NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In dollars)
1. Organization and Business
UpHealth, Inc.
UpHealth, Inc. (“UpHealth,” “we,” “us,” “our,” or the “Company”) is the parent company of UpHealth Holdings, Inc. (“UpHealth Holdings”).
GigCapital2, Inc. (“GigCapital2”), our predecessor, was incorporated in Delaware on March 6, 2019. GigCapital2 was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On November 20, 2020, GigCapital2, UpHealth Merger Sub, Inc. (“UpHealth Merger Sub”), and UpHealth Holdings, entered into a business combination agreement (as subsequently amended on January 29, 2021, March 23, 2021, April 23, 2021, and May 30, 2021, the “UpHealth Business Combination Agreement”). In connection with the UpHealth Business Combination Agreement, UpHealth Merger Sub was merged with and into UpHealth Holdings, with UpHealth Holdings surviving the merger (the “UpHealth Business Combination”). Also on November 20, 2020, GigCapital2; Cloudbreak Health Merger Sub, LLC, a Delaware limited liability company (“Cloudbreak Merger Sub”); Cloudbreak Health, LLC (“Cloudbreak”); Dr. Chirinjeev Kathuria and Dr. Mariya Pylypiv; UpHealth Holdings; and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative, agent, and attorney-in-fact of the Cloudbreak members, entered into a business combination agreement (as subsequently amended on April 23, 2021 and June 9, 2021, the “Cloudbreak Business Combination Agreement” and, together with the UpHealth Business Combination Agreement, the “Business Combination Agreements”). In connection with the Cloudbreak Business Combination Agreement, Cloudbreak Merger Sub was merged with and into Cloudbreak, with Cloudbreak surviving the merger (the “Cloudbreak Business Combination” and, together with the UpHealth Business Combination, the “Business Combinations”). The Business Combinations were consummated on June 9, 2021. In connection with the Business Combinations, GigCapital2 changed its corporate name to “UpHealth, Inc.”
Our public units began trading on the New York Stock Exchange (the “NYSE”) under the symbol “GIX.U” on June 5, 2019. On June 26, 2019, we announced that the holders of our units may elect to separately trade the securities underlying such units. On July 1, 2019, the shares, warrants, and rights began trading on the NYSE under the symbols “GIX,” “GIX.WS,” and “GIX.RT,” respectively. On June 9, 2021, upon the completion of the Business Combinations, our units separated into their underlying shares of common stock, warrants, and rights (and the rights were converted into shares of common stock). Our units and rights ceased to trade, and our common stock and warrants began trading under the symbols “UPH” and “UPH.WS,” respectively.
On November 28, 2023, we received written notice from the staff of NYSE Regulation of its determination to commence proceedings to delist the Company’s redeemable warrants, exercisable for one share of common stock of the Company, at an exercise price of $115.00 per share, from the NYSE and that trading in the warrants was suspended immediately. As a result, effective November 29, 2023, our warrants are trading in the over-the-counter market under the symbol “UPHLW.” The NYSE on December 13, 2023 filed a Form 25 with the SEC to delist the warrants from the NYSE.
On December 11, 2023, we received written notice from the staff of NYSE Regulation that it has commenced proceedings to delist our common stock from the NYSE, and suspended trading in our common stock pending the completion of such proceedings. As a result, effective December 12, 2023, our common stock is trading in the over-the-counter market under the symbol “UPHL.” We timely filed an appeal of this determination with the NYSE and requested a hearing before the NYSE Regulatory Oversight Committee’s Committee for Review. On January 12, 2024, the NYSE granted our request for a hearing, which was originally scheduled to occur on April 17, 2024 but is currently being rescheduled to a later date.
The over-the-counter market is a significantly more limited market than the NYSE, and quotation on the over-the-counter market likely results in a less liquid market for our existing and potential stockholders to trade the common stock and could further depress the trading price of our common stock. We can provide no assurance that our common stock will continue to trade on this market, that broker-dealers will continue to provide public quotes of our common stock on this market, or that the trading volume of our common stock will be sufficient to provide for an efficient trading market.
The transition of our common stock to the over-the-counter market will not affect the Company’s business operations or its reporting requirements under the rules of the U.S. Securities and Exchange Commission (“SEC”).
UpHealth Holdings
UpHealth Holdings, a Delaware corporation formed on October 26, 2020, was established to raise capital and pursue opportunities for investment and acquisition in various healthcare entities, primarily those that bring technology and services to efficiently and profitably manage chronic and complex care, including behavioral health and substance abuse, while also serving the demands for easy access to personalized primary care. On October 26, 2020, the shareholders of UpHealth Services, Inc. (“UpHealth Services”) contributed their shares of UpHealth Services to UpHealth Holdings in exchange for shares of UpHealth Holdings, resulting in UpHealth Services being a wholly owned subsidiary of UpHealth Holdings. See Deconsolidation of UpHealth Holdings and Subsidiaries below for further information.
UpHealth Services was incorporated in Illinois on November 5, 2019; operations effectively began January 1, 2020 and have continued to date.
On November 20, 2020, UpHealth Holdings completed the acquisition of Thrasys, Inc. (“Thrasys”), a California corporation and a provider of an advanced, comprehensive, and extensible technology platform, marketed under the umbrella “SyntraNetTM,” to manage health, quality of care, and costs, especially for individuals with complex medical, behavioral health, and social needs. See Deconsolidation of UpHealth Holdings and Subsidiaries below for further information.
On November 20, 2020, we also completed the acquisition of Behavioral Health Services, LLC and subsidiaries (“BHS”), a Missouri limited liability company and provider of medical, retail pharmacy and billing services. See Deconsolidation of UpHealth Holdings and Subsidiaries below for further information.
On November 20, 2020, UpHealth Holdings completed the acquisition of 43.46% of Glocal Healthcare Systems Private Limited and subsidiaries (“Glocal”), an India based healthcare company, which was presented as an equity method investment. On March 26, 2021, UpHealth Holdings acquired an additional 45.94% of Glocal and recognized a gain of $0.6 million on our equity method investment through the step-acquisition, which is presented as a gain on consolidation of equity method investment in the consolidated statement of operations for the three months ended March 31, 2021. On May 14, 2021, June 21, 2021, and August 27 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8% and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of June 30, 2022. See Deconsolidation of Glocal below for further information.
On January 25, 2021, UpHealth Holdings completed the acquisition of TTC Healthcare, Inc. (“TTC”), a Delaware corporation and a provider of medical, retail pharmacy, and billing services for individuals with complex medical and behavioral health needs. See Deconsolidation of UpHealth Holdings and Subsidiaries below for further information.
On April 27, 2021, UpHealth Holdings completed the acquisition of Innovations Group, Inc. (d/b/a MedQuest) (“Innovations Group”), a Utah corporation and a Utah-based internet pharmacy company. See Sale of Innovations Group below for further information.
