NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in dollars, unaudited)
1.Organization and Business
UpHealth, Inc. (“UpHealth,” “we,” “us,” “our,” “UpHealth,” or the “Company”) is the parent company of both UpHealth Holdings, Inc. (“UpHealth Holdings”) and Cloudbreak Health, LLC (“Cloudbreak”).
GigCapital2, Inc. (“GigCapital2”), the Company’s predecessor, was incorporated in Delaware on March 6, 2019. GigCapital2 was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The Company’s business combinations (the “Business Combinations”) were consummated on June 9, 2021, and in connection with the Business Combinations, GigCapital2 changed its corporate name to UpHealth, Inc.
Going Concern
Since 2021, UpHealth Holdings has been a party to a legal action in the state court in New York entitled Needham & Company LLC (“Needham”) v. UpHealth Holdings, Inc. and UpHealth Services, Inc. (the “Needham Action”), which arose out of UpHealth Services, Inc.’s engagement of Needham to provide placement and other financial advisory services. On September 14, 2023, the court in New York issued a Decision and Order granting summary judgment in favor of Needham and denying UpHealth Holdings’ and UpHealth Services, Inc.’s motion for summary judgment. The court in New York entered that Decision and Order on its docket on September 15, 2023. The Decision and Order concluded that Needham is entitled to fees in the amount of $31.3 million, plus interest. On September 18, 2023, the court in New York signed a judgment against UpHealth Holdings and UpHealth Services, Inc. in the amount of $31.3 million, plus prejudgment interest of $6.5 million, for a total judgment of $37.8 million, plus post-judgment interest of 9% per year.
Following the Decision and Order in the Needham Action, on September 19, 2023, UpHealth Holdings filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In addition, on October 20, 2023, two of UpHealth Holdings’ wholly-owned subsidiaries, Thrasys, Inc. (“Thrasys”) and Behavioral Health Services, LLC (“BHS”), and each of the subsidiaries of Thrasys and BHS (such subsidiaries, collectively with UpHealth Holdings, Thrasys and BHS, being referred to individually herein and collectively as the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. The Chapter 11 cases of the Debtors are being jointly administered under the caption In re UpHealth Holdings, Inc., Case No. 23-11476 (U.S. Bankr. D. Del.), for procedural purposes only. Following the commencement of their Chapter 11 cases, the Debtors have filed a number of ordinary “first-” and “second-day” motions to continue ordinary course operations and allow for a smooth transition into Chapter 11. On October 24, November 1 and November 17, 2023, the U.S. Bankruptcy Court approved all of the “first-” and “second-day” motions, including but not limited to confirming the worldwide automatic injunction of all litigation and creditor action against the Debtors, allowing the use of cash and the continued use of the Debtors’ cash management system, allowing payment to employees and independent contractors and setting a deadline for creditors to file proofs of claim. Accordingly, the Debtors continue to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the U.S. Bankruptcy Code and orders of the Bankruptcy Court.
Thrasys has also filed motions to effectuate a transition of the Integrated Care Management segment to its customers, as described in Note 17. Subsequent Events. In addition, a motion to pay retention bonuses to Thrasys employees involved in the transition of the Integrated Care Management segment through year end was approved by the U.S. Bankruptcy Court on November 17, 2023.
Notwithstanding the filing of the voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court, and the automatic stay pursuant to section 362(a) of the U.S. Bankruptcy Code, the Clerk of Court of the court in New York entered the judgment on the court’s docket on September 27, 2023. On November 13, 2023, UpHealth Holdings entered into a stipulation with Needham in the Bankruptcy Court providing that, to the extent it applies, the automatic stay pursuant to section 362(a) of the U.S. Bankruptcy Code shall be deemed modified for the sole and limited purpose of authorizing UpHealth Holdings and UpHealth Services, Inc. to appeal the New York court’s judgment (and for Needham to be able to participate in the appeal). We are awaiting the Bankruptcy Court’s entry of an order approving the stipulation. When it does so, we will appeal the judgment in the Needham Action.
Neither we nor any other direct or indirect subsidiary of us besides UpHealth Holdings, Thrasys, BHS and the subsidiaries of Thrasys and BHS have filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code, and we, Cloudbreak Health, LLC, and TTC Healthcare, Inc. (“TTC”) continue to operate outside of bankruptcy.
The filing of the Chapter 11 case by UpHealth Holdings constitutes an event of default that accelerated our obligations under the following debt instruments:
•Indenture, dated June 9, 2021, by and between UpHealth and Wilmington Trust, National Association, a national banking association (the “Indenture Trustee”), in its capacity as trustee thereunder (the “Unsecured Notes Indenture”), governing UpHealth’s 6.25% Convertible Senior Notes due 2026 (the “2026 Notes” and all beneficial holders thereof, the “2026 Noteholders”) which, subject to the event of default triggered by the Chapter 11 case, mature on June 15, 2026.
•Indenture, dated as of August 18, 2022, by and between UpHealth and the Indenture Trustee, in its capacity as trustee and as collateral agent thereunder (the “Senior Secured Notes Indenture” and together with the Unsecured Notes Indenture, the “Indentures”), governing UpHealth’s Variable Rate Convertible Senior Secured Notes due 2025 (the “2025 Notes” and all beneficial holders thereof, the “2025 Noteholders”) which, subject to the event of default triggered by the Chapter 11 case, mature on December 15, 2025.
The Indentures provide that upon the filing of the Chapter 11 case, the principal and interest due thereunder shall be immediately due and payable. As a result of such acceleration of our debt obligations in respect of the 2025 Notes and 2026 Notes, we believe there is substantial doubt about our ability to continue as a going concern, as described in this Quarterly Report on Form 10-Q (this “Quarterly Report”).
On November 16, 2023, we agreed to sell 100% of the outstanding equity interests of Cloudbreak, our wholly owned subsidiary, to Forest Buyer, LLC, a Delaware limited liability company (“Buyer”) and an affiliate of GTCR LLC, a leading private equity firm (“GTCR”), pursuant to a membership interests purchase agreement, dated November 16, 2023 (the “Purchase Agreement”), by and among the Company, Cloudbreak and Buyer (the “Sale” and all of the transactions contemplated by the Purchase Agreement, as supplemented by the terms and conditions of the Transaction Support Agreement (as defined below), including entry into the Escrow Agreement (as defined below), the Supplemental Indentures (as defined below) and any documents or instruments relating to the Fundamental Change Repurchase Offer (as defined below), collectively, the “Transactions”). We will utilize the proceeds from the Sale for payment in full or in part of the Company’s 2026 Notes and 2025 Notes, as well as other expenses related to the Transactions. The Transactions are expected to close (the “Closing”) in the first half of 2024, subject to obtaining customary regulatory and stockholder approval (such date, the “Closing Date”).
Pursuant to the terms of the Purchase Agreement, the “Cash Consideration” for the Sale means an amount equal to $180.0 million, with adjustments for debt as of immediately prior to the Closing and cash as of 11:59 p.m. (Delray Beach, Florida time) on the day immediately prior to the Closing Date (the “Calculation Time”), Cloudbreak’s net working capital as of the Calculation Time, and unpaid expenses related to the Transactions. The consideration delivered to the Company at the Closing shall equal $180.0 million, subject to adjustments for the estimated closing debt and cash and the estimated unpaid expenses related to the Transactions (the “Estimated Cash Consideration”), with all such Estimated Cash Consideration to be delivered by Buyer to an escrow agent (the “Escrow Agent”) for deposit into certain segregated escrow accounts to be established pursuant to the Escrow Agreement, as described below. Following the Closing, in connection with a customary adjustment to the Cash Consideration, which adjustment is expected, in the absence of any disagreement, to be determined within 120 days following the Closing Date, to the extent that the Cash Consideration exceeds the Estimated Cash Consideration, a payment shall be made for the purpose of repurchasing the 2026 Notes and/or the 2025 Notes of an amount equal to the amount by which the Cash Consideration exceeds the Estimated Cash Consideration (up to an excess equal to the amount of the Adjustment Escrow Amount (as defined below)). To the extent that following such customary adjustment to the Cash Consideration, the Estimated Cash Consideration is greater than the Cash Consideration, Buyer and the Company shall cause the Escrow Agent (including by delivering joint written instructions to the Escrow Agent) to make payment to Buyer (or its designees) of an amount equal to the lesser of (i) an amount equal to the amount by which the Estimated Cash Consideration exceeds the Cash Consideration, and (ii) the Adjustment Escrow Amount held in the Adjustment Escrow Account, including any dividends, interest, distributions and other income received in respect thereof, less any losses on investment thereof, less distributions thereof in accordance with the Purchase Agreement and the Escrow Agreement (as defined below) (the “Adjustment Escrow Funds”), in each case, from the Adjustment Escrow Account, and after any such payments are made to Buyer, the remaining Adjustment Escrow Funds (if any) shall be paid for the purpose of repurchasing the 2026 Notes and/or the 2025 Notes.
