as the scope and footprint of the
technology platform expands.
Hosting Infrastructure. Thrasys' technology and solutions are designed to be
agnostic to any particular cloud services provider. Currently, customer
environments are hosted through contracts with two cloud service providers.
Thrasys anticipates capabilities of cloud service providers to grow, and costs
to become increasingly competitive, and will continue to evaluate offerings in
the marketplace to determine the optimum mix of security, reliability,
scalability, and performance to meet customer needs. Hosting infrastructure
costs for Thrasys are related to the number and size of environments deployed
for customers and also on the service level agreements ("SLAs") negotiated with
customers. As the average size of customers continues to grow, hosting
infrastructure costs are expected to grow as a percentage of revenues.
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.
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Research and Development ("R&D") Expenses. Thrasys continues to invest in R&D.
The core R&D team consists of a small team of very experienced software
developers. Beginning in 2019, Thrasys added considerable capacity via a
consulting group with whom it has been working for over ten years. The team,
based in Chicago , functioned much like the Thrasys internal team, until they
were brought in-house in June 2021 . R&D expenses attributed to internal-use
software development are capitalized and amortized to cost of revenues. R&D
expenses also include an allocation of facilities, information technology, and
depreciation costs.
General and Administrative ("G&A") Expenses. G&A expenses include compensation
and benefits expense, and other administrative costs, related to its executive,
finance, human resources, legal, facilities, and information technology teams,
net of allocations to cost of revenues, 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 revenues. Amortization
expense relates to the amortization of intangible assets from the acquisition of
Thrasys.
Virtual Care Infrastructure Segment – Cloudbreak and 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 Centers, urgent care centers, stand-alone clinics and medical practices, employers, and schools. Cloudbreak's Telemedicine-as-a-Service ("TaaS") business model aligns interests between Cloudbreak and its clients, creating a partnership targeted towards forming long-term agreements with sustainable and mutually beneficial growth models for all stakeholders. Cloudbreak has specifically structured itself to not have a captive medical group as it believes that creates a conflict of interest with its client base, as local health systems do not want to suffer patient leakage to a technology partner or be forced to use a provider network. As a result, Cloudbreak has the freedom to match its partners with centers of excellence on its network, who can satisfy their specific needs and strategy without fear of competing for the patient's attention, and thereby avoid the employment and maintenance of a medical group, which is a lower margin and a more labor intensive activity.
Cloudbreak Key Business Metrics
Revenues
Services. Services revenues are 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 revenues 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 revenues consist 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 Revenues
37 -------------------------------------------------------------------------------- Cost of revenues primarily consist 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 revenues 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 revenues. Amortization expense relates to the amortization of intangible assets from the acquisition of Cloudbreak. Glocal Overview As discussed in Note 1, Organization and Business, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, we deconsolidated Glocal during the three months endedSeptember 30, 2022 ; therefore, the financial results of Glocal as ofDecember 31, 2021 and for the three months endedSeptember 30, 2021 , the period fromMarch 26, 2021 toSeptember 30, 2021 , and the period fromJanuary 1, 2022 toJune 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal as ofSeptember 30, 2022 and for the three months then ended are not included in our unaudited condensed consolidated financial statements. 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 theUN'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. InSeptember 2021 , Glocal delivered its first digital hospital in the Indianstate 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 inIndia andSoutheast Asia , Glocal generates the majority of its revenues inIndia . Glocal's telemedicine/HelloLyf CX digital dispensaries have been functional inIndia 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 38 --------------------------------------------------------------------------------
of
HelloLyf CX digital dispensaries in the Indian State of Madhya Pradesh,
resulting in a total of 750+ government-placed nodes across
Glocal has begun focusing on a business-to-business ("B2B") model where the
HelloLyf CX digital dispensaries are sold to B2B partners/customers, who operate
them with a revenue-share to Glocal. This results in lower revenues but higher
margins.
Glocal also owns nine hospitals, four of which it operates and five of which it
has contracted with third parties to operate with Glocal receiving a
revenue-share.
Glocal Key Business Metrics Revenues
Services. Services revenues are generated primarily from operating hospitals and
clinics, including pharmacy and medicine sales, and transaction fees per
telemedicine consultation.
Products. Products revenues are generated primarily from the sale of HelloLyf CX
digital dispensaries and the construction of HelloLyf HX digital hospitals.
Cost of Revenues
Cost of revenues primarily consist 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 revenues 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 revenues. Amortization expense
relates to the amortization of intangible assets from the acquisition of Glocal.