Cloudbreak
Cloudbreak, a Delaware limited liability company that was formed on May 26, 2015, is a unified telemedicine and video medical interpretation solutions provider. On June 9, 2021, contemporaneous with the GigCapital2 merger with UpHealth Holdings, GigCapital2 completed the acquisition of Cloudbreak. See Sale of Cloudbreak below for further information.
Chapter 11 Cases of UpHealth Holdings, Thrasys, and BHS
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’ 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’ 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 a fee 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 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 and 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 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. On November 3, 2023, the U.S. Trustee appointed an official committee of unsecured creditors.
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 in favor of Needham 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). The Bankruptcy Court entered an order approving this stipulation on November 30, 2023. On December 6, 2023, UpHealth Holdings and UpHealth Services, Inc. appealed the judgment entered in New York state court to the New York Supreme Court’s Appellate Division, First Department. Briefing in the appeal is complete and
UpHealth Holdings expects oral argument, which has not yet been scheduled, to be set in April or May of 2024. The ultimate outcome of this matter is unknown at this time.
On November 16 and December 24, 2023, Thrasys filed motions to effectuate a transition of the Integrated Care Management segment to its customers, as disclosed in the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 filed by the Company with the SEC on November 21, 2023. This transition was substantially completed as of December 28, 2023 and Thrasys subsequently ceased all operations. In addition, a motion to pay retention bonuses to Thrasys employees involved in the transition of the Integrated Care Management segment was approved by the Bankruptcy Court on November 17, 2023.
On November 16, 2023, the Bankruptcy Court entered an order setting deadlines to file claims in the Chapter 11 cases. The deadline to file proofs of claim by general creditors of all Debtors passed on January 15, 2024 and the deadline for governmental entities to file proofs of claim against UpHealth Holdings passed on March 18, 2024 and will pass on April 17, 2024 against the other Debtors.
On December 18, 2023, the Debtors filed their schedules of assets and liabilities and their statements of financial affairs. On January 23, 2024, the Bankruptcy Court entered an order extending the Debtors’ exclusive right to file a Chapter 11 plan through and including April 30, 2024, and extending the Debtors’ exclusive right to solicit such a plan through and including July 1, 2024.
Other than UpHealth Holdings, Thrasys, BHS and the subsidiaries of Thrasys and BHS, we and our other subsidiaries have not filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code, and we and TTC continue to operate outside of bankruptcy.
The filing of the Chapter 11 cases by the Debtors constituted an event of default under the Indentures (as defined below) governing UpHealth’s 6.25% Convertible Senior Notes due 2026 (the “2026 Notes” and all beneficial holders thereof, the “2026 Noteholders”) and UpHealth’s Variable Rate Convertible Senior Secured Notes due 2025 (the “2025 Notes” and all beneficial holders thereof, the “2025 Noteholders”), which accelerated our payment obligations in respect of the 2025 Notes. On February 9, 2024, we entered into the Waivers and Rescission Agreements (as defined below), providing for, among other things, the waiver of the specified events of default under the Indentures and the recission of the automatic acceleration the principal and interest due in respect of the 2025 Notes pursuant to the applicable Indenture. See Sale of Cloudbreak below for further information.
Sale of Cloudbreak
On November 16, 2023, the Company and Cloudbreak, entered into a membership interests purchase agreement (the “Membership Interests Purchase Agreement”) with Forest Buyer, LLC, a Delaware limited liability company (“Forest Buyer”) and an affiliate of GTCR LLC, a leading private equity firm, pursuant to which we agreed to sell all of the outstanding equity interests of Cloudbreak and the wholly-owned subsidiaries of Cloudbreak to Forest Buyer for $180.0 million in cash, subject to certain adjustments for closing indebtedness, net working capital, cash and unpaid transaction expenses related to the transactions contemplated by the Membership Interests Purchase Agreement (the “Sale” and all of the transactions contemplated by the Membership Interests Purchase Agreement, collectively, the “Transactions”).
In connection and concurrently with the entry into the Membership Interests Purchase Agreement, the Company, Cloudbreak and Forest Buyer entered into a transaction support agreement, dated as of November 16, 2023 (the “Transaction Support Agreement”), with certain beneficial holders of our 2025 Notes (being the holders of at least 69% of the 2025 Notes, the “Consenting 2025 Noteholders”) and certain beneficial holders of our 2026 Notes (being the holders of at least 88% of the 2026 Notes, the “Consenting 2026 Noteholders,” and together with the Consenting Senior Secured Noteholders, the “Consenting Noteholders”), pursuant to which the parties thereto agreed, among other things, to support the Membership Interests Purchase Agreement and the Transactions, including the Sale, and to enter into and effect the Supplemental Indentures (as defined below) in connection with the 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”) to be made by us pursuant to the terms of the Transaction Support Agreement.
Furthermore, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into a supplemental indenture and amendment to security and pledge agreement, dated as of February 9, 2024 (the “First Lien Supplemental Indenture and Amendment to Security Agreement”), which amended the terms of the indenture, dated as of August 18, 2022, by and among the Company, the Guarantors (as defined below) party thereto and Wilmington Trust, National Association (“Wilmington Trust”), in its capacity as trustee and collateral agent thereunder, relating to the 2025 Notes (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the First Lien Supplemental Indenture and Amendment to Security Agreement as described below, the “First Lien Indenture”), and the security and pledge agreement, dated as of August 18, 2022, by and among the Company, the Guarantors from time to time party thereto and Wilmington Trust, as collateral agent, relating to the 2025 Notes (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the First Lien Supplemental Indenture and Amendment to Security Agreement as described below, the “First Lien Security Agreement” and together with the First Lien Indenture, the “First Lien Documents”). The First Lien Supplemental Indenture and Amendment to Security Agreement amended the terms of the First Lien Indenture to, among other things, (a) provide for certain changes to certain of the definitions in the First Lien Indenture, including “Permitted Indebtedness,” “Permitted Investments,” “Permitted Liens,” “Asset Sale,” “Excluded Subsidiary,” and “Significant Subsidiary;” (b) provide for certain modifications to covenants of the Company and certain changes with respects to events of default; (c) provide a carveout for the Sale from the terms of the First Lien Indenture with respect to mergers and sale transactions; (d) delete the rule prohibiting repurchases in connection with a Fundamental Change arising from the Sale at the time the 2025 Notes have been accelerated, and (e) modify the provisions in respect of repurchases of 2025 Notes as a result of a Fundamental Change for the Consenting 2025 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 (as defined below)), in each case, at a 5.00% premium to the principal amount of such 2025 Notes pursuant to the terms of the Transaction Support Agreement.