Pursuant to the terms of the Purchase Agreement, prior to the Closing, the Company, Buyer and the Escrow Agent will enter into one or more escrow agreements in a customary form to be agreed upon as provided under the Purchase Agreement by Buyer, the Company, the Required Noteholders (as defined below) and the Escrow Agent (the “Escrow Agreement”), pursuant to which, at the Closing, Buyer will remit to the Escrow Agent all of the Estimated Cash Consideration to be deposited as follows: (i) $3.0 million (the “Adjustment Escrow Amount”) shall be deposited in a segregated escrow account to satisfy any downward adjustment to the Cash Consideration (the “Adjustment Escrow Account”); (ii) $27.0 million (the “Tax Escrow Amount”), subject to reduction if the Company and Buyer mutually determine prior to the Closing that the maximum possible amount of taxes that would become due and payable by the Company as a result of the Transactions (the “Maximum Seller Tax Amount”) should be less than $27.0 million, in which case the Tax Escrow Amount shall be reduced to an amount equal to the agreed-upon Maximum Seller Tax Amount, shall be deposited in a segregated escrow account to enable the Company to pay any and all taxes that become due and payable by the Company as a result of the Transactions (the “Tax Escrow Account”); provided, that any amounts remaining in the Adjustment
Escrow Account after the post-Closing adjustment or in the Tax Escrow Account after the payment of all taxes shall (x) if the Fundamental Change Repurchase Date (as defined in the Senior Secured Notes Indenture) has not yet occurred, be paid to the Notes Escrow Account (as defined below) by wire transfer of immediately available funds for purposes of making an offer to repurchase the 2026 Notes and the 2025 Notes, or (y) if the Fundamental Change Repurchase Date has occurred, be released to the Company (and held in a deposit account subject to a control agreement in favor of the Consenting Noteholders) for the sole purpose of complying with mandatory repurchase requirements set forth in the Senior Secured Notes Supplemental Indenture with respect to any remaining 2025 Notes; and (iii) the remaining portion of the Estimated Cash Consideration (such amount, the “Notes Escrow Amount”), shall be deposited in a segregated escrow account (the “Notes Escrow Account”, and together with the Adjustment Escrow Account and the Tax Escrow Account, the “Escrow Accounts”), the purpose of which shall be to fund the offer, on behalf of the Company, (a) to repurchase all of the Company’s 2026 Notes issued under the Unsecured Notes Indenture, which repurchase shall use a portion of the Notes Escrow Account, together with any dividends, interest, distributions and other income received in respect thereof, less any losses on investment thereof, less distributions thereof in accordance with the Purchase Agreement and the Escrow Agreement (the “Notes Escrow Fund”), which portion as of the date of the Purchase Agreement and based on certain assumptions that are subject to change, is currently estimated to be equal to $115.0 million, and which payment is expected to occur on or around June 3, 2024, together with the payment of any other amounts to be made to the 2026 Noteholders concurrently with the payment of such portion of the Notes Escrow Funds as specified by the Unsecured Notes Indenture following a Fundamental Change (as such term is defined in the Unsecured Notes Indenture), which other amounts may be paid using amounts of the Notes Escrow Funds, and (b) in addition to the repurchase of up to all of the 2026 Notes, to repurchase in accordance with the terms of the Senior Secured Notes Indenture (as defined below) in the event of a Fundamental Change (as defined in the Senior Secured Notes Indenture) the maximum principal amount of the Company’s 2025 Notes issued under the Senior Secured Notes Indenture, which, as of the date of the Purchase Agreement and based on certain assumptions that are subject to change and presuming that all of the 2026 Noteholders accept the repurchase of the 2026 Notes as well as any other amounts of the Notes Escrow Funds paid in respect of the repurchase of the 2026 Notes, is estimated to be approximately $25.8 million, and the Company, in accordance with such terms of the Senior Secured Notes Indenture, shall make such payments of other amounts required to be made in connection with such repurchase, which other amounts may be paid using amounts of the Notes Escrow Funds, such that following the payment of the amounts to be paid for such initial repurchase of the 2025 Notes, which payment is expected to occur on or around June 3, 2024, a portion of the 2025 Notes shall remain outstanding (which, as of the date of the Purchase Agreement and based on certain assumptions that are subject to change, is estimated to be approximately $31.4 million in aggregate principal amount), the terms of which shall be governed by the 2025 Notes and the Senior Secured Notes Indenture and the Senior Secured Notes Supplemental Indenture (it being acknowledged and agreed that all of the 2025 Noteholders that have not signed the Transaction Support Agreement will be repurchased in full with respect to their 2025 Notes to the extent such noteholders so elect and all of the 2025 Noteholders that have signed the Transaction Support Agreement will be partially repurchased with respect to their 2025 Notes on a pro rata basis). In the event that any amounts remain outstanding of the Notes Escrow Funds, those amounts shall be used to offer to repurchase in part such anticipated outstanding amount of the 2025 Notes in accordance with the terms of the Senior Secured Notes Indenture in the event of a Fundamental Change (as such term is defined in the Senior Secured Notes Indenture). Furthermore, any repurchases of the 2025 Notes in accordance with the Purchase Agreement will be made at a premium of 5.0% to the principal amount of such 2025 Notes.
In connection and concurrently with the entry into the Purchase Agreement, the Company, Cloudbreak and Buyer entered into a transaction support agreement, dated as of November 16, 2023 (the “Transaction Support Agreement”), with certain beneficial holders of the 2025 Notes (being the holders of at least 69% of the 2025 Notes, the “Consenting Senior Secured Noteholders”) and certain beneficial holders of the 2026 Notes (being the holders of at least 88% of the 2026 Notes, the “Consenting Unsecured Noteholders”, and together with the Consenting Senior Secured Noteholders, the “Consenting Noteholders”), pursuant to which the parties have agreed, among other things, to support the Purchase Agreement and the Transactions and to enter into and effect the Escrow Agreements, Supplemental Indentures in connection with the Fundamental Change Repurchase Offer to be made by the Company and each other Definitive Document (as defined in the Transaction Support Agreement), in each case, subject to the terms and conditions set forth in the Transaction Support Agreement.
The Transaction Support Agreement provides that (i) the Company and Cloudbreak will abide by the proceeds waterfall set forth in the Purchase Agreement as described above, the Escrow Agreements and the Supplemental Indentures, including, for the avoidance of doubt, releasing the Notes Escrow Funds as set forth in the Escrow Agreement, commencing offers to repurchase the 2025 Notes and the 2026 Notes in accordance with the terms of the applicable Indenture as a result of any or all of the Transactions constituting a Fundamental Change (as such term is defined in each of the Indentures) under the applicable Indenture (each, a “Fundamental Change Repurchase Offer”) and delivering the applicable Fundamental Change Company Notices (as such terms are defined in each of the Indentures) pursuant to the applicable Indenture, in each case, at the times and pursuant to the terms specified in the Supplemental Indentures; (ii) the Buyer will abide by the proceeds waterfall set forth in the Purchase Agreement as described above, the Escrow Agreements and the Supplemental Indentures, including, for the avoidance of doubt, depositing and releasing the Escrow Funds as set forth in the Escrow Agreement; and (iii) the Consenting Noteholders will, so long as the Company complies with the applicable terms, conditions and procedures set forth in the Indentures, participate in and comply with the terms set forth in respect of any Fundamental Change Company Notice given under (and as defined in) the respective Indenture and applicable Supplemental Indenture in connection with each relevant Fundamental Change Repurchase Offer. The Company and each Consenting Noteholder, in their separate and individual capacities, represent in the Transaction Support Agreement that, as of the date thereof and to the best of
their knowledge, and assuming that all coupon payments on the 2025 Notes and the 2026 Notes due prior to June 3, 2024 are paid in full: if the Sale were to occur on March 15, 2024, (i) the outstanding amount due and payable in the aggregate to the 2025 Noteholders arising under or in connection with a Fundamental Change Repurchase Offer under the Senior Secured Notes Indenture to be consummated on June 3, 2024 would be $62.2 million, consisting of (a) $57.2 million in aggregate principal amount of the 2025 Notes (assuming 100% participation), (b) $2.9 million premium payable in respect of the 2025 Notes, and (c) $2.1 million in accrued and unpaid interest; and (ii) the outstanding amount due and payable in the aggregate to the 2026 Noteholders arising under or in connection with a Fundamental Change Repurchase Offer under the Unsecured Notes Indenture to be consummated on June 3, 2024 would be $119.6 million, consisting of (x) $115.0 million in aggregate principal amount of the 2026 Notes (assuming 100% participation) and (y) $4.6 million of accrued and unpaid interest.
In accordance with the terms of the Purchase Agreement and the Transaction Support Agreement, the Company and the Indenture Trustee will enter into a supplement to the Senior Secured Notes Indenture, to be agreed and effected no later than December 20, 2023 (the “Senior Secured Notes Supplemental Indenture”), that will, among other things (a) provide for the waiver, with respect to the Company and Cloudbreak, of the specified events of default under the Senior Secured Notes Indenture resulting from the commencement of the Chapter 11 cases (the “2025 Indenture Events of Default”); (b) rescind, with respect to the Company and Cloudbreak, the acceleration of the 2025 Notes resulting from the occurrence of the foregoing events of default (the “2025 Notes Acceleration”); (c) provide for certain changes to certain of the definitions in the Senior Secured Notes Indenture, including “Permitted Indebtedness”; (d) provide for certain modifications to covenants of the Company and certain changes with respects to events of default; (e) provide a carveout for the Sale from the terms of the Senior Secured Notes Indenture with respect to mergers and sale transactions; and (f) delete the rule prohibiting repurchases in connection with a Fundamental Change (as defined in the Senior Secured Notes Indenture) arising from the Sale at the time the 2025 Notes have been accelerated, and will modify the provisions in respect of repurchases of 2025 Notes as a result of a Fundamental Change for the Consenting Noteholders in respect of the Sale to account for a multi-step process for the repurchase of the 2025 Notes (i.e., to require a repurchase offer at Closing and in connection with subsequent paydowns with the proceeds of released funds from the Escrow Accounts), in each case, at a 5.0% premium to the principal amount of such 2025 Notes.
In addition, in accordance with the terms of the Purchase Agreement and the Transaction Support Agreement, the Company and the Indenture Trustee will enter into a supplement to the Unsecured Notes Indenture, to be agreed and effected no later than December 20, 2023 (the “Unsecured Notes Supplemental Indenture” and together with the Senior Secured Notes Supplemental Indenture, the “Supplemental Indentures”), that will, among other things (a) provide for the waiver, with respect to the Company and Cloudbreak, of the specified events of default under the Unsecured Notes Indenture resulting from the 2025 Notes Acceleration and the commencement of the Chapter 11 cases (the “2026 Indenture Events of Default” and together with the 2025 Indenture Events of Default, the “Specified Defaults”); (b) add each subsidiary of the Company, other than any subsidiary of the Company that is, as of the date of the Unsecured Notes Supplemental Indenture, a debtor or debtor in possession in any bankruptcy proceeding, including the Chapter 11 cases, as a guarantor of the obligations under the 2026 Notes pursuant to the Unsecured Notes Indenture; (c) cause the Company and each of its subsidiaries, other than any subsidiary of the Company that is, as of the date of the Unsecured Notes Supplemental Indenture, a debtor or debtor in possession in any bankruptcy proceeding, including the Chapter 11 cases, to grant a second-priority security interest on the same collateral that secures the 2025 Notes; (d) in connection with those items described in clauses (b) and (c) above, incorporate provisions similar to those in the Senior Secured Notes Indenture including with respect to covenants and events of default and as modified by the Senior Secured Notes Supplemental Indenture; and (e) provide a carveout for the Sale from the terms of the Unsecured Notes Indenture with respect to mergers and sale transactions.