Services Segment –
Innovations Group Overview
Innovations Group is the parent company of the following wholly-owned operating subsidiaries:MedQuest Pharmacy, Inc. ("MedQuest Pharmacy "),WorldLink Medical, Inc ("WorldLink Medical"),Medical Horizons, Inc. ("Medical Horizons"), andPinnacle Labs, Inc. (doing business as MedQuest Testing Services ("MTS")).MedQuest Pharmacy is a full-service compounding pharmacy licensed in 50 states and theDistrict 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 revenues 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 mail order or national fulfillment center, as a personalized medication administration partner with prescribers, and as a lifestyle wellness direct-to-consumer offering. Its proprietary software and operating system, eMedplus, is Electronic Prescribing of Controlled Substances ("EPCS") certified by theU.S. Drug Enforcement Administration ("DEA") and provides prescribers with a full-service prescription management system. InJanuary 2020 , eMedplus becameSureScripts 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 theSureScripts platform to prescribe medications dispensed byMedQuest Pharmacy . 39 --------------------------------------------------------------------------------MedQuest Pharmacy is accredited and recognized by theAccreditation 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 marketing efforts and training via the Worldlink education conferences. Medical Horizons (product brand is NutraScriptives) is also expanding their sales of supplements through the new products like Nutra Direct and Nutra referral programs, which allows physicians to profit from referrals and direct recommendations of Nutra supplements. Also under theInnovations Group suite of services is WorldLink Medical, which is also known as "The Academy of Preventative and Innovative Medicine ," Medical Horizons, and MedQuest Testing Services. WorldLink Medical is the educational services arm ofInnovations Group , providing Continuing Medical Education ("CME") educational courses accredited as a joint provider through theAccreditation Council for Continuing Medical Education ("ACCME"). Medical Horizons specializes in customized formulations and contract dietary supplement and nutraceuticals manufacturing as an own label distributor with its brand NUTRAscriptivesTM, as well as other brands. Its turnkey solutions include label design, printing, and application; custom packaging; daily packs; a selection of capsule sizes and colors; and convenient auto-reorder services. It features a staff of experts that is committed to excellence and outstanding customer service. MedQuest Testing Services focuses specifically on facilitating diagnostic testing between lab companies, such as LabCorp and Quest Diagnostics, patients, and providers.
Innovations Group Key Business Metrics
Revenues
Products. Products revenues are generated primarily from the sale of prescription medications directly to patients, as well as through the sale of supplemental products to providers and patients. The majority of customer revenues are billed and collected before the medications and products are shipped from the facility.MedQuest Pharmacy is Innovation's largest subsidiary in terms of revenues and generates approximately 60% of its revenues from sales of compounded medications and approximately 40% of its revenues from sales of manufactured medications and supplements. Services. Services revenues are generated primarily from CME educational courses provided by WorldLink Medical and MedQuest Testing, with the majority coming from WorldLink. Cost of Revenues Cost of revenues primarily consist of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs.MedQuest Pharmacy purchases these items through a large industry distributor with many suppliers and also sources products and supplies directly with manufacturers.MedQuest Pharmacy is also able to leverage the size of its operations to purchase larger quantities of certain ingredients and materials at lower prices. Operating Expenses Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, 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 revenues 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 revenues. Amortization expense relates to the amortization of intangible assets from the acquisition ofInnovations Group .
TTC Overview
TTC provides inpatient and outpatient mental health and substance abuse
treatment services for individuals with behavioral health issues, including
post-traumatic stress disorder and drug and alcohol addiction. TTC offers a
complete continuum of care from its detoxification services, residential care,
partial hospitalization programs, and intensive outpatient, and outpatient
programs. During the COVID-19 pandemic, outpatient programs have been virtual
for a majority of visits.
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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
Revenues
Services. TTC generates revenues 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 revenues are 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. 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 revenues are 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 Revenues
Cost of revenues primarily consist 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 revenues 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 revenues. Amortization expense relates to the amortization of intangible assets from the acquisition of TTC.
BHS Overview
BHS operates throughPsych Care Consultants, LLC ,BHS Pharmacy, LLC , andReimbursement Solutions, LLC , wholly-owned subsidiaries of BHS.Psych Care Consultants, LLC is a medical group that has three medical offices located in theSt. 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 forPsych 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 throughReimbursement Solutions, LLC . 41 -------------------------------------------------------------------------------- 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 Revenues Services. Services revenues are 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 revenues are generated primarily by providing retail pharmacy
services through
Cost of Revenues
Cost of revenues consist 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 revenues 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 revenues.
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 revenues. 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 inthe 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, revenues and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected. Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, as well as Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements for the year endedDecember 31, 2021 included in our Annual Report, the following accounting policies and specific estimates involve a greater degree of judgment and complexity:
•Business combinations;
•Identification and reporting of variable interest entities (“VIEs”);
•Goodwill and intangible assets;
•Revenue recognition;
•Capitalized software;
•Valuation of derivatives and warrants; and
•Income taxes.
Identification and Reporting of Variable Interest Entities (“VIE”)
42 -------------------------------------------------------------------------------- When analyzing whether an entity is a VIE, we assess if (1) the equity is sufficient to finance the entity's activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity's operations, and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, the entity is considered a VIE and is assessed for consolidation.
The party that has a controlling financial interest is called a primary
beneficiary and consolidates the VIE. The party is deemed to have a controlling
financial interest if it has both:
•The power to direct the activities of the VIE that most significantly impact
the entity’s economic performance; and
•The obligation to absorb the entity’s losses that could potentially be
significant to the VIE or the right to receive benefits from the entity that
could potentially be significant to the VIE.