In addition, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into a supplemental indenture (the “Second Lien Supplemental Indenture” and together with the First Lien Supplemental Indenture, the “Supplemental Indentures”) to the indenture, dated June 9, 2021, by and between the Company and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), in its capacity as successor trustee and as collateral agent thereunder (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the Second Lien Supplemental Indenture and the Second Lien Security Agreement as described below, the “Second Lien Indenture” and together with the First Lien Indenture, the “Indentures”), the terms of which amended the Second Lien Indenture to, among other things, (a) add each subsidiary of UpHealth, other than Glocal Healthcare Systems Private Limited, UPH Digital Health Services Private Limited and any subsidiary of UpHealth that is, as of the date of the Supplemental Indentures, a debtor or debtor in possession in any bankruptcy proceeding, including the Chapter 11 Proceedings (as defined below) (collectively, the “Guarantors”), as a guarantor of the obligations under the 2026 Notes pursuant to the Second Lien Indenture; (b) cause UpHealth and the Guarantors to grant a second-priority security interest on the same collateral that secures the 2025 Notes; (c) in connection with those items described in clauses (a) and (b) above, incorporate provisions similar to those in the First Lien Indenture, including with respect to covenants and events of default, as previously disclosed by the Company and as modified by the First Lien Supplemental Indenture; and (d) provide a carveout for the Sale from the terms of the Second Lien Indenture with respect to mergers and sale transactions. Pursuant to the terms of the Second Lien Indenture, the 2026 Notes are secured by a second-priority lien, subject only to certain permitted liens, in substantially all assets of the Company and the Guarantors, subject to customary exclusions, pursuant to a security and pledge agreement, dated as of February 9, 2024 (as it may be amended, modified, or supplemented from time to time, the “Second Lien Security Agreement” and together with the Second Lien Indenture, the “Second Lien Documents”), by and among the Company, the Guarantors and BNY Mellon, as collateral agent on behalf of the 2026 Noteholders.
In connection with the entry into the Supplemental Indentures, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, the Company, Cloudbreak and the Consenting 2025 Noteholders entered into a waiver and rescission agreement, dated as of February 9, 2024 (the “Waiver and Recission Agreement”), pursuant to which the Consenting 2025 Noteholders have agreed to waive, with respect to the Company and Cloudbreak, the specified events of default under the First Lien Indenture resulting from the commencement of the Chapter 11 Proceedings (the “2025 Indenture Events of Default”) and rescind, with respect to the Company and Cloudbreak, the automatic acceleration of the 2025 Notes resulting from the occurrence of the 2025 Indenture Events of Default (the “2025 Notes Acceleration”).
Furthermore, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, the Company and the Consenting 2026 Noteholders entered into a waiver agreement, dated as of February 9, 2024 (the “Waiver Agreement” and together with the Waiver and Recission Agreement, the “Waivers and Rescission Agreements”), pursuant to which the Consenting 2026 Noteholders have agreed to waive, with respect to the Company and Cloudbreak, the specified events of default under the Second Lien Indenture resulting from the 2025 Notes Acceleration and the commencement of the Chapter 11 Proceedings (the “2026 Indenture Events of Default”).
Upon the effectiveness of the Waivers and Rescission Agreements and until the earlier of (i) the completion of the Company’s initial Fundamental Change Repurchase Offer in respect of the 2026 Notes or (ii) the termination of the Transaction Support Agreement in accordance with the terms thereof, each of the Consenting Noteholders has agreed not to consent to, execute or otherwise participate in any way in any declaration of acceleration of the principal amount of the 2025 Notes and 2026 Notes (as applicable) as a result of the failure of the Company to issue a Fundamental Change Company Notice (as defined in the applicable Indenture) or to conduct or consummate a Fundamental Change repurchase pursuant to Article 15 of the Indenture, in each case, in the event that the Company’s common stock, par value $0.0001 per share, ceases to be listed on a national securities exchange (the “Delisting Fundamental Change”).
At a special meeting of our stockholders held on February 29, 2024, the stockholders of the Company approved the Membership Interests Purchase Agreement providing for the Sale of Cloudbreak and the wholly-owned subsidiaries of Cloudbreak to Forest Buyer, as such Sale constituted the sale of substantially all of the assets of the Company under Delaware law.
On March 15, 2024 (the “Closing Date”), we completed the closing of the Transactions (the “Closing”). Pursuant to the terms of the Membership Interests Purchase Agreement, the “Cash Consideration” for the Sale was 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 payable for our benefit at the Closing was $180.0 million, less adjustments for the estimated closing debt and cash and the estimated unpaid expenses related to the Transactions (the “Estimated Cash Consideration”). All of the Estimated Cash Consideration was delivered by Forest Buyer to an escrow agent (the “Escrow Agent”) and deposited into three segregated escrow accounts established pursuant an escrow agreement, dated March 15, 2024, entered into in accordance with the terms of the Membership Interests Purchase Agreement by the Company, Forest Buyer and the Escrow Agent (the “Escrow Agreement”), as follows: (i) $3 million (the “Working Capital Escrow Amount”) was deposited in a segregated escrow account to satisfy any adjustment to the Cash Consideration (as defined below) (the “Working Capital Escrow Account”); (ii) $27 million (the “Tax Escrow Amount”) was 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”); and (iii) the remaining portion of the Estimated Cash Consideration equal to approximately $139 million (such amount, the “Notes Escrow Amount”), was deposited in a segregated escrow account (the “Notes Escrow Account,” and together with the
Working Capital Escrow Account and the Tax Escrow Account, the “Escrow Accounts”), the purpose of which is to fund the Fundamental Change Repurchase Offers. The funds in the Notes Escrow Account will be released on approximately June 3, 2024, but no later than June 15, 2024, and will be used to satisfy in full, plus accrued interest, the 2026 Notes and to repurchase approximately $20 million of the 2025 Notes, plus accrued interest, following which approximately $37 million in aggregate principal amount of 2025 Notes will remain outstanding, which will constitute the entirety of our outstanding long term debt. Funds in the Tax Escrow Account will be used to satisfy our 2024 tax liability in respect of the Transactions and any funds not required for this purpose will be used to repurchase additional 2025 Notes. Funds in the Working Capital escrow will be used to satisfy any of our obligations resulting from a difference between Cloudbreak’s targeted and actual working capital as of the Closing, and any funds not used for this purpose will be used to repurchase additional 2025 Notes.
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 Working Capital Escrow Amount). To the extent that following such customary adjustment to the Cash Consideration, the Estimated Cash Consideration is greater than the Cash Consideration, Forest Buyer and the Company shall cause the Escrow Agent to make payment to Forest Buyer (or its designees) of an amount equal to the lesser of (i) the amount by which the Estimated Cash Consideration exceeds the Cash Consideration, and (ii) the Working Capital Escrow Amount held in the Working Capital 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 Membership Interests Purchase Agreement and the Escrow Agreement (the “Working Capital Escrow Funds”), in each case, from the Working Capital Escrow Account, and after any such payments are made to Forest Buyer, the remaining Working Capital Escrow Funds (if any) shall be used for the repurchase of 2026 Notes and/or 2025 Notes.