Pursuant to the Transaction Support Agreement, each of the Company and Cloudbreak has agreed (severally and not jointly) to (a) grant liens in favor of the 2025 Noteholders and 2026 Noteholders with respect to the Escrow Accounts and the funds held therein, as applicable, subject to the terms of the Supplemental Indentures and any related intercreditor agreements; and (b) in connection with the Unsecured Notes Supplemental Indenture, grant a second priority lien on the assets of the Company and Cloudbreak and any subsidiaries of the Company and Cloudbreak that are not at such time a debtor or debtor in possession in any bankruptcy proceeding, including the Chapter 11 cases, provided, that any such liens on the issued and outstanding equity interests of Cloudbreak or the assets of Cloudbreak and its subsidiaries will be released at or prior to the Closing.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business. However, given the events described above, in particular, the filing of the Chapter 11 cases by the Debtors which constituted an event of default under the Indentures that accelerated the obligations of the Company with respect to the 2025 Notes and 2026 Notes, we believe there is substantial doubt about our ability to continue as a going concern. However, upon the entry into the Supplemental Indentures pursuant to the terms of the Transaction Support Agreement, the Specified Defaults will each be waived and the 2025 Notes Acceleration will be rescinded.
Deconsolidation of UpHealth Holdings, Inc. and Subsidiaries
As a result of the bankruptcy proceedings described above and the designation of UpHealth Holdings, Thrasys, BHS and the subsidiaries of Thrasys and BHS, as “debtors-in-possession,” we determined that a reconsideration event occurred on September 19, 2023, which required us to reassess whether UpHealth Holdings was a Variable Interest Entity (“VIE”) and whether we continued to
have a controlling financial interest in UpHealth Holdings. Based on this assessment, we concluded that UpHealth Holdings was a VIE, and furthermore, that we no longer had the ability to direct any activities of UpHealth Holdings and no longer have a controlling financial interest. As a result, effective September 30, 2023, we deconsolidated UpHealth Holdings and recorded a $59.1 million gain on deconsolidation of equity investment in our unaudited condensed consolidated statements of operations, measured as the difference between the fair value of UpHealth Holdings of $75.6 million and the carrying amount of UpHealth Holdings’ assets and liabilities as of September 30, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material. The fair value of UpHealth Holdings, which is included in equity investment in our unaudited condensed consolidated balance sheets, was determined based upon generally accepted valuation approaches, including the income and market approaches.
Further, we assessed the prospective accounting for our equity investment in UpHealth Holdings. Since we no longer had the ability to exercise significant influence over operating and financial policies of UpHealth Holdings, we concluded the investment should be accounted for utilizing the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 321, Investments - Equity Securities (“ASC 321”) measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment.
The financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements.
The following table sets forth details of the unaudited condensed consolidated balance sheet of UpHealth Holdings and subsidiaries, which was deconsolidated effective September 30, 2023:
| | | | | |
| (In thousands) | As of September 30, 2023 |
| Cash and cash equivalents | $ | 35,606 | |
| Accounts receivable, net | 4,647 | |
| Inventories | 17 | |
| Due from related parties | 3,681 | |
| Prepaid expenses and other current assets | 457 | |
| Property and equipment, net | 694 | |
| Operating lease right-of-use assets | 3,615 | |
| Goodwill | 38,376 | |
| Other assets | 499 | |
| Total assets | 87,592 | |
| Accounts payable | 1,986 | |
| Accrued expenses | 57,626 | |
| Deferred revenue, current | 3,646 | |
| Due to related party | 12,439 | |
| Related-party debt | 181 | |
| Lease liabilities, current | 1,591 | |
| Other liabilities, current | 641 | |
| Lease liabilities, noncurrent | 2,903 | |
| Additional paid in capital | 450,096 | |
| Accumulated deficit | (461,477) | |
| Noncontrolling interests | 1,457 | |
| Total liabilities and stockholder's equity | 71,089 | |
| Carrying value of Holdings and subsidiaries at deconsolidation | 16,503 | |
| Fair value of Holdings and subsidiaries at deconsolidation | 75,568 | |
| Gain on deconsolidation of equity investment | $ | 59,065 | |
Deconsolidation of Glocal
As a result of events which occurred in the three months ended September 30, 2022, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal Healthcare Systems Private Limited (“Glocal”), which was included in our Virtual Care Infrastructure segment, 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 had the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effective July 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 of July 1, 2022. The probability-weighted fair value of Glocal, which is included in equity investment in our unaudited condensed consolidated balance sheets, incorporated scenarios where control of Glocal was gained and Glocal would continue as a going concern, control of Glocal was gained and Glocal would need to be liquidated, and control of Glocal was not gained and the equity investment in Glocal would be worthless. 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 321 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. In the nine months ended September 30, 2023, there has been no change in the status of Glocal, and accordingly, we continue to account for it as an equity investment. If through legal processes 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 in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
Reverse Stock Split
On December 5, 2022, our stockholders approved an amendment to our Second Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) to effect a reverse split of the outstanding shares of our common stock, par value $0.0001 per share, at a specific ratio within a range of 4:1 to 10:1, with the specific ratio to be fixed within this range by our board of directors in its sole discretion without further stockholder approval (the “Reverse Stock Split”). Our board of directors fixed the Reverse Stock Split ratio at 10:1, such that each ten shares of common stock were combined and reconstituted into one share of common stock effective December 8, 2022. Except as noted, all share, stock option, restricted stock unit (“RSU”), and per share information throughout this Quarterly Report has been retroactively adjusted to reflect this Reverse Stock Split.
Sale of Innovations Group
On February 26, 2023, we agreed to sell 100% of the outstanding capital stock of our wholly owned subsidiary, Innovations Group, Inc. (“Innovations Group”), to Belmar MidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and other adjustments. See Note 3. Significant Transactions, for further information.
UpHealth Holdings, Inc. Debtor-In-Possession Condensed Consolidated Balance Sheet
The following table sets forth details of the unaudited condensed consolidated balance sheet of UpHealth Holdings, which was deconsolidated effective September 30, 2023. No condensed consolidated statement of operations (debtor-in-possession) or condensed consolidated statement of cash flows (debtor-in-possession) have been presented for UpHealth Holdings, as the deconsolidation occurred on September 30, 2023.
| | | | | |
| UPHEALTH HOLDINGS |
| (DEBTOR-IN-POSSESSION) |
| CONDENSED CONSOLIDATED BALANCE SHEET |
| (In thousands, unaudited) |
| |
| September 30, 2023 |
| ASSETS | |
| Cash and cash equivalents | $ | 34,268 | |
| Investment in subsidiaries | 231,078 | |
| Total assets | 265,346 | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Accounts payable | 200 | |
| Accrued expenses | 37,830 | |
| Due to related party | 7,813 | |
| Total liabilities | 45,842 | |
| Additional paid in capital | 450,096 | |
| Accumulated deficit | (230,592) | |
| Total stockholders’ equity | 219,504 | |
| Total liabilities and stockholders’ equity | $ | 265,346 | |
2.Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Our unaudited condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited consolidated financial statements. Our unaudited condensed consolidated balance sheet as of December 31, 2022 has been derived from our audited consolidated financial statements as of that date, but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, our 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 U.S. GAAP. The results of operations in the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period. Our accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022.
Our unaudited condensed consolidated financial statements include the accounts of UpHealth and its consolidated subsidiaries. As described in Note 1. Organization and Business, our Glocal subsidiary was deconsolidated effective July 1, 2022 and our UpHealth Holdings subsidiary was deconsolidated effective September 30, 2023.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and accompanying notes thereto.
Significant estimates and assumptions made by management include the determination of:
•The identification and reporting of 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.
•The valuation of equity investments, including our determination of the carrying value of Glocal and UpHealth Holdings;
•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 valuations prepared in connection with the review of goodwill, intangible assets, and other long-lived assets for impairment:
•The timing and amount of revenues to be recognized, including standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;
•The identification of and provision for uncollectible accounts receivable;
•The capitalization and useful life of internal-use software development costs;
•The valuation of 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.
Allowance for Expected Credit Losses
We closely monitor our accounts receivable balances and estimate the allowance for expected credit losses. The estimate is primarily based on historical collection experience and other factors, including those related to current market conditions and events. Credit losses associated with accounts receivable have not been material historically.
Equity Investment
As discussed in Deconsolidation of Equity Investment in Note 1. Organization and Business, as of September 30, 2023 and December 31, 2022, we held an interest in the privately-held equity securities of Glocal in which we did not have a controlling interest and were unable to exercise significant influence. Additionally, as of September 30, 2023, we held an interest in the privately-held equity securities of UpHealth Holdings in which we did not have a controlling interest and were unable to exercise significant influence. Based on the terms of these privately-held securities, we concluded the investments should be accounted for utilizing the ASC 321 measurement alternative, whereby the investments were measured at cost and will continue to be evaluated for any indicators of impairment.
Held for Sale
Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into assets and liabilities held for sale on our consolidated balance sheets as of December 31, 2022. The reclassification occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. and reported in impairment of goodwill, intangible assets, and other long-lived assets in our unaudited condensed consolidated statements of operations.
New Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued Accounting Standards Update (“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 of the adoption of this ASU will have on our unaudited condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
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 Accounting Standards Codification Topic (“ASC”) 842. This ASU was effective for us on January 1, 2023, and the adoption did not have a material effect on our unaudited condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified on our unaudited condensed consolidated statements of operations to conform to the current year presentation as shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| As Reported | Reclassifications | As Adjusted | | As Reported | Reclassifications | As Adjusted |
| Revenues: | | | | | | | |
| Services | $ | 27,600 | | $ | — | | $ | 27,600 | | | $ | 81,382 | | $ | — | | $ | 81,382 | |
| Licenses and subscriptions | 2,019 | | — | | 2,019 | | | 10,612 | | — | | 10,612 | |
| Products | 9,047 | | — | | 9,047 | | | 26,312 | | — | | 26,312 | |
| Total revenues | 38,666 | | — | | 38,666 | | | 118,306 | | — | | 118,306 | |
| Costs of revenues: | | | | | | | |
| Services | 13,440 | | 1,473 | | 14,913 | | | 42,647 | | 4,256 | | 46,903 | |
| License and subscriptions | 463 | | — | | 463 | | | 913 | | — | | 913 | |
| Products | 6,264 | | — | | 6,264 | | | 18,550 | | — | | 18,550 | |
| Total costs of revenues | 20,167 | | 1,473 | | 21,640 | | | 62,110 | | 4,256 | | 66,366 | |
| Gross profit | 18,499 | | (1,473) | | 17,026 | | | 56,196 | | (4,256) | | 51,940 | |
| Operating expenses: | | | | | | | |
| Sales and marketing | 4,771 | | (123) | | 4,648 | | | 10,983 | | 638 | | 11,621 | |
| Research and development | 2,231 | | (56) | | 2,175 | | | 5,600 | | 344 | | 5,944 | |
| General and administrative | 13,922 | | (1,294) | | 12,628 | | | 42,213 | | (5,238) | | 36,975 | |
| Depreciation and amortization | 3,336 | | — | | 3,336 | | | 13,272 | | — | | 13,272 | |
| Stock-based compensation | 2,126 | | — | | 2,126 | | | 4,588 | | — | | 4,588 | |
| Impairment of goodwill, intangible assets, and other long-lived assets | 106,096 | | — | | 106,096 | | | 112,345 | | — | | 112,345 | |
| Acquisition, integration, and transformation costs | 6,049 | | — | | 6,049 | | | 15,182 | | — | | 15,182 | |
| Total operating expenses | 138,531 | | (1,473) | | 137,058 | | | 204,183 | | (4,256) | | 199,927 | |
| Loss from operations | (120,032) | | — | | (120,032) | | | (147,987) | | — | | (147,987) | |
| Other income (expense): | | | | | | | |
| Interest expense | (6,708) | | — | | (6,708) | | | (20,306) | | — | | (20,306) | |
| Loss on deconsolidation of subsidiary | (37,708) | | — | | (37,708) | | | (37,708) | | — | | (37,708) | |
| Gain (loss) on fair value of derivative liability | 223 | | — | | 223 | | | 6,893 | | — | | 6,893 | |
| Loss on extinguishment of debt | (14,610) | | — | | (14,610) | | | (14,610) | | — | | (14,610) | |
| Other income, net, including interest income | 32 | | — | | 32 | | | 220 | | — | | 220 | |
| Total other income (expense) | (58,771) | | — | | (58,771) | | | (65,511) | | — | | (65,511) | |
| Loss before income tax benefit | (178,803) | | — | | (178,803) | | | (213,498) | | — | | (213,498) | |
| Income tax benefit | 13,219 | | — | | 13,219 | | | 17,744 | | — | | 17,744 | |
| Net loss | (165,584) | | — | | (165,584) | | | (195,754) | | — | | (195,754) | |
| Less: net income (loss) attributable to noncontrolling interests | 178 | | — | | 178 | | | (109) | | — | | (109) | |
| Net loss attributable to UpHealth, Inc. | $ | (165,762) | | $ | — | | $ | (165,762) | | | $ | (195,645) | | $ | — | | $ | (195,645) | |
Certain other prior period amounts have been reclassified on our unaudited condensed consolidated balance sheets to conform with our current period presentation.
3. Significant Transactions
Sale of Innovations Group
On February 26, 2023, we agreed to sell 100% of the outstanding capital stock of our wholly owned subsidiary, Innovations Group, to Belmar MidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to the Stock Purchase Agreement dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and other adjustments. Accordingly, the financial results of Innovations Group for the period from January 1, 2023 through May 10, 2023, and the three and nine months ended September 30, 2022, and the financial position of Innovations Group as of December 31, 2022 are included in our unaudited condensed consolidated financial statements.
In connection with entering into this agreement, we concluded that the disposal group met the held for sale criteria and classified the assets and liabilities as held for sale as of December 31, 2022. Assets and liabilities that were classified as held for sale were $65.3 million and $11.1 million, respectively, as of December 31, 2022. There were no businesses classified as held for sale as of September 30, 2023.
In connection with the held for sale classification, upon the remeasurement of the disposal group to its fair value, less cost to sell, we recorded a loss of $0.5 million in the three months ended March 31, 2023 and a loss of $1.8 million in the three months ended December 31, 2022, which were recorded in impairment of goodwill, intangible assets, and other long-lived assets in the unaudited condensed consolidated statements of operations. In connection with the sale closing on May 11, 2023, based on net proceeds of $54.9 million, we recorded an additional loss of $1.4 million in the three months ended June 30, 2023, which was recorded in impairment of goodwill, intangible assets, and other long-lived assets in our unaudited condensed consolidated statements of operations.
4. Revenues
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
Revenues by geography consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Americas | $ | 32,681 | | | $ | 38,666 | | | $ | 112,649 | | | $ | 111,402 | |
| Asia | — | | | — | | | — | | | 6,904 | |
| Total revenues | $ | 32,681 | | | $ | 38,666 | | | $ | 112,649 | | | $ | 118,306 | |
Our revenues are entirely derived from the healthcare industry. Revenues recognized over-time were approximately 96% and 75% of the total revenues in the three months ended September 30, 2023 and 2022, respectively. Revenues recognized at a point-in-time were approximately 4% and 25% of the total revenues in the three months ended September 30, 2023 and 2022, respectively. Revenues recognized over-time were approximately 85% and 73% of the total revenues in the nine months ended September 30, 2023 and 2022, respectively. Revenues recognized at a point-in-time were approximately 15% and 27% of the total revenues in the nine months ended September 30, 2023 and 2022, respectively.
Contract Assets
There were no impairments of contract assets, consisting of unbilled receivables, in the three and nine months ended September 30, 2023 and 2022.
The change in contract assets was as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 |
| Unbilled receivables, beginning of period | $ | 694 | | | $ | 784 | |
| Reclassifications to billed receivables | (694) | | | (784) | |
| Revenues recognized in excess of period billings | 603 | | | 896 | |
| Deconsolidation of subsidiary | (603) | | | — | |
| Unbilled receivables, end of period | $ | — | | | $ | 896 | |
Contract Liabilities
The change in contract liabilities, consisting of deferred revenue, was as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 |
| Deferred revenue, beginning of period | $ | 2,738 | | | $ | 2,649 | |
| Revenues recognized from balances held at the beginning of the period | (2,760) | | | (2,023) | |
| Revenues deferred from period collections on unfulfilled performance obligations | 3,720 | | | 4,403 | |
| Deconsolidation of subsidiary | (3,646) | | | (622) | |
| Deferred revenue, end of period | $ | 52 | | | $ | 4,407 | |
As of September 30, 2023, the deferred revenue is expected to be recognized within a year, and as such, is classified as current on the condensed consolidated balance sheets. Revenues recognized ratably over time are generally billed in advance and includes software-as-a-service (“SaaS”) internet hosting, subscriptions, construction of digital hospitals and dispensaries, and related consulting, implementation, services support, and advisory services.
Revenues recognized as delivered over time include 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 0.4% and 2.5% of revenues recognized in the three and nine months ended September 30, 2023, were from the deferred revenue balance existing as of December 31, 2022. Approximately 0.1% and 1.7% of revenues recognized in the three and nine months ended September 30, 2022, were from the deferred revenue balance existing as of December 31, 2021.
5. Supplemental Financial Statement Information
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1, Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
Impairment of goodwill, intangible assets, and other long-lived assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Impairment of goodwill | $ | 34,632 | | | $ | 89,149 | | | $ | 42,924 | | | $ | 94,643 | |
| Impairment of intangible assets | 4,203 | | | 16,947 | | | 4,203 | | | 17,627 | |
| Impairment of long-lived assets | 2,382 | | | — | | | 2,831 | | | 75 | |
| Total impairment of goodwill, intangible assets, and other long-lived assets: | $ | 41,217 | | | $ | 106,096 | | | $ | 49,958 | | | $ | 112,345 | |
The impairment of goodwill in the nine months ended September 30, 2023 includes a goodwill impairment charge of $1.9 million related to our Pharmacy business, which was classified as held for sale as of December 21, 2022 and was sold in the second quarter of 2023.
Property and equipment consisted of the following:
| | | | | | | | | | | |
| (In thousands) | September 30, 2023 | | December 31, 2022 |
| Leasehold improvements | $ | — | | | $ | 868 | |
| Electrical and other equipment | — | | | 21 | |
| Computer equipment, furniture and fixtures | 16,790 | | | 16,222 | |
| Vehicles | 9 | | | 302 | |
| Capitalized software development costs | 4,967 | | | 4,404 | |
| Capitalized software development costs in progress | 1,469 | | | 2,590 | |
| 23,235 | | | 24,407 | |
| Accumulated depreciation and amortization | (13,007) | | | (10,338) | |
| Total property and equipment, net | $ | 10,228 | | | $ | 14,069 | |
Depreciation expense was $1.8 million and $1.8 million in the three months ended September 30, 2023 and 2022, respectively, and $5.0 million and $5.1 million in the nine months ended September 30, 2023 and 2022, respectively.
In the three and nine months ended September 30, 2023, we recorded impairment charges on long-lived assets of $2.4 million and $2.8 million, respectively, in the Integrated Care Management segment.
Accrued expenses consisted of the following:
| | | | | | | | | | | |
| (In thousands) | September 30, 2023 | | December 31, 2022 |
| Accrued professional fees | $ | 4,733 | | | $ | 14,245 | |
| Accrued products and licenses | — | | | 17,820 | |
| Accrued interest on debt | 2,474 | | | 741 | |
| Accrued payroll and bonuses | 3,763 | | | 5,163 | |
| Income tax payable | 62 | | | 388 | |
| Other accruals | — | | | 794 | |
| Total accrued expenses | $ | 11,032 | | | $ | 39,151 | |
Other liabilities, noncurrent consisted of the following:
| | | | | | | | | | | |
| (In thousands) | September 30, 2023 | | December 31, 2022 |
| Derivative liability, noncurrent | $ | 59 | | | $ | 56 | |
| Warrant liabilities, noncurrent | 17 | | | 9 | |
| Other liabilities, noncurrent | 71 | | | 662 | |
| Total other liabilities, noncurrent | $ | 147 | | | $ | 727 | |
Other income, net, including interest income consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Gain (loss) on fair value of warrant liabilities | $ | — | | | $ | — | | | $ | (8) | | | $ | 190 | |
| Other income, net, including interest income | 295 | | | 32 | | | 433 | | | 30 | |
| Total other income, net, including interest income | $ | 295 | | | $ | 32 | | | $ | 425 | | | $ | 220 | |
6. Intangible Assets
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets as of September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Names | | Technology and Intellectual Property | | Customer Relationships | | Total |
| Gross carrying amount as of September 30, 2023 | $ | 12,975 | | | $ | 5,825 | | | $ | 13,675 | | | $ | 32,475 | |
| Accumulated amortization | (2,995) | | | (2,641) | | | (3,156) | | | (8,792) | |
| Intangible assets, net as of September 30, 2023 | $ | 9,980 | | | $ | 3,184 | | | $ | 10,519 | | | $ | 23,683 | |
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Names | | Technology and Intellectual Property | | Customer Relationships | | Total |
| Gross carrying amount as of December 31, 2022 | $ | 15,242 | | | $ | 10,634 | | | $ | 17,613 | | | $ | 43,489 | |
| Accumulated amortization | (3,295) | | | (4,762) | | | (4,070) | | | (12,127) | |
| Intangible assets, net as of December 31, 2022 | $ | 11,947 | | | $ | 5,872 | | | $ | 13,543 | | | $ | 31,362 | |
In the three and nine months ended September 30, 2023, we recorded an impairment charge of $4.2 million in the Integrated Care Management segment. In the three months ended September 30, 2022, we recorded impairment charges of $16.9 million, consisting of $16.8 million in our Integrated Care Management segment and $0.1 million in our Services segment. In the nine months ended September 30, 2022, we recorded impairment charges of $17.6 million, consisting of $16.8 million in our Integrated Care Management segment and $0.8 million in our Services segment.