We assess whether we have a controlling financial interest in an entity and, thus, are the primary beneficiary. We identify the activities that most significantly impact the entity's performance and determine whether we have the power to direct those activities. In conducting the analysis, we consider the purpose, the design, and the risks that the entity was designed to create and pass through to its variable interest holders. Additionally, we assess if we have the obligation to absorb losses or if we have the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, we have a controlling financial interest in the VIE and consolidate the entity. We monitor changes to the facts and circumstances of the existing involvement with legal entity to determine whether it requires reconsideration of the entity's designation as a VIE or voting interest entity. For VIEs, we regularly reassess the primary beneficiary determination. As a result of events which occurred during the three months endedSeptember 30, 2022 , as described in Dispute and Litigation Regarding Control of Glocal Board of Directors of Item 1. Legal Proceedings in Part II of this Quarterly Report, we determined that a reconsideration event occurred inJuly 2022 , which required us to reassess whether Glocal was a VIE and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effectiveJuly 2022 , we deconsolidated Glocal and recorded a$37.7 million loss on deconsolidation of equity investment in our unaudited condensed consolidated statements of operations, measured as the difference between the probability-weighted fair value of Glocal of$21.2 million and the carrying amount of Glocal's assets and liabilities as ofJune 30, 2022 . The probability-weighted fair value of Glocal is included in equity investment in our unaudited condensed consolidated balance sheets. Further, we assessed the prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the ASC 621 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment. In addition, we derecognized$14.3 million of noncontrolling interests related to Glocal. If through the legal processes discussed in Dispute and Litigation Regarding Control of Glocal Board of Directors of Item 1. Legal Proceedings in Part II of this Quarterly Report, we are able to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to achieve such a result, then we will further reassess the appropriate accounting treatment of our investment in Glocal. The financial results of Glocal as ofDecember 31, 2021 and for the three months endedSeptember 30, 2021 , the period fromMarch 26, 2021 toSeptember 30, 2021 , and the period fromJanuary 1, 2022 toJune 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal as ofSeptember 30, 2022 and for the three months then ended are not included in our unaudited condensed consolidated financial statements. There are no transactions between the Company and Glocal during the three months endedSeptember 30, 2022 . Aside from the Glocal deconsolidation, there have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a significant impact on our unaudited condensed consolidated financial statements and related notes.
Operating Results
As discussed in Note 1, Organization and Business, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, we deconsolidated Glocal during the three months endedSeptember 30, 2022 ; therefore, the financial results of Glocal as ofDecember 31, 2021 and for the three months endedSeptember 30, 2021 , the period fromMarch 26, 2021 toSeptember 30, 2021 , and the period fromJanuary 1, 2022 toJune 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal as ofSeptember 30, 2022 and for the three months then ended are not included in our unaudited condensed consolidated financial statements.
As of
and its subsidiaries Thrasys, BHS, TTC, Glocal,
Cloudbreak.
As ofSeptember 30, 2022 and for the three months then ended,UpHealth's operating results consist of the results of operations forUpHealth and its subsidiaries Thrasys, BHS, TTC,Innovations Group , and Cloudbreak, and for the nine months then ended,UpHealth's operating results consist of the results of operations forUpHealth and its subsidiaries Thrasys, BHS, TTC,Innovations Group , and Cloudbreak for the entire period, and the result of operations for Glocal for the period fromJanuary 1, 2022 toJune 30, 2022 . 43 -------------------------------------------------------------------------------- The following table sets forth the consolidated results of operations ofUpHealth : (Unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Revenues: Services$ 27,600 $ 21,977 $ 5,623 26 %$ 81,382 $ 45,563 $ 35,819 79 % Licenses and subscriptions 2,019 10,956 (8,937) (82) % 10,612 23,759 (13,147) (55) % Products 9,047 12,259 (3,212) (26) % 26,312 20,568 5,744 28 % Total revenues 38,666 45,192 (6,526) (14) % 118,306 89,890 28,416 32 % Costs of revenues: Services 13,440 12,434 1,006 8 % 42,647 26,497 16,150 61 % License and subscriptions 463 6,350 (5,887) (93) % 913 13,020 (12,107) (93) % Products 6,264 8,461 (2,197) (26) % 18,550 14,104 4,446 32 % Total costs of revenues 20,167 27,245 (7,078) (26) % 62,110 53,621 8,489 16 % Gross profit 18,499 17,947 552 3 % 56,196 36,269 19,927 55 % Operating expenses: Sales and marketing 4,771 3,090 1,681 54 % 10,983 5,670 5,313 94 % Research and development 2,231 1,916 315 16 % 5,600 5,759 (159) (3) % General and administrative 13,922 11,452 2,470 22 % 42,213 22,481 19,732 88 % Depreciation and amortization 3,336 3,626 (290) (8) % 13,272 7,496 5,776 77 % Stock-based compensation 2,126 410 1,716 419 % 4,588 410 4,178 1,019 % Lease abandonment expenses - 915 (915) (100) % 75 915 (840) (92) %Goodwill and intangible asset impairment 106,096 - 106,096 - % 112,270 - 112,270 - % Acquisition, integration, and transformation costs 6,049 1,227 4,822 393 % 15,182 36,566 (21,384) (58) % Total operating expenses 138,531 22,636 115,895 512 % 204,183 79,297 124,886 157 % Loss from operations (120,032) (4,689) (115,343) 2,460 % (147,987) (43,028) (104,959) 