Deconsolidation of UpHealth Holdings and Subsidiaries
As a result of the bankruptcy proceedings described above and the designation of UpHealth Holdings and its subsidiaries, 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 its subsidiaries and recorded a $59.1 million gain on deconsolidation of equity investment in our 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 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 (“ASC”) 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 and its subsidiaries as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries in the nine months ended September 30, 2023 and the year ended December 31, 2022 are included in our consolidated financial statements and the financial position of UpHealth Holdings and its subsidiaries as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries in the three months ended December 31, 2023 are not included in our consolidated financial statements.
The following table sets forth details of the condensed consolidated balance sheet of UpHealth Holdings and its 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 | |
Sale of Innovations Group
On February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of its 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 year ended December 31, 2022 and the financial position of Innovations Group as of December 31, 2022 are included in our consolidated financial statements. See Note 3, Significant Transactions, for further information.
Deconsolidation of Glocal and Subsidiaries
As a result of events which occurred during the three months ended September 30, 2022, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal was a Variable Interest Entity (“VIE”) and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effective July 2022, we deconsolidated Glocal and recorded a $37.7 million loss on deconsolidation of equity investment in our 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 consolidated balance sheets as of December 31, 2022, 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 year ended
December 31, 2023, there has been no change in the status of Glocal, and accordingly, we continue to account for it as an equity investment valued at cost. 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 following table sets forth details the condensed balance sheet of Glocal and its subsidiaries, which was deconsolidated effective July 1, 2022:
| | | | | |
| (In thousands) | As of July 1, 2022 |
| Cash and cash equivalents | $ | 8,743 | |
| Restricted cash | 508 | |
| Accounts receivable, net | 5,043 | |
| Inventories | 276 | |
| Prepaid expenses and other current assets | 816 | |
| Property and equipment, net | 27,415 | |
| Intangible assets | 34,449 | |
| Other assets | 1,814 | |
| Total assets | 79,064 | |
| Accounts payable | 2,430 | |
| Accrued expenses | 1,189 | |
| Deferred revenue, current | 588 | |
| Income taxes payable | 2,512 | |
| Related-party debt | 71 | |
| Debt | 551 | |
| Other liabilities | 144 | |
| Deferred tax liabilities | 6,045 | |
| Accumulated other comprehensive loss | (7,659) | |
| Noncontrolling interests | 14,285 | |
| Total liabilities and stockholder's equity | 20,156 | |
| Carrying value of Glocal at deconsolidation | 58,908 | |
| Fair value of Glocal at deconsolidation | 21,200 | |
| Loss on deconsolidation of equity investment | $ | (37,708) | |
The financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements. The only transactions between us and Glocal during the six months ended December 31, 2022 was the transfer of $5.1 million by us to a designated “Share Account” maintained with a leading bank in India in the name of Glocal for which our Chief Financial Officer is the sole authorized signatory.
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 these consolidated financial statements have been retroactively adjusted to reflect this Reverse Stock Split.
Going Concern
The accompanying 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. Cash and cash equivalents on hand were $2.5 million as of December 31, 2023. The Company has historically incurred losses and negative cash flows from operations. As of December 31, 2023, the Company also had an accumulated deficit of $624.0 million and a working capital deficit of $6.6 million. Furthermore, unless and until we can reconsolidate TTC, we have no operations. The Company may need to raise additional funds in the next twelve months by selling additional equity or incurring debt and, as a result, the Company believes there is substantial doubt about our ability to continue as a going concern. The Company’s subsidiary UpHealth Holdings, which directly owns TTC, is currently in process of the proceedings of the bankruptcy court in order to formulate a plan to emerge from bankruptcy.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements of UpHealth have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC for financial information and the instructions to Form 10-K and Rule 10-01 of Regulation S-X. Our consolidated financial statements include the accounts of UpHealth, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
We follow the FASB ASC guidance for identification and reporting of entities over which control is achieved through means other than voting rights. The guidance defines such entities as VIEs. We consolidate VIEs when we have variable interests and are the primary beneficiary. We continually evaluate our involvement with VIEs to determine when these criteria are met.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups (“JOBS”) Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised accounting standard at the time private companies adopt the new or revised standard.
Fiscal Year
Our fiscal year ends on December 31. References to fiscal year 2023 and fiscal year 2022 refer to our fiscal years ended December 31, 2023 and 2022, respectively.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the 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 fair value of Glocal;
•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.
Foreign Currency Translation Adjustments
Balance sheet assets and liabilities of subsidiaries which do not use the U.S. dollar as their functional currency are translated at the exchange rate at the end of the reporting period. Statement of operations amounts are translated using a weighted-average exchange rate during the period. Equity accounts and noncontrolling interests are translated using historical exchange rates at the date the entry to stockholders’ deficit was recorded, except for the change in accumulated deficit during the reporting period, which is translated using the same weighted-average exchange rate used to translate the consolidated statements of operations. The net cumulative translation adjustment is reported in accumulated other comprehensive loss, net of tax, in the consolidated balance sheets.
Foreign Currency Transactions
Foreign exchange transactions are recorded at the exchange rate prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at foreign exchange rates in effect at the end of the reporting period. Exchange differences arising on settlements/period-end translations are recognized in the consolidated statements of operations in the period they arise.
Fair Value Measurements
Fair value is measured in accordance with ASC guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. We measure fair value for financial instruments on an ongoing basis. We measure fair value for non-financial assets when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist.
Cash and Cash Equivalents
We consider all cash on deposit, money market funds and short-term investments with original maturities of three months or less when purchased to be cash and cash equivalents. Cash and cash equivalents consist of amounts we have on deposit with major commercial financial institutions.
Restricted Cash
As of December 31, 2023 and 2022, we had no restricted cash.
Provision for Expected Credit Losses
We closely monitor our accounts receivable balances and estimate the provision 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.
Receivables
For software-as-a-service (“SaaS”) internet hosting, licenses, and subscriptions provided by our integrated care management operations, accounts receivable are carried at original invoice, net of a provision for expected credit losses. Management determines the provision for expected credit losses by evaluating individual customer receivables on a monthly basis and considering a customer’s financial condition and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. As of December 31, 2023 and 2022, the provision for expected credit losses was zero (due to the deconsolidation of Thrasys, as discussed in Note 1, Organization and Business) and $15.6 million, respectively.
For subscription-based medical language interpretation services provided by and the sales of products through our Virtual Care Infrastructure operations, accounts receivable are carried at original invoice, net of a provision for expected credit losses. Management determines the provision for expected credit losses by evaluating individual customer receivables on a monthly basis and considering a customer’s financial condition and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. As of December 31, 2023 and 2022, the provision for expected credit losses was $0.4 million and $0.6 million, respectively.
For medical services provided through our services operations, accounts receivable are recorded without collateral from patients, most of whom are local residents and are insured under third-party payor agreements. Accounts receivable are based on gross charges, reduced by explicit price concessions provided to third-party payors and implicit price concessions provided primarily to self-pay patients. Estimates for explicit price concessions are based on provider contracts and historical experience adjusted for economic conditions and other trends affecting our ability to collect outstanding amounts. For accounts receivable associated with self-pay patients, we record implicit price concessions in the period of service on the basis of our past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible.