The estimated useful lives of trade names are 3-10 years, the estimated useful lives of technology and intellectual property are 5-7 years, and the estimated useful life of customer relationships is 10 years.
Amortization expense was $1.2 million and $2.7 million in the three months ended September 30, 2023 and 2022, respectively. Amortization expense was $3.5 million and $12.0 million in the nine months ended September 30, 2023 and 2022, 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 | | Total |
| Remaining 2023 | $ | 364 | | | $ | 286 | | | $ | 345 | | | $ | 995 | |
| 2024 | 1,298 | | | 1,165 | | | 1,368 | | | 3,831 | |
| 2025 | 1,298 | | | 1,165 | | | 1,368 | | | 3,831 | |
| 2026 | 1,298 | | | 568 | | | 1,368 | | | 3,234 | |
| 2027 | 1,298 | | | — | | | 1,368 | | | 2,666 | |
| Thereafter | 4,424 | | | — | | | 4,702 | | | 9,126 | |
| $ | 9,980 | | | $ | 3,184 | | | $ | 10,519 | | | $ | 23,683 | |
7. Goodwill
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
As a result of UpHealth Holdings filing a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on September 19, 2023 (See Note 1. Organization and Business, for further information), which was determined to be an indicator of impairment, we performed a goodwill impairment assessment as of September 30, 2023. As a result, in the three months ended September 30, 2023, we recorded a $34.6 million impairment charge in our Integrated Care Management segment. In the nine months ended September 30, 2023, we recorded a $41.0 million impairment charge, consisting of $34.6 million in our Integrated Care Management segment and $6.4 million in our Services segment.
As a result of indicators of impairment identified in the three months ended September 30, 2022, we performed a goodwill impairment assessment as of September 30, 2022, which included both qualitative and quantitative assessments. Our assessment included a comparison of the 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 two segments were 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 $89.1 million, consisting of $87.5 million in our Integrated Care Management segment and $1.6 million in our Services segment. In the nine months ended September 30, 2022, we recorded a $94.6 million impairment charge, consisting of $87.5 million in our Integrated Care Management segment and $1.6 million in our Services segment, and as a result of measurement period adjustments in our Virtual Care Infrastructure segment, 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 as of December 31, 2022 | $ | 159,675 | |
| Impairments | (40,989) | |
| Deconsolidation of subsidiary | (38,376) | |
| Balance as of September 30, 2023 | $ | 80,310 | |
8. Debt
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1.
Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
Debt consisted of the following:
| | | | | | | | | | | |
| (In thousands) | September 30, 2023 | | December 31, 2022 |
| 2025 Notes | $ | 115,000 | | | $ | 67,500 | |
| 2026 Notes | 57,227 | | | 115,000 | |
| Total debt | 172,227 | | | 182,500 | |
| Less: unamortized original issue and debt discount | (28,338) | | | (36,538) | |
| Total debt, net of unamortized original issue and debt discount | 143,889 | | | 145,962 | |
| Less: current portion of debt | (143,889) | | | — | |
| Noncurrent portion of debt | $ | — | | | $ | 145,962 | |
2025 Senior Secured Convertible Notes and Indenture
On August 12, 2022, we entered into the Senior Secured Notes Indenture with the Indenture Trustee in its capacity as trustee thereunder, in respect of the $67.5 million in aggregate principal amount of 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 (see below). The debt issuance costs consisted of cash paid in the amount of $1.5 million and the issuance of 115,000 shares of common stock, following the reverse stock split, with a value of $0.7 million. The 2025 Notes are convertible following the reverse split of our shares into 3,857,142 shares of our 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 of UpHealth, secured by substantially all of our assets and those of our 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 our December 15, 2022 interest payment date. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require us to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that we sell 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. We may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. We will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.
As discussed in Note 3. Significant Transactions, on May 11, 2023 we completed the sale of 100% of the outstanding capital stock of Innovations Group. In accordance with the terms and conditions set forth in the Senior Secured Notes Indenture, on June 9, 2023, we commenced an offer to purchase up to $10.3 million (representing 20% of the net proceeds from the sale subject to adjustment to maintain the authorized denominations of the 2025 Notes) in aggregate principal amount of our 2025 Notes for cash, at a repurchase price per Note equal to 100% of the principal amount thereof, plus accrued and unpaid interest (if any), from the holders of the 2025 Notes (the “Offer”). On June 15, 2023, we completed the repurchase of $10.3 million in aggregate principal amount of 2025 Notes, which were validly tendered and accepted for repurchase by us in accordance with the terms and conditions of the Offer (the “Note Repurchase”), representing 15.22% of the outstanding principal amount of the 2025 Notes before the Note Repurchase. Following the completion of the Note Repurchase, there is $57.2 million in aggregate principal amount of 2025 Notes outstanding.
Total interest expense related to the 2025 Notes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Contractual variable interest expense | $ | 2,126 | | | $ | 982 | | | $ | 6,764 | | | $ | 982 | |
| Debt issuance costs amortization | 138 | | | 79 | | | 709 | | | 79 | |
| Total interest expense | $ | 2,264 | | | $ | 1,061 | | | $ | 7,473 | | | $ | 1,061 | |
Included in the debt issuance costs amortization in the three and nine months ended September 30, 2023 was a write-off of $0.3 million, which was the proportionate share of the remaining debt issuance costs related to the repurchased 2025 Notes.
In March 2023, the Indenture Trustee, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.03% for our June 15, 2023 interest payment date. In June 2023, the Indenture Trustee, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.25% for our September 15, 2023 interest payment date. In September 2023, the Indenture Trustee, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.41% for our December 15, 2023 interest payment date.
The filing of the Chapter 11 case by UpHealth Holdings constitutes an event of default that accelerated our obligations under the Senior Secured Indenture. The Senior Secured Notes Indenture provides that upon the filing of the Chapter 11 case, the principal and interest due thereunder shall be immediately due and payable. However, pursuant to the terms of the November 16, 2023 Transaction Support Agreement, we will enter into a Supplemental Indenture to the Senior Secured Notes Indenture which will, among other things, (a) provide for the waiver, with respect to us and Cloudbreak, of the specified events of default under the Senior Secured Notes Indenture resulting from the commencement of the Chapter 11 cases and (b) rescind, with respect to us and Cloudbreak, the acceleration of the 2025 Notes resulting from the occurrence of the foregoing events of default.
2026 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 the Unsecured Notes Indenture with the Indenture Trustee, in its capacity as trustee thereunder, in respect of the $160.0 million in aggregate principal amount of 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 were convertible following the reverse split of our shares into approximately 1,502,347 shares of common stock at a conversion price of $106.50 in accordance with the terms of the Unsecured Notes 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. As of September 30, 2023 and December 31, 2022, the fair value of the derivative was $59 thousand and $0.1 million, respectively, all of which was included in other liabilities, noncurrent, in our unaudited condensed consolidated balance sheets.
The filing of the Chapter 11 case by UpHealth Holdings constitutes an event of default that accelerated our obligations under the Unsecured Notes Indenture. The Unsecured Notes Indenture provides that upon the filing of the Chapter 11 case and the acceleration of the obligations under the Senior Secured Notes Indenture, the principal and interest due thereunder shall be immediately due and payable. However, pursuant to the terms of the November 16, 2023 Transaction Support Agreement, we will enter into a Supplemental Indenture to the Unsecured Notes Indenture which will, among other things, provide for the waiver, with respect to us and Cloudbreak, of the specified events of default under the Unsecured Notes Indenture resulting from the acceleration of the 2025 Notes resulting from the occurrence of the event of default of the Senior Secured Notes Indenture and the commencement of the Chapter 11 cases.
Total interest expense related to the 2026 Notes consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Contractual fixed interest expense | $ | 1,874 | | | $ | 2,184 | | | $ | 5,468 | | | $ | 7,184 | |
| Derivative accretion | 2,210 | | | 2,730 | | | 6,629 | | | 8,899 | |
| Debt issuance costs amortization | 287 | | | 351 | | | 862 | | | 1,152 | |
| Total interest expense | $ | 4,371 | | | $ | 5,265 | | | $ | 12,959 | | | $ | 17,235 | |
On August 12, 2022, concurrently and in connection with the issuance of our 2025 senior secured convertible notes and indenture (see below), Oppenheimer & Co. Inc. (“OpCo”) commenced a private offer to repurchase approximately $45.0 million in
aggregate principal amount of our 2026 Notes (the “2026 Notes Repurchase”). In connection with the 2026 Notes Repurchase, OpCo entered into a note purchase agreement with each institutional investor pursuant to which OpCo agreed to purchase 2026 Notes from each investor, concurrently with each investor’s purchase of 2025 Notes in the 2025 Notes Offering (see below). At the closing, each investor had the ability to sell $2.0 million in principal amount of 2026 Notes at 100% of par value for each $3.0 million in principal amount of 2025 Notes purchased in the 2025 Notes Offering. Concurrently and in connection with the closing on August 18, 2022, OpCo purchased from each investor the principal amount of the 2026 Notes set forth in each investor’s note purchase agreement, pursuant to and in accordance with the terms thereof. Following the reverse split of shares, the remaining 2026 Notes are convertible into approximately 1,079,812 shares of common stock at a conversion price of $106.50 in accordance with the terms of the Indenture.
Seller Notes
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. In August 2022, we paid the remaining $18.7 million of seller notes plus accrued interest of $1.9 million. As of both September 30, 2023 and December 31, 2022, the seller notes totaled zero.