244 % Other income (expense): Interest expense (6,708) (8,145) 1,437 (18) % (20,306) (13,760) (6,546) 48 % Gain on consolidation of equity investment - - - - % - 640 (640) (100) % Loss on deconsolidation of subsidiary (37,708) - (37,708) - % (37,708) - (37,708) - % Gain on fair value of derivative liability 223 49,885 (49,662) (100) % 6,893 49,885 (42,992) (86) % Gain on fair value of warrant liabilities - 373 (373) (100) % 190 1,447 (1,257) (87) % Gain (loss) on extinguishment of debt (14,610) - (14,610) - % (14,610) 151 (14,761) (9,775) % Other income, net, including interest income 32 259 (227) (88) % 30 40 (10) (25) % Total other income (expense) (58,771) 42,372 (101,143) (239) % (65,511) 38,403 (103,914) (271) % Income (loss) before income tax benefit (expense) (178,803) 37,683 (216,486) (574) % (213,498) (4,625) (208,873) 4,516 % Income tax benefit (expense) 13,219 (6,695) 19,914 (297) % 17,744 357 17,387 4,870 % Net income (loss) before loss from equity investment (165,584) 30,988 (196,572) (634) % (195,754) (4,268) (191,486) 4,487 % Loss from equity investment - - - - % - (561) 561 (100) % Net income (loss) (165,584) 30,988 (196,572) (634) % (195,754) (4,829) (190,925) 3,954 % Less: net income (loss) attributable to noncontrolling interests 178 231 (53) (23) % (109) 147 (256) (174) % Net income (loss) attributable to UpHealth, Inc.$ (165,762) $ 30,757 $ (196,519) (639) %$ (195,645) $ (4,976) $ (190,669) 3,832 % 44
--------------------------------------------------------------------------------
The following table sets forth the consolidated results of operations of
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenues:
Services 71 % 49 % 69 % 51 %
Licenses and subscriptions 5 % 24 % 9 % 26 %
Products 23 % 27 % 22 % 23 %
Total revenues 100 % 100 % 100 % 100 %
Costs of revenues:
Services 35 % 28 % 36 % 29 %
License and subscriptions 1 % 14 % 1 % 14 %
Products 16 % 19 % 16 % 16 %
Total costs of revenues 52 % 60 % 52 % 60 %
Gross profit 48 % 40 % 48 % 40 %
Operating expenses:
Sales and marketing 12 % 7 % 9 % 6 %
Research and development 6 % 4 % 5 % 6 %
General and administrative 36 % 25 % 36 % 25 %
Depreciation and amortization 9 % 8 % 11 % 8 %
Stock-based compensation 5 % 1 % 4 % - %
Lease abandonment expenses - % 2 % - % 1 %
Goodwill and intangible asset impairment 274 % - % 95 % - %
Acquisition, integration, and transformation costs 16 % 3 % 13 % 41 %
Total operating expenses 358 % 50 % 173 % 88 %
Loss from operations (310) % (10) % (125) % (48) %
Other income (expense):
Interest expense (17) % (18) % (17) % (15) %
Gain on consolidation of equity investment - % - % - % 1 %
Loss on deconsolidation of subsidiary (98) % - % (32) % - %
Gain on fair value of derivative liability 1 % 110 % 6 % 55 %
Gain on fair value of warrant liabilities - % 1 % - % 2 %
Gain (loss) on extinguishment of debt (38) % - % (12) % - %
Other income, net, including interest income - % 1 % - % - %
Total other income (expense) (152) % 94 % (55) % 43 %
Income (loss) before income tax benefit (expense) (462) % 83 % (180) % (5) %
Income tax benefit (expense) 34 % (15) % 15 % - %
Net income (loss) before loss from equity
investment (428) % 69 % (165) % (5) %
Loss from equity investment - % - % - % (1) %
Net income (loss) (428) % 69 % (165) % (5) %
Less: net income (loss) attributable to
noncontrolling interests - % 1 % - % - %
Net income (loss) attributable to UpHealth, Inc. (429) % 68 % (165) % (6) %
Due to the timing of UpHealth's acquisitions of TTC, Glocal, Innovations Group ,
and Cloudbreak, and the deconsolidation of Glocal during the third quarter of
2022, the numbers presented above are not directly comparable between periods.
Three months ended
Revenue
In the three months endedSeptember 30, 2022 , revenues were$38.7 million , a decrease of$6.5 million , or 14%, compared to$45.2 million in the three months endedSeptember 30, 2021 . Services revenues increased$5.6 million , primarily due to a$3.6 million increase in the Virtual Care Infrastructure segment due to increases in both new clients and additional revenues from existing clients at Cloudbreak, partially offset by decreased revenues from the deconsolidation of Glocal. Products revenues decreased$3.2 million , primarily resulting from the deconsolidation of Glocal. Licenses and subscriptions revenues decreased$8.9 million , primarily due to Thrasys' loss of a contract with a European customer. 45 -------------------------------------------------------------------------------- We expect revenues to increase in 2022 as compared to fiscal 2021 due to a full year of operations for TTC,Innovations Group , and Cloudbreak, which were acquired in the first half of 2021, partially offset by the deconsolidation of Glocal. In addition, we expect revenues 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 Revenues
In the three months endedSeptember 30, 2022 , cost of revenues was$20.2 million , a decrease of$7.1 million , or 26%, compared to$27.2 million in the three months endedSeptember 30, 2021 . Cost of services increased$1.0 million , primarily due to a$0.5 million increase in the Virtual Care Infrastructure segment resulting from increased revenues at Cloudbreak, partially offset by the deconsolidation of Glocal, and a$0.7 million increase in the Services segment primarily resulting from increased compensation and contract labor costs to support revenue growth at TTC in the three months endedSeptember 30, 2022 . Cost of products decreased$2.2 million , primarily due to the deconsolidation of Glocal. Cost of licenses and subscriptions declined$5.9 million , primarily due to Thrasys' loss of a contract with a European customer. We expect cost of revenues to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of revenues may fluctuate as a percentage of our total revenues (gross margin %) from period to period due to the changes in the percentage of revenues contributed by each of our segments. This growth will be partially offset by the deconsolidation of Glocal.