For digital pharmacy prescriptions provided through our services operations, accounts receivable are recorded at net invoice amount from patients. For all prescriptions including compounded and customized medications, substantially all accounts receivable are paid by credit card at the time of shipment. As discussed in Note 3, Signification Transactions, the sale of Innovations Group sale closed on May 11, 2023. As a result, as of December 31, 2023, no provision for expected credit losses was necessary. Additionally, as of December 31, 2022, we determined that no provision for expected credit losses was necessary.
As of December 31, 2023 and 2022, the total provision for expected credit losses was $0.4 million and $16.2 million, respectively.
Inventories
Inventories primarily consist of stock of medicines and pharmaceutical products finished goods, and are stated at the lower of cost or net realizable value. Cost comprises purchase price and all incidental expenses incurred in bringing the inventory to its present location and condition. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, with a normal margin to sell. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Once the cost of the inventory is reduced, a new lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. As discussed in Note 3, Signification Transactions, the sale of Innovations Group sale closed on May 11, 2023. As a result, as of December 31, 2023, our inventory balance is zero.
Equity Investment
For the period January 1, 2021 through March 26, 2021, we held an interest in the privately-held equity securities of Glocal in which we did not have a controlling interest, but were able to exercise significant influence. Based on the terms of these privately-held securities, we determined that we exercised significant influence on Glocal, applied the equity method of accounting for our investment in Glocal, and presented our investment in Glocal in equity method investments in the consolidated balance sheets. Any and all gains and losses on privately-held equity securities, realized and unrealized, were recorded in other income (expense) in the consolidated statements of operations. Income recognized in our equity method investments was reduced by the expected amortization from intangible assets recognized through the fair value step-up, until we acquired a controlling financial interest and consolidated Glocal.
As discussed in Note 1, Organization and Business, as of December 31 2023 and 2022, and for the year ended December 31, 2023 and the July 1, 2022 to December 31, 2022 period, 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. Based on the terms of these privately-held securities, 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.
As discussed in Note 1, Organization and Business, as a result of the bankruptcy proceedings 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 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. 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 ASC 321 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment.
Valuations of privately-held securities in which we do not have a controlling financial interest are inherently complex due to the lack of readily available market data and requires the use of judgment. The carrying value is not adjusted for our privately-held equity securities if there are no observable price changes in a similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment. Our impairment analysis encompasses an assessment of both qualitative and quantitative factors, including the investee’s financial metrics, market acceptance of the investee’s product or technology, and the rate at which the investee is using its cash. If the investment is considered impaired, we recognize an impairment in the consolidated statements of operations and establish a new carrying value for the investment.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated economic lives of the assets, which range as follows:
| | | | | |
| Medical and surgical equipment | 13 years |
| Electrical and other equipment | 5-7 years |
| Computer equipment, furniture and fixtures | 3-7 years |
| Vehicles | 5-7 years |
| Capitalized software development costs | 3 years |
Leasehold improvements are amortized over the lesser of the remaining lease term or the estimated economic life of the asset.
When assets are retired or disposed of, the asset costs and related accumulated depreciation or amortization are removed from the respective accounts and any related gain or loss is recognized in the consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which extend the economic lives of assets, are capitalized.
Capitalized Software Development Costs
We capitalize our ongoing costs of developing software during the application development stage, which consists primarily of internal personnel costs and external contractor costs.
Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers.
Intangible Assets
Acquired intangible assets subject to amortization are stated at fair value and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for potential impairment when events or circumstances indicate that carrying amounts may not be recoverable. An impairment charge of $4.2 million was recognized during fiscal 2023 related to our Integrated Care Management segment. In fiscal 2022, an impairment charge of $17.6 million was recognized, consisting of $16.8 million in our Integrated Care Management segment and $0.8 million in our Services segment.
Trade Names
A trade name is a legally-protected trade or similar mark. Acquired trade names are valued using an income method approach, generally the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of trade names and applies it to the after-tax discounted free cash flow attributed to the trade name. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.
Technology and Intellectual Property
Technology and intellectual property (“IP”) is a design, work, or invention that is the result of creativity to which one has ownership rights that may be protected through a patent, copyright, trademark, or service mark. IP is valued using the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of IP and applies it to the after-tax discounted free cash flow attributed to the IP. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.
IP is amortized following the pattern in which the expected benefits will be consumed or otherwise used up over each component’s useful life, based on our plans and expectations for the IP going forward, which is generally the underlying IP’s legal expiration dates.
Customer Relationships
Customer relationships are intangible assets that consist of historical and factual information about customers and contacts collected from repeat transactions with customers, with or without any underlying contracts. The information is generally organized as customer lists or customer databases. We have the expectation of repeat patronage from these customers based on the customers’ historical purchase activity, which creates the intrinsic value over a finite period of time and translates into the expectation of future revenues, income, and cash flow.
Customer relationships are valued using projected operating income, adjusted for estimated future existing customer growth, less estimated future customer attrition, net of charges for net tangible assets, IP charge, trade name charge, and work force. The concluded value is the after-tax discounted free cash flow.
Long-Lived Assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment charges of $2.8 million and $4.0 million were recognized during fiscal 2023 and 2022, respectively, both related to the impairment of software licenses in our Integrated Care Management segment.
Goodwill
Our goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired. We assess goodwill for impairment on an annual basis as of the first day of our fourth quarter, or sooner if events indicate such a review is necessary through a triggering event. An impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than its respective carrying value. The impairment for goodwill is limited to the total amount of goodwill allocated to the reporting unit. Future changes in the estimates used to conduct the impairment review, including revenue projections, market values, and changes in the discount rate used, could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-down of a portion or all of goodwill. The discount rate used is based on independently calculated risks, our capital mix, and an estimated market premium.
A $42.9 million impairment charge was recognized during fiscal 2023, consisting of a $34.6 million impairment charge in our Integrated Care Management segment, which resulted from the UpHealth Holdings’ filing of the 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. A $6.4 million impairment charge in our Services segment, and a $1.9 million impairment charge 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.
A $94.6 million impairment charge was recognized in fiscal 2022, 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 in the three months ended March 31, 2022, which was immediately impaired. Additionally, we recognized a $1.8 million impairment charge on the remeasurement of the disposal group held for sale in the three months ended December 31, 2022 in connection with the sale of our Pharmacy business.
The estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of each acquisition date to estimate the fair value of assets acquired and liabilities assumed. We believe that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are waiting for additional information necessary to finalize those fair values. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant.
In evaluating whether new information obtained meets the criteria for adjusting provisional amounts, management must consider all relevant factors, including:
•the timing of the receipt of the additional information that management could have used in its evaluation on or after the acquisition date; and
•whether management can identify a reason that a change to the provisional amounts is warranted and not driven by a discrete independent event occurring subsequent to the acquisition.
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. 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.