Accrued interest payable was zero as of both September 30, 2023 and December 31, 2022. Interest expense was zero and $0.3 million in the three months ended September 30, 2023 and 2022, respectively. Interest expense was zero and $1.2 million in the nine months ended September 30, 2023 and 2022, respectively.
9. Fair Value of Financial Instruments
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of September 30, 2023 and December 31, 2022, the fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying values due to the short-term nature of these instruments. Additionally, the fair values of short-term and long-term debt instruments approximate their carrying values.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
•Quoted prices for similar assets/liabilities in active markets;
•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
The following tables present information about our financial assets and liabilities measured at fair value on are recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities: | | | | | | | |
| Derivative liability | $ | — | | | $ | — | | | $ | 59 | | | $ | 59 | |
| Warrant liability | — | | | 17 | | | — | | | 17 | |
| $ | — | | | $ | 17 | | | $ | 59 | | | $ | 76 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Cash equivalents - money market funds | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| Liabilities: | | | | | | | |
| Derivative liability | $ | — | | | $ | — | | | $ | 56 | | | $ | 56 | |
| Warrant liability | — | | | 9 | | | — | | | 9 | |
| $ | — | | | $ | 9 | | | $ | 56 | | | $ | 65 | |
Money Market Funds
As of September 30, 2023 and December 31, 2022, 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 in the three and nine months ended September 30, 2023 and the year ended December 31, 2022.
The fair value and amortized cost of our cash equivalents - money market funds were both zero as of September 30, 2023.
Cash equivalents as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In thousands) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
Derivative Liability
As of September 30, 2023 and December 31, 2022, the fair value of the derivative was $59 thousand and $56 thousand, respectively, which was included in other liabilities, noncurrent in our unaudited condensed consolidated balance sheets. Other income, net in the three months ended September 30, 2023 and 2022 included a gain on the fair value of the derivative liability of zero and $0.2 million, respectively. Other income, net in the nine months ended September 30, 2023 and 2022 included a loss on the fair value of the derivative liability of $3 thousand and a gain on the fair value of the derivative liability of $6.9 million, respectively
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:
| | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
| Stock price | $1.90 | | $1.63 |
| Volatility | 100.0% | | 95.0% |
| Risk free rate | 4.51% | | 4.17% |
| Exercise price | $106.50 | | $106.50 |
| Expected life (in years) | 2.95 | | 3.44 |
| Conversion periods | 5 months-3 years | | 2-4 years |
| Future share price | $5.90-$594.30 | | $0.10-$405.60 |
2021 Private Placement Warrants and 2021 PIPE Warrants
As of September 30, 2023, the fair value of the 2021 Private Placement Warrants (the “2021 Private Placement Warrants”) and the 2021 PIPE Warrants (the “2021 PIPE Warrants”) was determined to be $0.02 per warrant, totaling $11 thousand and $6 thousand respectively, and are included in other liabilities, noncurrent in our unaudited condensed consolidated balance sheets. As of December 31, 2022, the fair value of the 2021 Private Placement Warrants and the 2021 PIPE Warrants was determined to be $0.01 per warrant, totaling $6 thousand and $3 thousand respectively, and are included in other liabilities, noncurrent in our unaudited condensed consolidated balance sheets.
Gain or loss due to the fair value changes in the 2021 Private Placement Warrants and the 2021 PIPE Warrants, both of which are included in other income, net in our unaudited condensed consolidated statements of operations, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Gain (loss) on fair value of Private Placement warrant liabilities | $ | — | | | $ | — | | | $ | (5) | | | $ | 124 | |
| Gain (loss) on fair value of PIPE warrant liabilities | — | | | — | | | (3) | | | 66 | |
| $ | — | | | $ | — | | | $ | (8) | | | $ | 190 | |
There were no transfers between fair value levels in the three and nine months ended September 30, 2023 and 2022.
10. Capital Structure
2023 Private Placement
On March 9, 2023, we entered into a Securities Purchase Agreement, with a single institutional investor, pursuant to which, in a private placement (the “2023 Private Placement”), we agreed to issue and sell (i) 1,650,000 shares of our common stock, par value $0.0001 per share; (ii) warrants that are exercisable six months from the date of issuance and will have a term of five years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series A Warrants”); (iii) warrants that are exercisable six months from the date of issuance and will have a term of two years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series B Warrants” and, collectively with Series A Warrants, the “Common Stock Purchase Warrants”); and (iv) pre-funded warrants (the “Pre-Funded Warrants,” and together with the Common Stock Purchase Warrants, the “Private Placement Warrants”) to purchase an additional 1,350,000 shares of our common stock (all of such shares issuable upon exercise of the Warrants, the “Warrant Shares”). On March 13, 2023, we announced that we completed the closing of the 2023 Private Placement. The purchase price of each share of common stock sold in the 2023 Private Placement was $1.50, the exercise price of each Common Stock Purchase Warrants (as defined above) is $2.04, and the exercise price of each Pre-Funded Warrant is $0.0001 and the purchase price of each Pre-Funded Warrant was $1.4999. The aggregate gross proceeds to us from the 2023 Private Placement were approximately $4.5 million, before deducting $0.3 million of placement agent fees and other offering expenses. We intend to use the net proceeds from the offering for general corporate purposes, including working capital.
On June 6, 2023, 100,000 Pre-Funded Warrants were exercised and on August 17, 2023, 549,000 Pre-Funded Warrants were exercised, bringing the total outstanding to 701,000 as of September 30, 2023.
Common Stock Reserved for Future Issuance
The following table summarizes shares of common stock reserved for future issuance as of September 30, 2023 (recorded on a post-reverse split basis):
| | | | | |
| (In thousands) | Number of Shares |
| Restricted stock units outstanding | 1,912 | |
| Stock options outstanding | 54 | |
| Shares issuable upon conversion of 2025 Notes | 3,857 | |
| Shares issuable upon conversion of 2026 Notes | 1,080 | |
| Shares issuable upon conversion of 2021 Public Warrants | 1,725 | |
| Shares issuable upon conversion of 2021 Private Warrants | 57 | |
| Shares issuable upon conversion of 2021 PIPE Warrants | 29 | |
| Shares issuable upon conversion of the 2023 Private Placement Series A Warrants | 3,000 | |
| Shares issuable upon conversion of the 2023 Private Placement Series B Warrants | 3,000 | |
| Shares issuable upon conversion of the 2023 Private Placement Pre-Funded Warrants | 701 | |
| Shares available for future grant under 2021 EIP | 840 | |
| 16,255 | |
2015 Cloudbreak Incentive Plan
The following table summarizes stock option activity under the Cloudbreak Plan (recorded on a post-reverse split basis):
| | | | | | | | |
| Number of Shares | Weighted Average Exercise Price Per Share |
| Outstanding as of December 31, 2022 | 138 | | $ | 50.76 | |
| Options exercised | — | | $ | — | |
| Outstanding as of March 31, 2023 | 138 | | $ | 50.76 | |
| Options forfeited or expired | (84) | | $ | 53.00 | |
| Outstanding as of June 30, 2023 | 54 | | $ | 47.35 | |
| Options forfeited or expired | — | | $ | — | |
| Outstanding as of September 30, 2023 | 54 | | $ | 47.35 | |
2021 Equity Incentive Plan
The following table summarizes our RSU activity under the 2021 EIP (recorded on a post-reverse split basis):
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value Per Share |
| Outstanding as of December 31, 2022 | 878 | | $ | 6.61 | |
RSUs granted | 663 | | $ | 2.03 | |
RSUs vested and released | (82) | | $ | 16.09 | |
RSUs forfeited | (118) | | $ | 7.10 | |
Outstanding as of March 31, 2023 | 1,341 | | $ | 3.91 | |
RSUs granted | 1,000 | | $ | 1.56 | |
RSUs vested and released | (277) | | $ | 5.67 | |
RSUs forfeited | (42) | | $ | 1.95 | |
Outstanding as of June 30, 2023 | 2,022 | | $ | 2.55 | |
RSUs granted | — | | $ | — | |
RSUs vested and released | (45) | | $ | 8.68 | |
RSUs forfeited | (425) | | $ | 1.83 | |
Outstanding as of September 30, 2023 | 1,552 | | $ | 2.56 | |
2023 Inducement Equity Incentive Plan
On May 1, 2023, our Board of Directors approved up to 700,000 shares to be issued under a 2023 Inducement Equity Incentive Plan, the “2023 IEIP”. The following table summarizes our RSU activity under the 2023 IEIP:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value Per Share |
| Outstanding as of December 31, 2022 | — | | $ | — | |
RSUs granted | 200 | | $ | 1.24 | |
Outstanding as of June 30, 2023 | 200 | | $ | 1.24 | |
RSUs granted | 160 | | $ | 1.01 | |
Outstanding as of September 30, 2023 | 360 | | $ | 1.14 | |
Subsequent to September 30, 2023, 545,889 RSUs were canceled under the 2021 EIP and 160,000 RSUs were canceled under the 2023 IEIP due to the elimination of 20 positions at UpHealth, Inc. and 295,625 RSUs were accelerated in connection with the departure of our former Chief Executive Officer.
11. Income Taxes
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
The income tax benefit (expense) was zero and $13.2 million in the three months ended September 30, 2023 and 2022, respectively. The income tax benefit (expense) was $(0.9) million and $17.7 million in the nine months ended September 30, 2023 and 2022, respectively.
Consistent with our conclusion as of December 31, 2022, we continue to believe that it is not more likely than not that the deferred tax assets will be realized and we therefore maintained a full valuation allowance against the deferred tax assets as of September 30, 2023. However, we expect to suffer income tax expense due to U.S. tax rules related to the utilization of net operating loss carryforwards. In the nine months ended September 30, 2023, we recorded discrete tax items totaling $0.6 million related to the sale of Innovations Group.
The Internal Revenue Service (“IRS”) audited the 2008 and 2009 tax returns for a business in our Integrated Care Management segment for the proper year of inclusion of approximately $15.0 million long-term capital gain on the license of certain intellectual property rights. The business 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 the business passed the gain through to its shareholders. The IRS has asserted that the business owes C Corporation tax of approximately $5.0 million for 2008, or in the alternative, the business owes C Corporation tax of approximately $5.0 million for 2009 as a built-in gain. In addition, the business could be assessed additional California franchise tax of approximately $1.3 million; and 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 former shareholders of the business for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment; however, the business prevailed, and the motion was denied. In January 2020, the business 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 the business’ 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 the business’ motion. Had the motion been granted, the need for a trial would have been obviated. The business filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware on October 20, 2023. As a result, the
automatic stay imposed by section 362(a)(8) of the Bankruptcy Code became immediately effective, and, on October 30, 2023, the U.S. Tax Court entered an order staying all proceedings in the case. In addition, when we acquired the business in November 2020, all of the former shareholders of the business agreed to indemnify us for any losses as a result of this dispute with the IRS. This business is a subsidiary of UpHealth Holdings, which we deconsolidated as of September 30, 2023 (as discussed in Note 1. Organization and Business).