Operating Expenses
Sales and Marketing. In the three months endedSeptember 30, 2022 , S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were$4.8 million , compared to$3.1 million in the three months endedSeptember 30, 2021 . The increase in S&M expenses was largely due to a$0.6 million increase in S&M expenses at Thrasys for business development, a$0.5 million increase in S&M expenses at Cloudbreak due to increased commission expenses resulting from increased revenue, a$0.4 million increase in corporate S&M expenses related to additional headcount, and a$0.2 million increase in S&M expenses at TTC due to increased headcount to support new business. We expect the rate of growth in S&M expenses to decrease for the foreseeable future as we target investment in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities. This growth will be partially offset by the deconsolidation of Glocal. Research and Development. In the three months endedSeptember 30, 2022 , R&D expenses, which primarily consisted of compensation and benefits expenses and other administrative costs related to the software development teams, were$2.2 million compared to$1.9 million in the three months endedSeptember 30, 2021 . The increase in R&D expenses was largely due to an increase in compensation and benefits at Cloudbreak for ongoing initiatives, net of an increase in the capitalization of internal-use software development costs. We expect the rate of growth in R&D expense to decrease for the foreseeable future as we target investment in the development of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize internal-use software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as internal-use software development costs. General and Administrative. In the three months endedSeptember 30, 2022 , G&A expenses, which primarily consisted of compensation and benefits expenses and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of revenues and S&M and R&D expenses, were$13.9 million , compared to$11.5 million in the three months endedSeptember 30, 2021 . The increase in G&A expenses of$2.4 million was largely due an increase of approximately$4.3 million in corporate expenses, primarily related to increased professional and legal fees of$2.9 million and increased compensation and benefits of$1.9 million due to increased headcount, partially offset by a decrease of approximately$2.1 million in the Services and Virtual Care Infrastructure segments primarily due to reductions in headcount and decreases in professional fees. We expect the rate of growth in G&A expense to decrease at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to increase for the foreseeable future as we continue to grow our business and pursue litigation or arbitration or defend ourselves in litigation. Our G&A expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent of our G&A expenses. Depreciation and Amortization. In the three months endedSeptember 30, 2022 , depreciation and amortization expenses were$3.3 million , primarily consisting of$2.7 million of amortization of intangible assets and$0.6 million of depreciation related to property, plant and equipment, net of allocations to cost of revenues. In the three months endedSeptember 30, 2021 depreciation and amortization expenses were 46 --------------------------------------------------------------------------------$3.6 million , primarily consisting of$3.5 million of amortization of intangible assets and$0.1 million of depreciation related to property and equipment, net of allocations to cost of revenues. The decrease in depreciation and amortization expenses was primarily due to the deconsolidation of Glocal, partially offset by increased amortization related to the increased capitalization of internal-use software development costs in theIntegrated Care Management segment and increased depreciation related to additions to property, plant and equipment in the Services segment. We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of operations for TTC,Innovations Group and Cloudbreak, which were acquired in the first half of 2021, increased amortization related to the increased capitalization of internal-use software development costs, and increased depreciation related to additions to property, plant and equipment, partially offset by the deconsolidation of Glocal. Stock-Based Compensation. In the three months endedSeptember 30, 2022 , stock-based compensation expenses were$2.1 million , related to grants under equity incentive plans. In the three months endedSeptember 30, 2021 , stock-based compensation expenses were$0.4 million , related to grants under equity incentive plans. We expect stock-based compensation expenses to continue to increase for the remainder of fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.Goodwill and Intangible Asset Impairment. An impairment charge of$106.1 million was recognized in the three months endedSeptember 30, 2022 , consisting of a$104.4 million impairment charge at Thrasys and a$1.7 million impairment charge at BHS resulting from our impairment test performed during the three months endedSeptember 30, 2022 due to identified indicators of impairment. No impairment charge was recognized in the three months endedSeptember 30, 2021 . Acquisition, Integration and Transformation Costs. In the three months endedSeptember 30, 2022 , acquisition, integration and transformation costs were$6.0 million , primarily related to professional fees for on-going litigation and business transformation. In the three months endedSeptember 30, 2021 , acquisition, integration and transformation costs were$1.2 million , primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal,Innovations Group , andCloudbreak andUpHealth Holdings' merger withUpHealth .
Other Income (Expense)
In the three months endedSeptember 30, 2022 , other expense was$58.8 million , primarily consisting of$37.7 million due to the loss on the deconsolidation of Glocal,$14.6 million of loss on extinguishment of debt and$6.7 million of interest expense, partially offset by a$0.2 million of gain on fair value of derivative liability. In the three months endedSeptember 30, 2021 , other income was$42.4 million , primarily consisting of a$49.9 million gain on fair value of derivative liability,$0.4 million gain on fair value of warrants and$0.3 million of other income, net, partially offset by$8.1 million of interest expense.
Income Tax Benefit (Expense)
In the three months endedSeptember 30, 2022 , the income tax benefit was$13.2 million . In the three months endedSeptember 30, 2021 , the income tax expense was$6.7 million . Income tax benefit reflects management's best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in our financial statements.