Debt Issuance Costs and Original Issue Discounts
The third-party cost of issuing debt results in the recognition of debt issuance costs (“DIC”), which are capitalized and presented as a net reduction to the face amount of the debt. DIC is amortized using the effective interest rate method over the expected life of the debt.
The reduction in gross proceeds from a debt facility by a lender or lenders results in an original issue discount (“OID”), which is amortized using the effective interest rate method over the expected life of the debt. The amortization of OID for the reporting period results in the recognition of additional interest expense.
Warrant Liabilities
We account for the Private Placement Warrants and PIPE Warrants (as described in Note 12, Capital Structure) that are not indexed to our own stock as liabilities at fair value on the consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense) in the consolidated statements of operations. We will continue to adjust the liabilities for changes in fair value until the earlier of the exercise or expiration of the common stock warrants. At that time, the portion of the warrant liability related to the common stock warrants will be reclassified to additional paid-in capital.
Forward Share Purchase Agreement
On June 3, 2021, we entered into a third-party put option arrangement with Kepos Alpha Fund L.P. (“KAF”), a Cayman Islands limited partnership, whereby we assumed the obligation to repurchase our common stock at a future date by transferring cash to KAF under certain conditions. Due to its mandatorily redeemable for cash feature, we recorded such obligation as a forward share purchase liability, and the $18.1 million of cash held in escrow as restricted cash, in our consolidated balance sheets as of December 31, 2021. In April 2022, in accordance with the Forward Share Purchase Agreement, KAF transferred the 170,000 shares of our common stock (recorded on a post-reverse split basis) to us and we transferred to KAF the $18.1 million in cash previously held in escrow and $0.4 million of interest. As of December 31, 2023 and 2022, the 170,000 shares of common stock are recorded as treasury stock in our consolidated balance sheets.
Stock Based Compensation
Our stock-based compensation primarily consists of stock options and RSUs. Stock-based compensation is recognized in the consolidated statements of operations based on the grant date fair value of the awards. The fair value of stock options is determined on the grant date using a Black-Scholes model. The fair value of RSUs is determined by the grant date market price of our common shares. The compensation expense recognized for stock-based awards is recognized ratably over the service period of the awards. We recognize forfeitures as they occur.
Revenue Recognition
We recognize revenue in accordance with ASC guidance on revenue from contracts with customers. Revenue is reported at the amount that reflects the consideration to which we expect to be entitled in exchange for providing goods and services.
Contract Assets, Contract Liabilities, and Remaining Performance Obligations
We record a contract asset when revenue recognized on a contract exceeds the billings. Subscriptions and SaaS internet hosting are generally invoiced monthly, quarterly, or in installments. Services are generally invoiced upon providing services as the performance obligations are deemed complete. Contract assets are included in accounts receivable in the consolidated balance sheets.
We record deferred revenue when billed amounts have been invoiced and received in advance of revenue recognition. It is recognized as revenue when transfer of control to customers has occurred or services have been provided. The deferred revenue balance does not represent the remaining contract value of multi-year, non-cancelable subscription agreements. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size, and new business linearity within the period.
The transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unbilled receivables and deferred revenue that will be recognized as revenue in future periods. The transaction price allocated to the remaining performance obligations is influenced by several factors, including seasonality, the timing of renewals, the timing of delivery of software licenses, average contract terms, and foreign currency exchange rates. Unbilled portions of the remaining performance obligations are subject to future economic risks including bankruptcies, regulatory changes, and other market factors. We exclude amounts related to performance obligations that are billed and recognized as they are delivered. This primarily consists of professional services contracts that are on a time-and-materials basis.
Services Revenues
We derive our services revenues primarily through the provision of professional services through our Integrated Care Management segment; the provision of medical and behavioral health services by accredited medical professionals through our Services segment, and through Glocal in our Virtual Care Infrastructure segment through June 30, 2022; and the provision of subscription-based medical language interpretation services through our Virtual Care Infrastructure segment, as follows:
•Professional services for training, set-up, configuration, implementation, and customization services
The majority of our professional services contracts related to SaaS are on a time and materials basis, which may also be independently offered by our competitors. When these services are not combined with other SaaS revenues as a distinct performance obligation, revenue is recognized as the services are rendered for time and materials contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts. Training revenues and configuration fees are recognized as the services are completed.
•Medical and behavioral services provided through our clinics and hospitals, digital dispensaries, and behavioral services operations
Performance obligations for medical and behavioral services provided by accredited medical and clinical professionals are satisfied over time as services are provided, and revenue is recognized accordingly. Revenue is based on gross charges, reduced by explicit price concessions provided to third-party payors and implicit price concessions provided primarily to self-pay patients. Estimates for explicit price concessions
are based on provider contracts and historical experience, adjusted for economic conditions and other trends affecting our ability to collect outstanding items. Substantially all of our patients are insured under third-party payor agreements.
Generally, patients who are covered by third-party payors are responsible for related deductibles and coinsurance, which may vary in amount. We also provide services to uninsured patients and may offer those uninsured patients a discount from standard charges. We estimate the transaction price for patients with deductibles and coinsurance, and from those who are uninsured, based on historical experience and market conditions. We determined that the nature, amount, timing, and uncertainty of revenues and cash flows are affected by payors having different reimbursement and payment methodologies, length of the patient’s service, and method of reimbursement.
Estimates of net realizable value are subject to significant judgment and approximation by management. It is possible that actual results could differ from the historical estimates management has used to help determine the net realizable value of revenue. If actual collections either exceed or are less than the net realizable value estimates, we record a revenue adjustment, either positive or negative, for the difference between the estimate of the receivable and the amount actually collected in the reporting period in which the collection occurred. No significant adjustments were recorded in the years ended December 31, 2023 and 2022.
•Subscription-based medical language interpretation services
Service fees of subscription-based fixed monthly minute medical language interpretation services are recognized monthly on a straight-line basis over the term of the contract due to the stand-ready nature of the services provided. Variable consideration received for medical language interpretation services, information technology services, and for the lease of Martti™ devices, our language access solution, is based on a fixed per item charge applied to a variable quantity. Variable consideration for these services is recognized over time in accordance with the “right to invoice” practical expedient and therefore is not subject to revenue constraint evaluation. Revenues related to the sale of Martti™ devices are recognized at a point in time upon delivery of the devices to the customer. We may enter into multiple component services arrangements that bundle the pricing for the lease of Martti™ devices with information technology services, but the lease may not always accompany Martti™ services. When an equipment lease is bundled with services, allocation of the transaction price consideration between the lease and nonlease components of the lease is required. We have determined that the consideration allocated to the lease components in its bundled multiple component services arrangements is not material to the consolidated financial statements.
Licenses and Subscriptions Revenues
Software license revenues are recognized by SyntraNetTM based on whether or not the license constitutes a distinct performance obligation. If the license is a distinct performance obligation, separate from a distinct performance obligation for hosting services, it may be fully recognized on the date license rights are granted to the customer and access is granted; otherwise, it is an indistinct performance obligation, which is recognized ratably over the contract term, along with other hosting services beginning on the commencement date of each contract, which is the date license rights are granted to the customer.