12. Earnings (Loss) Per Share
Basic earnings (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 earnings (loss) per share assumes the conversion of any convertible securities using the treasury stock method or the if-converted method.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| (In thousands, except per share data) | 2023 | | 2022 | 2023 | | 2022 |
| Numerator: | | | | | | |
| Net income (loss) attributable to UpHealth, Inc. | $ | (20,605) | | | $ | (165,762) | | $ | (47,815) | | | $ | (195,645) | |
| Denominator: | | | | | | |
| Weighted average shares outstanding | 18,428 | | | 14,842 | | 17,459 | | | 14,588 | |
| Diluted effect of stock options | — | | | — | | — | | | — | |
Diluted effect of RSUs | — | | | — | | — | | | — | |
| Weighted average shares outstanding assuming dilution | 18,428 | | | 14,842 | | 17,459 | | | 14,588 | |
| Net income (loss) per share attributable to UpHealth, Inc.: | | | | | | |
| Basic | $ | (1.12) | | | $ | (11.17) | | $ | (2.74) | | | $ | (13.41) | |
| Diluted | $ | (1.12) | | | $ | (11.17) | | $ | (2.74) | | | $ | (13.41) | |
The calculation of basic and dilutive earnings per share included the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
Pre-funded warrants with an exercise price of $0.0001(1) | 701 | | — | | | 701 | | — | |
(1) The pre-funded warrants are included in the calculation of basic and dilutive earnings per share, as the shares are issuable for little consideration.
The calculation of basic and dilutive earnings per share excluded the following because the effect would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
2021 Public, Private and PIPE Warrants at a $115.00 per share conversion price | 1,812 | | | 1,812 | | | 1,812 | | | 1,812 | |
2023 Private Placement Series A and B Warrants at a $2.04 per share conversion price | 6,000 | | | — | | | 6,000 | | | — | |
| Stock options | 54 | | | 142 | | | 54 | | | 142 | |
| Restricted stock units | 1,912 | | | 1,007 | | | 1,912 | | | 1,007 | |
2025 Notes at a $17.50 per share conversion price(2) | 3,857 | | | 3,857 | | | 3,857 | | | 3,857 | |
2026 Notes at a $106.50 per share conversion price | 1,080 | | | 1,080 | | | 1,080 | | | 1,080 | |
| Forward share purchase agreement | — | | | — | | | — | | | 170 | |
(2) Subject to the occurrence of certain corporate events.
13. Related Party Transactions
See Note 8. Debt, for related party debt.
See Note 16. Commitments and Contingencies, for leases with related parties.
We make guaranteed payments to related parties. Guaranteed payments aggregated $5 thousand and $1.3 million in the three months ended September 30, 2023 and 2022, respectively, and $0.6 million and $3.8 million in the nine months ended September 30, 2023 and 2022, respectively. These amounts are presented in costs of revenues in our unaudited condensed consolidated statements of operations. We had unpaid guaranteed payments of $1 thousand and $0.5 million as of September 30, 2023 and December 31, 2022, respectively, which is included in accrued expenses in our unaudited condensed consolidated balance sheets.
Due to related parties consisted of $2.5 million and $0.2 million as of September 30, 2023 and December 31, 2022, respectively. Due from related parties consisted zero and $14 thousand as of September 30, 2023 and December 31, 2022.
14. Segment Reporting
Our business is organized into three operating business segments and one non-operating business segment:
•Virtual Care Infrastructure—consisting of U.S. Telehealth and International Telehealth businesses(3);
•Services—consisting of Behavioral and Pharmacy businesses(1)(2);
•Integrated Care Management—consisting of SaaS business(1); and
•Corporate—consisting of holding company.
(1) As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
(2) As discussed in Note 3. Significant Transactions, we completed the sale of Innovations Group, which comprised our Pharmacy business, on May 11, 2023. In addition, we substantially completed the wind down of a company within our Behavioral business in our Services segment in the three months ended June 30, 2023.
(3) As discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
We evaluate performance based on several factors, of which revenues, gross profit, and total assets are the primary financial measures:
Revenues by segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | 2023 | | 2022 | | 2023 | | 2022 |
Virtual Care Infrastructure | $ | 18,506 | | | $ | 14,978 | | | $ | 52,802 | | | $ | 47,423 | |
| Services | 10,908 | | | 19,893 | | | 47,225 | | | 56,653 | |
| Integrated Care Management | 3,267 | | | 3,795 | | | 12,622 | | | 14,230 | |
| Total revenues | $ | 32,681 | | | $ | 38,666 | | | $ | 112,649 | | | $ | 118,306 | |
Gross profit by segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | 2023 | | 2022 | | 2023 | | 2022 |
Virtual Care Infrastructure | $ | 10,789 | | | $ | 7,186 | | | $ | 29,444 | | | $ | 21,090 | |
| Services | 5,593 | | | 6,986 | | | 23,232 | | | 19,465 | |
| Integrated Care Management | 1,241 | | | 2,854 | | | 7,599 | | | 11,385 | |
| Total gross profit | $ | 17,623 | | | $ | 17,026 | | | $ | 60,275 | | | $ | 51,940 | |
Total assets by segment consisted of the following:
| | | | | | | | | | | |
| In thousands | September 30, 2023 | | December 31, 2022 |
| Virtual Care Infrastructure | $ | 134,877 | | | $ | 140,776 | |
| Services | — | | | 124,980 | |
| Integrated Care Management | — | | | 44,776 | |
| Corporate | 100,267 | | | 29,272 | |
| Total assets | $ | 235,144 | | | $ | 339,804 | |
All long-lived assets were located in the U.S. as of September 30, 2023 and December 31, 2022.
15. Leases
As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings in the three and nine months ended September 30, 2023 are included in our unaudited condensed consolidated financial statements and the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements. The filing of a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, as discussed in Note 1. Organization and Business, occurred on September 19, 2023. Management concluded that it would use the September 30, 2023 date for deconsolidation, as the last 12 days in the month were determined to not be material.
As also discussed in Note 1. Organization and Business, we deconsolidated Glocal as of July 1, 2022; accordingly, the financial results of Glocal in the six months ended June 30, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of September 30, 2023 and December 31, 2022 and the financial results of Glocal in the three months ended September 30, 2022 and the three and nine months ended September 30, 2023 are not included in our unaudited condensed consolidated financial statements.
The components of lease expense consisted of the following during the three and nine months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| In thousands | Third Party | | Related Party | | Total | | Third Party | | Related Party | | Total |
| Finance lease costs: | | | | | | | | | | | |
| Amortization of right-of-use assets | $ | 814 | | | $ | — | | | $ | 814 | | | $ | 2,546 | | | $ | — | | | $ | 2,546 | |
| Interest on lease liabilities | 75 | | | — | | | 75 | | | 244 | | | — | | | 244 | |
| Operating lease costs | 487 | | | 98 | | | 585 | | | 1,796 | | | 294 | | | 2,090 | |
| Short-term lease costs | 40 | | | — | | | 40 | | | 106 | | | 67 | | | 173 | |
| Variable lease costs | 144 | | | — | | | 144 | | | 597 | | | — | | | 597 | |
| Sublease income | (111) | | | — | | | (111) | | | (353) | | | — | | | (353) | |
| Total lease costs | $ | 1,449 | | | $ | 98 | | | $ | 1,547 | | | $ | 4,936 | | | $ | 361 | | | $ | 5,297 | |
Lease-related assets and liabilities recorded on the unaudited condensed consolidated balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| In thousands | Third Party | | Third Party | | Related Party | | Total |
| Assets | | | | | | | |
| Finance lease right-of-use assets (included in property and equipment, net) | $ | 4,696 | | | $ | 5,916 | | | $ | — | | | $ | 5,916 | |
| Operating lease right-of-use assets | 1,653 | | | 5,819 | | | 1,394 | | | 7,213 | |
| Total leased assets | $ | 6,349 | | | $ | 11,735 | | | $ | 1,394 | | | $ | 13,129 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Lease liabilities, current: | | | | | | | |
| Finance lease liabilities | $ | 3,044 | | | $ | 3,023 | | | $ | — | | | $ | 3,023 | |
| Operating lease liabilities | 620 | | | 2,130 | | | 322 | | | 2,452 | |
| Lease liabilities, current | $ | 3,664 | | | $ | 5,153 | | | $ | 322 | | | $ | 5,475 | |
| | | | | | | |
| Lease liabilities, noncurrent: | | | | | | | |
| Finance lease liabilities | $ | 1,821 | | | $ | 2,976 | | | $ | — | | | $ | 2,976 | |
| Operating lease liabilities | 1,476 | | | 4,672 | | | 1,093 | | | 5,765 | |
| Lease liabilities, noncurrent | 3,297 | | | 7,648 | | | 1,093 | | | 8,741 | |
| Total leased liabilities | $ | 6,961 | | | $ | 12,801 | | | $ | 1,415 | | | $ | 14,216 | |
Accumulated amortization related to the finance lease assets was $9.2 million and $3.9 million as of September 30, 2023 and December 31, 2022, respectively.