Nine months ended
Revenue
In the nine months endedSeptember 30, 2022 , revenues were$118.3 million , an increase of$28.4 million , or 32%, compared to$89.9 million in the nine months endedSeptember 30, 2021 . Services revenues increased$35.8 million , primarily due to an increase of$29.0 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the nine months endedSeptember 30, 2022 at Cloudbreak, which was acquired inJune 2021 , and increases in both new clients and additional revenues from existing clients at Cloudbreak, partially offset by the deconsolidation of Glocal, and an increase of$8.9 million in the Services segment resulting from a full period of operations in the nine months endedSeptember 30, 2022 atInnovations Group , which was acquired inApril 2021 . Products revenues increased$5.7 million , primarily due to a full period of operations in the nine months endedSeptember 30, 2022 atInnovations Group . Licenses and subscriptions revenues declined$13.1 million , primarily due to Thrasys' loss of a contract with a European customer, net of increased revenues from an amended contract with an existing customer. 47 -------------------------------------------------------------------------------- We expect revenues to continue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC,Innovations Group , and Cloudbreak, which were acquired in the first half of 2021, partially offset by the deconsolidation of Glocal. In addition, we expect revenues 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 revenues In the nine months endedSeptember 30, 2022 , cost of revenues was$62.1 million , an increase of$8.5 million , or 16%, compared to$53.6 million in the nine months endedSeptember 30, 2021 . Cost of services increased$16.2 million , primarily due to an increase of$12.8 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the nine months endedSeptember 30, 2022 at Cloudbreak, which was acquired inJune 2021 , as well as increases in both new clients and additional revenues from existing clients at Cloudbreak, partially offset by the deconsolidation of Glocal, and due to an increase of$3.4 million in the Services segment resulting from a full period of operations in the nine months endedSeptember 30, 2022 atInnovations Group , which was acquired inApril 2021 . Cost of products increased$4.4 million , primarily due to a full period of operations in the nine months endedSeptember 30, 2022 atInnovations Group . Cost of licenses and subscriptions revenues declined$12.1 million , primarily due to Thrasys' loss of a contract with a European customer. We expect cost of revenues to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC,Innovations Group and Cloudbreak, which were acquired in the first half of 2021, partially offset by the deconsolidation of Glocal. In addition, we expect cost of revenues to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of revenues may fluctuate as a percentage of our total revenues (gross margin %) from period to period due to the changes in the percentage of revenues contributed by each of our segments.
Operating Expenses
Sales and Marketing. In the nine months endedSeptember 30, 2022 , S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were$11.0 million , compared to$5.7 million in the nine months endedSeptember 30, 2021 . The increase in S&M expenses was largely due to a full period of operations in the nine months endedSeptember 30, 2022 forInnovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC, which was acquired in the first quarter of 2021, partially offset by the deconsolidation of Glocal. We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC,Innovations Group and Cloudbreak, which were acquired in the first half of 2021, partially offset by the deconsolidation of Glocal. 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 revenues 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 nine months endedSeptember 30, 2022 , R&D expenses, which primarily consisted of compensation and benefits expenses and other administrative costs related to the Thrasys' software development teams, were$5.6 million compared to$5.8 million in the nine months endedSeptember 30, 2021 . The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs. We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021, and for the foreseeable future, as we continue to invest in the development and integration of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize internal-use software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as internal-use software development costs. General and Administrative. In the nine months endedSeptember 30, 2022 , G&A expenses, which primarily consisted of compensation and benefits expenses and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of revenues and S&M and R&D expenses, were$42.2 million , compared to$22.5 million in the nine months endedSeptember 30, 2021 . The increase in G&A expenses of$19.7 million was largely due an increase of approximately$12.0 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, a full period of operations in the nine months endedSeptember 30, 2022 forInnovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021. We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC,Innovations Group and Cloudbreak, which were acquired in the first half of 2021, partially offset by the deconsolidation of Glocal, and an increase in expenses at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to 48 --------------------------------------------------------------------------------
increase for the foreseeable future as we continue to grow our business and
pursue litigation or arbitration or defend ourselves in litigation. Our G&A
expenses may fluctuate as a percentage of our total revenues from period to
period due to the timing and extent of our G&A expenses.
Depreciation and Amortization. In the nine months endedSeptember 30, 2022 , depreciation and amortization expenses were$13.3 million , primarily consisting of$12.0 million of amortization of intangible assets and$2.5 million of depreciation related to property and equipment, net of allocations to cost of revenues. In the nine months endedSeptember 30, 2021 depreciation and amortization expenses were$7.5 million , primarily consisting of$7.0 million of amortization of intangible assets and$0.5 million of depreciation related to property and equipment, net of allocations to cost of revenues. The increase in depreciation and amortization expenses was largely due to a full period of amortization expense related to intangible assets in the nine months endedSeptember 30, 2022 forInnovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021, net of the deconsolidation of Glocal, as well as increased amortization expense related to the increased capitalization of internal-use software development costs in theIntegrated Care Management segment and increased depreciation related to additions to property, plant and equipment in the Services segment. We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of operations for TTC,Innovations Group and Cloudbreak, which were acquired in the first half of 2021, increased amortization related to the increased capitalization of internal-use software development costs, and increased depreciation related to additions to property, plant and equipment, partially offset by the deconsolidation of Glocal. Stock-Based Compensation. In the nine months endedSeptember 30, 2022 , stock-based compensation expenses were$4.6 million , related to grants under equity incentive plans. In the nine months endedSeptember 30, 2021 , stock-based compensation expenses were$0.4 million , related to grants under equity incentive plans. We expect stock-based compensation expenses to continue to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees. Lease Abandonment Expenses. In the nine months endedSeptember 30, 2022 , we recorded a lease abandonment accrual in the amount of$0.1 million related to office spaces we vacated during the period. In the nine months endedSeptember 30, 2021 , we recorded a lease abandonment accrual in the amount of$0.9 million related to office spaces we vacated during the period.Goodwill and Intangible Asset Impairment. In the nine months endedSeptember 30, 2022 , we recorded a goodwill and intangible asset impairment of$112.3 million , primarily consisting of an$104.4 million impairment charge at Thrasys and a$1.7 million impairment charge at BHS, resulting from our impairment test performed during the three months endedSeptember 30, 2022 due to identified indicators of impairment, as well as a$5.5 million measurement period adjustment at Glocal that was immediately impaired, and a$17.6 million trade name intangible asset impairment at TTC during the three months endedMarch 31, 2022 . No impairment charge was recognized in the nine months endedSeptember 30, 2021 . Acquisition, Integration and Transformation Costs. In the nine months endedSeptember 30, 2022 , acquisition, integration and transformation costs were$15.2 million , primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the nine months endedSeptember 30, 2021 , acquisition, integration and transformation costs were$36.6 million , primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal,Innovations Group , andCloudbreak and UpHealth Holdings' merger withUpHealth .