Subscription revenues from SaaS hosting access and support and maintenance provided by SyntraNetTM are recognized ratably over the contract term beginning on the commencement date of each contract, which is the date our service is made available to the customer. Our subscription service arrangements are noncancellable and do not contain refund-type provisions.
Product Revenues
We derive product revenues from sales of products through digital pharmacy operations in our Services segment and, through June 30, 2022, and through the construction of clinics and sales of digital dispensaries by Glocal, in our Virtual Care Infrastructure segment through June 30, 2022. Our pharmacy sales are primarily a function of the price per unit for pharmaceutical products sold and the number of prescriptions provided to customers. We recognize revenue at the time the client effectively takes possession and control of the product. Revenue for both is typically recognized over time based on the percentage of costs incurred to date relative to the estimated total costs for the contract, as this method best depicts how control of the product is being transferred.
Contracts with Multiple Performance Obligations and Transaction Prices
From time to time, we may enter into contracts that contain multiple performance obligations, particularly with our SaaS internet hosting, licenses, subscriptions, and services. Additionally, we may enter into contracts that contain multiple performance obligations with our clinics and digital dispensaries, including maintenance and telehealth services. For these arrangements, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations.
A significant portion of our contracts with customers have fixed transaction prices. For some contracts, the amount of consideration to which we will be entitled is variable. We include variable consideration in a contract’s transaction price only to the extent that we have a relatively high level of confidence that the amounts will not be subject to significant reversals. In determining amounts of variable consideration to include in a contract’s transaction price, we rely on our experience and other evidence that supports our qualitative assessment of whether revenue would be subject to significant reversal.
Costs of Revenues
Costs of services for professional services, medical and behavioral services, and subscription-based medical language interpretation services includes the costs of direct labor, payroll taxes, and direct benefits of those individuals who provide direct services and/or generate billable hours, and an appropriately allocated portion of indirect overhead.
Costs of licenses and subscriptions includes all the accumulated costs of providing a hybrid cloud-based hosting arrangement; the costs of direct labor, payroll taxes, and direct benefits of those individuals who provide support and maintenance services; and an appropriately allocated portion of indirect overhead.
Costs of products is the accumulated total of all costs used to create a product, which has been sold to generate revenue. These costs include direct materials (resale products and raw and externally sourced materials for internally manufactured products), direct labor, an appropriately allocated portion of indirect overhead, and ancillary costs, such as freight, delivery, insurance, and non-sales and non-income taxes. Direct labor is the direct provision of activities to manufacture or provide a good or service. Indirect overhead includes allocable costs, such as facilities, information technology, and depreciation and amortization costs.
Taxes Collected from Customers and Remitted to Governmental Authorities
We exclude from our measurement of transaction prices all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected from customers. Accordingly, such tax amounts are not included as a component of revenue or costs of revenues in the consolidated statements of operations.
Research and Development Costs
Research and development costs are expensed as incurred and were $4.4 million and $7.9 million for the years ended December 31, 2023 and 2022, respectively.
Advertising, Marketing, and Promotion Expenses
Advertising, marketing, and promotion costs are expensed as incurred. Advertising expense was $1.3 million and $2.9 million for the years ended December 31, 2023 and 2022, respectively, and are included within sales and marketing expenses in the consolidated statements of operations.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the year in which the differences are expected to affect taxable income. Valuation allowances are established when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for income tax uncertainties in accordance with ASC guidance on income taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed by dividing the net loss by the weighted average number of shares of our outstanding common stock during the period. Diluted net earnings (loss) per share is computed by giving effect to all potential shares of common stock, including outstanding stock options and convertible notes, to the extent dilutive. Basic and diluted net earnings (loss) per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive due to our net loss in those periods.
Legal and Other Contingencies
We are currently involved in various claims and legal proceedings. We review the status of each significant matter and assess our potential financial exposure on a quarterly basis. We accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable, and the amount can be reasonably estimated. See Note 19, Commitments and Contingencies, for further information.
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 the adoption of this ASU will have on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of a segment’s profit or loss. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements and early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as additional disclosure on income taxes paid. The ASU is effective on a prospective basis for fiscal years beginning after December 15, 2024 for public entities and early adoption is permitted. We are currently evaluating the impact of adopting of this ASU on our 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 ASC 842. This ASU was effective for us on January 1, 2023, and the adoption did not have a material effect on our consolidated financial statements.
3. Significant Transactions
Sale of Cloudbreak
On November 16, 2023, the Company and Cloudbreak, entered into the Membership Interests Purchase Agreement with Forest Buyer and an affiliate of GTCR LLC, pursuant to which we agreed to sell all of the outstanding equity interests of Cloudbreak and the wholly-owned subsidiaries of Cloudbreak to Forest Buyer for $180.0 million in cash, subject to certain adjustments for closing indebtedness, net working capital, cash and unpaid transaction expenses related to the Transactions.
In connection and concurrently with the entry into the Membership Interests Purchase Agreement, the Company, Cloudbreak and Forest Buyer entered into the Transaction Support Agreement, dated as of November 16, 2023, with the Consenting Noteholders, pursuant to which the parties thereto agreed, among other things, to support the Membership Interests Purchase Agreement and the Transactions, including the Sale, and to enter into and effect the Supplemental Indentures in connection with the Fundamental Change Repurchase Offer to be made by us pursuant to the terms of the Transaction Support Agreement.
Furthermore, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into the First Lien Supplemental Indenture and Amendment to Security Agreement, dated as of February 9, 2024, which amended the terms of the indenture, dated as of August 18, 2022, by and among the Company, the Guarantors party thereto and Wilmington Trust, in its capacity as trustee and collateral agent thereunder, relating to the 2025 Notes, and the security and pledge agreement, dated as of August 18, 2022, by and among the Company, the Guarantors from time to time party thereto and Wilmington Trust, as collateral agent, relating to the 2025 Notes. The First Lien Supplemental Indenture and Amendment to Security Agreement amended the terms of the First Lien Indenture to, among other things, (a) provide for certain changes to certain of the definitions in the First Lien Indenture, including “Permitted Indebtedness,” “Permitted Investments,” “Permitted Liens,” “Asset Sale,” “Excluded Subsidiary,” and “Significant Subsidiary;” (b) provide for certain modifications to covenants of the Company and certain changes with respects to events of default; (c) provide a carveout for the Sale from the terms of the First Lien Indenture with respect to mergers and sale transactions; (d) delete the rule prohibiting repurchases in connection with a Fundamental Change arising from the Sale at the time the 2025 Notes have been accelerated, and (e) modify the provisions in respect of repurchases of 2025 Notes as a result of a Fundamental Change for the Consenting 2025 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 (as defined below)), in each case, at a 5.00% premium to the principal amount of such 2025 Notes pursuant to the terms of the Transaction Support Agreement.