Other information consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| In thousands | Third Party | | Related Party | | Total | | Third Party | | Related Party | | Total |
| Cash paid for amounts included in measurement of liabilities: | | | | | | | | | | | |
| Operating cash flows from operating leases | $ | 552 | | | $ | 95 | | | $ | 647 | | | $ | 3,632 | | | $ | 371 | | | $ | 4,003 | |
| Operating cash flows from finance leases | $ | 73 | | | $ | — | | | $ | 73 | | | $ | 310 | | | $ | — | | | $ | 310 | |
| Financing cash flows from finance leases | $ | 2,510 | | | $ | — | | | $ | 2,510 | | | $ | 3,106 | | | $ | — | | | $ | 3,106 | |
| | | | | | | | | | | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | | | | |
| Finance leases | $ | 706 | | | $ | — | | | $ | 706 | | | $ | 4,110 | | | $ | — | | | $ | 4,110 | |
| Operating leases | $ | — | | | $ | — | | | $ | — | | | $ | 10,843 | | | $ | 1,706 | | | $ | 12,549 | |
The following table summarizes our lease term and discount rate assumptions as of September 30, 2023:
| | | | | |
| September 30, 2023 |
| Third Party |
| Weighted-average remaining lease term (years): | |
| Finance leases | 1.78 |
| Operating leases | 3.19 |
| |
| Weighted-average discount rate: | |
| Finance leases | 7.2% |
| Operating leases | 6.9% |
Undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating and finance leases with terms of more than one year, as of September 30, 2023, have been reconciled to the total operating and finance lease liabilities recognized on the unaudited condensed consolidated balance sheets as of September 30, 2023 as follows:
| | | | | | | | | | | |
| September 30, 2023 |
| Finance Leases | Operating Leases |
| In thousands | Third Party | | Third Party |
| Remaining 2023 | $ | 878 | | | $ | 187 | |
| 2024 | 2,896 | | | 732 | |
| 2025 | 1,202 | | | 705 | |
| 2026 | 206 | | | 594 | |
| 2027 | — | | | 100 | |
| Thereafter | — | | | — | |
| Total lease payments | 5,182 | | | 2,318 | |
| Less: Interest | 317 | | | 222 | |
| Present value of lease liabilities | $ | 4,865 | | | $ | 2,096 | |
In the nine months ended September 30, 2023, we recorded an impairment charge of $0.4 million in our Integrated Care Management segment in connection with the write-down of an office lease which is included in impairment of goodwill, intangible assets, and other long-lived assets in our unaudited condensed consolidated statements of operations.
Prior to the adoption of ASU 2016-02, Leases, the following was disclosed in our Quarterly Report on Form 10-Q in the three and nine months ended September 30, 2022:
Total rent expense under related party and third-party agreements consisted of the following:
| | | | | | | | | | | |
| In thousands | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Related party | $ | 202 | | | $ | 602 | |
| Third-party | 1,125 | | | 3,101 | |
| Sublease income | (146) | | | (392) | |
| Total rent expense, net of sublease income | $ | 1,181 | | | $ | 3,311 | |
In the nine months ended September 30, 2022, we recorded additional lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office which is included in impairment of goodwill, intangible assets, and other long-lived assets in our unaudited condensed consolidated statements of operations.
16. Commitments and Contingencies
Commitments
Operating leases
See Note 15. Leases, for commitments related to our operating leases.
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 11. 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. Except as set forth below, 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 condensed consolidated results of operations, financial position or cash flows.
Advisory Services Agreement Dispute
As discussed in Note 1. Organization and Business, since 2021, UpHealth Holdings has been a party to the Needham Action in the state court in New York entitled Needham & Company LLC v. UpHealth Holdings, Inc. and UpHealth Services, Inc., which arose out of UpHealth Services, Inc.’s engagement of Needham to provide placement and other financial advisory services. On September 14, 2023, the trial in New York issued a Decision and Order granting summary judgment in favor of Needham and denying UpHealth Holdings’ and UpHealth Services, Inc.’s motion for summary judgment. That court in New York entered that Decision on its docket on September 15, 2023. The Decision and Order concluded that Needham is entitled to fees in the amount of $31.3 million, plus interest. On September 18, 2023, the court in New York signed a judgment against UpHealth Holdings and UpHealth Services, Inc. in the amount of $31.3 million, plus prejudgment interest of $6.5 million, for a total judgment of $37.8 million, plus post-judgment interest of 9% per year. Notwithstanding the filing of the voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court, and the automatic stay pursuant to section 362(a) of the U.S. Bankruptcy Code, the Clerk of Court entered that judgment on the docket on September 27, 2023. On November 13, 2023, UpHealth Holdings entered into a stipulation with Needham in the Bankruptcy Court providing that, to the extent it applies, the automatic stay pursuant to section 362(a) of the Bankruptcy Code shall be deemed modified for the sole and limited purpose of authorizing UpHealth Holdings and UpHealth Services, Inc. to appeal the New York court’s judgment (and for Needham to be able to participate in the appeal). We are awaiting the Bankruptcy Court’s entry of an order approving the stipulation. When it does so, we will appeal the judgment in the Needham Action.
Included in accrued expenses in our unaudited condensed consolidated balance sheet of December 31, 2022 was a liability totaling $8.0 million related to this matter. As a result of the summary judgment, in the three and nine months ended September 30, 2023, we recorded additional expense of $29.8 million, which was included in acquisition, integration, and transformation costs in our unaudited condensed consolidated statements of operations, which increased our total liability to $37.8 million as of September 30, 2023. As discussed in Note 1. Organization and Business, we deconsolidated UpHealth Holdings as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of September 30, 2023 is not included in our unaudited condensed consolidated financial statements.
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.
17. Subsequent Events
Management has determined that no material events or transactions have occurred subsequent to the balance sheet date, other than those events noted below, that require disclosure in our unaudited condensed consolidated financial statements.
As discussed in Note 1. Organization and Business, on November 16, 2023, we agreed to sell 100% of the outstanding equity interests of Cloudbreak, our wholly owned subsidiary, to Forest Buyer, LLC, a Delaware limited liability company and an affiliate of GTCR, pursuant to the Purchase Agreement. We will utilize the proceeds from the Sale for payment in full or in part of the 2026 Notes and 2025 Notes, as well as other expenses related to the Transactions. The Closing is expected in the first half of 2024, subject to obtaining customary regulatory and stockholder approval.
In connection and concurrently with the entry into the Purchase Agreement, we, Cloudbreak and Forest Buyer entered into Transaction Support Agreement, with the Consenting Senior Secured Noteholders, which are the holders of at least 69% of the 2025 Notes, and the Consenting Unsecured Noteholders, which are the holders of at least 88% of the 2026 Notes, pursuant to which the parties have agreed, among other things, to support the Purchase Agreement and the Transactions and to enter into and effect the Escrow Agreements, the Supplemental Indentures in connection with the Fundamental Change Repurchase Offer to be made by us and each other Definitive Document (as defined in the Transaction Support Agreement), in each case, subject to the terms and conditions set forth in the Transaction Support Agreement.
Motion Seeking Approval of Thrasys Transition Agreements and Related Matters
Thrasys, a Debtor in the Chapter 11 cases, operates an integrated care management business, which provides customers with highly customized digital products through its SyntraNetTM technology platform and applications. Because each of Thrasys’s customers have different source code configurations, the business does not have an easily scalable code base and the process of winning and onboarding new customers takes approximately 12 to 18 months. For years, Thrasys operated at almost break-even cash flow, with the majority of revenues coming from license fees paid up-front annually. Towards the end of 2022, Thrasys began to experience diminishing liquidity, and it became clear that its liquidity issues would not be easily resolved. The customized nature of the Thrasys’s business led to discussions with its customers regarding potential solutions. Following substantial negotiations with the customers of Thrasys and in consultation with its advisors, Thrasys has entered into three transition agreements with its customers, (i) Local Initiative Health Authority for Los Angeles County, a local public entity operating and doing business as L.A. Care Health Plan, (ii) EmpiRx Health LLC, a Delaware corporation and (iii) the County of Alameda, California, USA (each, a “Transition Agreement”), which provide for, among other things, the grant to each customer of a perpetual, non-exclusive license of the applicable source code
and related SyntraNetTM platform and the provision by Thrasys of certain transition services during the transition term provided under the applicable Transition Agreement. Pursuant to the applicable Transition Agreement, each of Thrasys’s customers will obtain its own source code and highly trained employees, and there is no obligation on Thrasys (or any other of the Debtors) to maintain or repair or update the code following the transition period under the Transition Agreements.
As a result of the transactions contemplated by the Transition Agreements, Thrasys will receive $3.8 million in cash from its customers. Pursuant to the Transition Agreements, Thrasys’s employees, with a few exceptions, will receive employment offers from Thrasys’s customers, provided that certain payments to be received by such employees are contingent upon their execution and delivery of a general release of claims in favor of the Debtors. As a condition to the willingness of such customers to enter into the Transition Agreements, the Transition Agreements also contemplate the assumption and assignment of associated contracts to the customers, which, in addition to the hiring of Thrasys’s existing employees, will result in substantial reduction of administrative expenses in respect of Thrasys. Except as otherwise provided in the Transition Agreements, Thrasys will continue to own all intellectual property, subject to such non-exclusive licenses. Upon the consummation of the transactions contemplated by the Transition Agreements, if approved by the Bankruptcy Court, Thrasys will no longer operate and will therefore have no use for the executory contracts previously utilized, the assumption and assignment of which is contemplated by the Transition Agreements.
The Transition Agreements shall only become effective on the date that the Bankruptcy Court enters an order approving the Transition Agreements. Upon termination of the Transition Agreements, (a) all fees and other amounts owed to Thrasys prior to such termination shall be immediately due and payable by the applicable customer and (b) in the case of a termination by Thrasys due to a material breach by the applicable customer of certain restrictions in respect of the SyntraNetTM source code, including with respect to the sale, transfer or assignment thereof and certain uses of open source software, or in the case of a material breach by such customer of its confidentiality obligations with respect to SyntraNetTM source code, such customer’s rights with respect to SyntraNetTM (including its license, use and ownership thereof, and modifications and enhancements thereto), shall terminate and such customer shall be obligated to return or destroy such source code, at Thrasys’s option, within 10 days of the effective date of termination. The Transition Agreements also provide for a mutual release of claims by the parties.
On November 16, 2023, the Debtors filed motion with the Bankruptcy Court seeking entry of an order (i) authorizing and approving the Debtors, including Thrasys, to enter into and perform under certain Transition Agreements (as defined below) with the customers of Thrasys, (ii) authorizing and approving the assumption and assignment of certain executory contracts related to the transactions contemplated thereby and (iii) granting related relief. The motion was presented to the Bankruptcy Court at a “second day hearing” held on November 17, 2023. We expect the Bankruptcy Court will enter its decision on the motion at a hearing currently scheduled on December 1, 2023.
In addition, on November 17, 2023, a motion to pay retention bonuses to Thrasys employees involved in the transition of the Integrated Care Management segment through year end was approved by the Bankruptcy Court.
Subsequent to September 30, 2023, 545,889 RSUs were canceled under the 2021 EIP and 160,000 RSUs were canceled under the 2023 IEIP due to the elimination of 20 positions at UpHealth, Inc. and 295,625 RSUs were accelerated in connection with the departure of our former Chief Executive Officer.