Other Income (Expense)
In the nine months endedSeptember 30, 2022 , other expense was$65.5 million , primarily consisting of the loss of$37.7 million due to the deconsolidation of Glocal,$20.3 million of interest expense and$14.6 million of loss on extinguishment of debt, partially offset by a$6.9 million of gain on fair value of derivative liability and a$0.2 million gain on fair value of warrant liabilities. In the nine months endedSeptember 30, 2021 , other income was$38.4 million , primarily consisting of a$49.9 million gain on fair value of derivative liability, a$1.4 million gain on fair value of warrant liabilities, a$0.6 million gain on consolidation of equity investment and a$0.2 million gain on extinguishment of debt, partially offset by$13.8 million of interest expense. Income Tax Benefit In the nine months endedSeptember 30, 2022 , the income tax benefit was$17.7 million . In the nine months endedSeptember 30, 2021 , the income tax benefit was$0.4 million . Income tax benefit reflects management's best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in our financial statements. 49 --------------------------------------------------------------------------------
Segment Information
We evaluate performance based on several factors, of which revenues and gross
profit by operating segment are the primary financial measures.
Revenues
Revenues by segment consisted of the following:
Three Months Ended September
30, Nine Months Ended September 30,
In thousands 2022 2021 2022 2021
Integrated Care Management $ 3,795 $ 11,858 $ 14,230 $ 29,427
Virtual Care Infrastructure(1) 14,978 15,284 47,423 22,838
Services 19,893 18,050 56,653 37,625
Total revenues $ 38,666 $ 45,192 $ 118,306 $ 89,890
Three Months Ended September 30, 2022 and 2021. Revenues from the Virtual Care
Infrastructure segment decreased $0.3 million , due to the deconsolidation of
Glocal in the three months ended September 30, 2022 , partially offset by
increases in both new clients and additional revenues from existing clients at
Cloudbreak. Revenues from the Services segment increased $1.8 million , primarily
due to increased services from an existing client at TTC and increased revenues
at Innovations Group resulting from adding new patients and providers and
heightened conference attendance compared to the three months ended September
30, 2021 , partially offset by a reduction in the number of billable encounters
and prescription volumes at BHS. Revenues from the Integrated Care Management
segment decreased $8.1 million , primarily due to Thrasys' loss of a contract
with a European customer.
Nine Months Ended September 30, 2022 and 2021. Revenues from the Virtual Care
Infrastructure segment increased $24.6 million , primarily resulting from a full
period of operations in the nine months ended September 30, 2022 at Cloudbreak,
which was acquired in June 2021 , as well as increases in both new clients and
additional revenues from existing clients at Cloudbreak, partially offset by the
deconsolidation of Glocal. Revenues from the Services segment increased $19.0
million , primarily due to a full year of operations at Innovations Group and
TTC, which were acquired in the first half of 2021. Revenues from the Integrated
Care Management segment decreased $15.2 million , primarily due to Thrasys' loss
of a contract with a European customer, net of increased revenues from an
amended contract with an existing customer.
Gross profit
Gross profit by segment consisted of the following:
Three Months Ended September Nine Months Ended September
30, 30,
In thousands 2022 2021 2022 2021
Integrated Care Management $ 2,854 $ 4,760 $ 11,385 $ 14,483
Virtual Care Infrastructure (1) 8,191 5,838 23,779 8,771
Services 7,454 7,349 21,032 13,015
Total gross profit $ 18,499 $ 17,947 $ 56,196 $ 36,269
Three Months Ended September 30, 2022 and 2021. Gross profit from the Virtual
Care Infrastructure segment increased $2.4 million , primarily due to increased
revenues at Cloudbreak resulting from increases in both new clients and
additional revenues from existing clients, partially offset by the
deconsolidation of Glocal. Gross profit from the Services segment decreased $0.1
million . Gross profit from the Integrated Care Management segment decreased $1.9
million , primarily due to Thrasys' loss of a contract with a European customer.
Nine Months Ended September 30, 2022 and 2021. Gross profit from the Virtual
Care Infrastructure segment increased $15.0 million , primarily due to a full
period of operations in the nine months ended September 30, 2022 at Cloudbreak,
which was acquired in June 2021 , as well as increases in both new clients and
additional revenues from existing clients at Cloudbreak, partially offset by the
deconsolidation of Glocal. Gross profit from the Services segment increased $8.0
million , primarily due to a full period of operations in the nine months ended
September 30, 2022 at Innovations Group and TTC, which were acquired in the
first half of 2021. Gross profit from the Integrated Care Management segment
decreased $3.1 million , primarily due to Thrasys' loss of a contract with a
European customer, net of increased revenues with minimal cost from an amended
contract with an existing customer.
Liquidity and Capital Resources
50 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 andDecember 31, 2021 , we had free cash on hand of$22.6 million and$58.2 million , respectively. Excluded from free cash on hand as ofSeptember 30, 2022 , was$7.0 million in funds held in a designated "Share Account" maintained with a leading bank inIndia in the name of Glocal for which our Chief Financial Officer is the sole authorized signatory. As ofSeptember 30, 2022 , we had no restricted cash. As ofDecember 31, 2021 , we had restricted cash of$18.6 million , representing$18.1 million of funds held in an escrow account as agreed in a forward share purchase agreement (see Note 10, Capital Structure, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for further information) and$0.5 million of funds held at our Glocal business. We believe our current cash, restricted cash, and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q.
Cash Flows
The following tables summarize cash flows for the nine months ended
Nine Months Ended September 30,
(In thousands) 2022 2021
Net cash used in operating activities $ (17,551) $ (48,409)
Net cash (used in) provided by investing activities (13,995) 2,637
Net cash (used in) provided by financing activities (22,188) 112,522
Effect of exchange rate changes on cash, cash equivalents, and
restricted cash
(459) (807)
Net (decrease) increase in cash, cash equivalents, and
restricted cash
$ (54,193) 65,943
As
described above, the numbers presented above are not directly comparable between
periods.
In the nine months endedSeptember 30, 2022 , cash used in operating activities was$17.6 million , primarily attributed to the net loss of$195.8 million , partially offset by$172.0 million of net non-cash items (loss on deconsolidation of Glocal, depreciation, intangible amortization, loss on extinguishment of debt, debt issuance cost amortization, impairments, and stock-based compensation) and the changes in operating assets and liabilities, net of effects of acquisitions, of$6.2 million . The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts payable and accrued expenses of$10.5 million due to delayed payments to vendors, partially offset by an increase in accounts receivable of$5.2 million due to net aging of receivables. In the nine months endedSeptember 30, 2021 , cash used in operating activities was$48.4 million , primarily attributed to the net loss of$4.8 million and the changes in operating assets and liabilities, net of effects of acquisitions, of$6.7 million , partially offset by$36.9 million of non-cash items (depreciation, deferred tax adjustments, gain on extinguishment of debt, loss on fair value of warrant liabilities, and debt issuance cost amortization). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts receivable of$27.6 million due to billed and unbilled receivables from two customers during the quarter that were not collected as ofJune 30, 2021 , partially offset by an increase in accounts payable and accrued expenses of$16.5 million due to delayed payments to vendors. In the nine months endedSeptember 30, 2022 , cash used in investing activities was$14.0 million , primarily consisting of purchases of property and equipment and capitalization of internal-use software development costs. In the nine months endedSeptember 30, 2021 , cash provided by investing activities was$2.6 million , primarily consisting of net cash acquired in acquisition of businesses. In the nine months endedSeptember 30, 2022 , cash used in financing activities was$22.2 million , primarily consisting of repayments of debt obligations of$48.2 million , repayments of seller notes of$18.7 million , the repayment of the forward share purchase of$18.5 million and payments of capital lease obligations of$2.5 million , partially offset by proceeds from convertible debt of$67.5 million . In the nine months endedSeptember 30, 2021 , cash provided by financing activities was$112.5 million , primarily consisting of proceeds from convertible debt of$164.5 million and proceeds from merger and recapitalization transaction of$83.4 million , partially offset by repayments of seller notes of$99.2 million , repayments of debt of$23.3 million and payments of amounts due to members of$4.3 million .
Debt
See Note 8, Debt, in the Notes to Condensed Consolidated Financial Statements of
this Quarterly Report for our debt.
OnAugust 12, 2022 , we entered into an indenture (the "2025 Indenture") with the Indenture Trustee in its capacity as trustee thereunder, in respect of the$67.5 million in aggregate principal amount of a new series of variable rate convertible senior secured notes dueDecember 15, 2025 (the "2025 Notes") issued to holders of our 2026 Notes in a private placement transaction ("2025 Notes Offering"), raising approximately$22.5 million in gross cash proceeds, net of debt issuance costs of$2.2 million , after paying for a repurchase of$45.0 million of the 2026 Notes, which net proceeds were used in part to fully repay the Seller Notes. The 2025 Notes are convertible following the reverse stock split of our shares into 3,857,142 shares ofUpHealth common stock at a conversion price, subject to the occurrence of certain corporate events, of$17.50 per share. The 2025 Notes are senior secured obligations ofUpHealth , secured by substantially all of our assets and those of our 51 -------------------------------------------------------------------------------- domestic subsidiaries, and accrue interest at a rate equal to the daily secured overnight financing rate ("SOFR") plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears, for a quarterly rate of 12.21% for ourDecember 15, 2022 interest payment date. The 2025 Notes will mature onDecember 15, 2025 , unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can requireUpHealth to repurchase for cash all or part of their 2025 Notes in principal amounts of$1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event thatUpHealth sells assets with net proceeds in excess of$15.0 million , then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any.UpHealth may not otherwise seek to redeem the 2025 Notes prior toJune 16, 2024 .UpHealth will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.
In
notified us of the quarterly rate reset of 13.53% for our
interest payment date.
Contractual Obligations and Commitments
See Note 11, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.
Off-Balance Sheet Arrangements
As of
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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