In addition, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into the Second Lien Supplemental Indenture, dated June 9, 2021, by and between the Company and BNY Mellon, in its capacity as successor trustee and as collateral agent thereunder, the terms of which amended the Second Lien Indenture to, among other things, (a) add
the Guarantors, as a guarantor of the obligations under the 2026 Notes pursuant to the Second Lien Indenture; (b) cause UpHealth and the Guarantors to grant a second-priority security interest on the same collateral that secures the 2025 Notes; (c) in connection with those items described in clauses (a) and (b) above, incorporate provisions similar to those in the First Lien Indenture, including with respect to covenants and events of default, as previously disclosed by the Company and as modified by the First Lien Supplemental Indenture; and (d) provide a carveout for the Sale from the terms of the Second Lien Indenture with respect to mergers and sale transactions. Pursuant to the terms of the Second Lien Indenture, the 2026 Notes are secured by a second-priority lien, subject only to certain permitted liens, in substantially all assets of the Company and the Guarantors, subject to customary exclusions, pursuant to the Second Lien Documents, dated as of February 9, 2024, by and among the Company, the Guarantors and BNY Mellon, as collateral agent on behalf of the 2026 Noteholders.
At a special meeting of our stockholders held on February 29, 2024, the stockholders of the Company approved the Membership Interests Purchase Agreement providing for the Sale of Cloudbreak and the wholly-owned subsidiaries of Cloudbreak to Forest Buyer, as such Sale constitutes the sale of substantially all of the assets of the Company under Delaware law.
On March 15, 2024, we completed the Closing. Pursuant to the terms of the Membership Interests Purchase Agreement, the Cash Consideration for the Sale was an amount equal to $180.0 million, with adjustments for debt as of the Calculation Time, Cloudbreak’s net working capital as of the Calculation Time, and unpaid expenses related to the Transactions. The Estimated Cash Consideration payable for the our benefit at the Closing was $180.0 million, less adjustments for the estimated closing debt and cash and the estimated unpaid expenses related to the Transactions. All of the Estimated Cash Consideration was delivered by Forest Buyer to the Escrow Agent and deposited into three segregated escrow accounts established pursuant an escrow agreement, dated March 15, 2024, entered into in accordance with the Escrow Agreement, as follows: (i) $3 million Working Capital Escrow Amount was deposited in a segregated escrow account to satisfy any adjustment to the Cash Consideration; (ii) $27 million Tax Escrow Amount was 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; and (iii) the approximately $139 million Notes Escrow Amount, was deposited in the Notes Escrow Account, the purpose of which is to fund the Fundamental Change Repurchase Offers. The funds in the Notes Escrow Account will be released on approximately June 3, 2024, but no later than June 15, 2024, and will be used to satisfy in full, plus accrued interest, the 2026 Notes and to repurchase approximately $20 million of the 2025 Notes, plus accrued interest, following which approximately $37 million in aggregate principal amount of 2025 Notes will remain outstanding, which will constitute the entirety of our outstanding long term debt. Funds in the Tax Escrow Account will be used to satisfy our 2024 tax liability in respect of the Transactions and any funds not required for this purpose will be used to repurchase additional 2025 Notes. Funds in the Working Capital escrow will be used to satisfy any of our obligations resulting from a difference between Cloudbreak’s targeted and actual working capital as of the Closing, and any funds not used for this purpose will be used to repurchase additional 2025 Notes.
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 Working Capital Escrow Amount). To the extent that following such customary adjustment to the Cash Consideration, the Estimated Cash Consideration is greater than the Cash Consideration, Forest Buyer and the Company shall cause the Escrow Agent to make payment to Forest Buyer (or its designees) of an amount equal to the lesser of (i) the amount by which the Estimated Cash Consideration exceeds the Cash Consideration, and (ii) the Working Capital Escrow Funds, in each case, from the Working Capital Escrow Account, and after any such payments are made to Forest Buyer, the remaining Working Capital Escrow Funds (if any) shall be used for the repurchase of 2026 Notes and/or 2025 Notes.
Sale of Innovations Group
On February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of its wholly owned subsidiary, Innovations Group, to Belmar MidCo, Inc., 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 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.
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 goodwill, intangible assets, and other long-lived assets impairment in the 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 consolidated statements of operations.
Business Combinations
Measurement Period
We have included a measurement period table for each acquisition, identifying the line item or line items where an adjustment was deemed necessary and have quantified its impact. We finalized the valuation and completed the purchase price allocation for Glocal during the three months ended March 31, 2022, and finalized the valuation and completed the purchase price allocation for Cloudbreak during the three months ended June 30, 2022.
Acquisition of TTC
On January 25, 2021, UpHealth Holdings completed the 100% acquisition of TTC in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $45.9 million, net of cash acquired of $2.4 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.
We identified trade names as a definite-lived intangible asset.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of TTC. The goodwill is not deductible for tax purposes.
The following table sets forth the allocation of the purchase price to TTC’s identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of January 25, 2022.
| | | | | | | | | | | | | | | | | |
| (In thousands) | As of January 25, 2022 | | Measurement Period
Adjustments | | As of January 25, 2021 |
| Accounts receivable | $ | 1,311 | | | $ | (462) | | | $ | 1,773 | |
| Prepaid expenses and other | 187 | | | — | | | 187 | |
| Identifiable intangible assets | 1,125 | | | — | | | 1,125 | |
| Property and equipment | 531 | | | — | | | 531 | |
| Other assets | 281 | | | — | | | 281 | |
| Goodwill | 58,354 | | | 780 | | | 57,574 | |
| Total assets acquired | 61,789 | | | 318 | | | 61,471 | |
| Accounts payable | 625 | | | — | | | 625 | |
| Accrued expenses and other current liabilities | 602 | | | — | | | 602 | |
| Due to related parties | 4,200 | | | 2,807 | | | 1,393 | |
| Debt | 11,216 | | | (1,284) | | | 12,500 | |
| Deferred tax liabilities | 446 | | | (28) | | | 474 | |
| Total liabilities assumed | 17,089 | | | 1,495 | | | 15,594 | |
| Net assets acquired | $ | 44,700 | | | $ | (1,177) | | | $ | 45,877 | |
TTC submitted a request for forgiveness of its PPP loans in 2020 and they were forgiven in full and TTC was legally released from repaying the loans in the amount of $0.9 million and $0.3 million in February and March 2021, respectively. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended March 31, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $1.2 million. During the three months ended June 30, 2021, TTC recorded an accrual in the amount of $2.8 million for amounts owing to a related party as of the acquisition date, with an offsetting increase in goodwill. During the three months ended December 31, 2021, a $0.5 million accounts receivable reserve was recorded as a decrease in accounts receivable and an increase in goodwill.
The acquired intangible assets from TTC and their related estimated useful lives consisted of the following:
| | | | | | | | | | | |
| Approximate
Fair Value | | Estimated
Useful Life |
| (In thousands) | | | (in years) |
| Definite-life intangible assets – Trade names | $ | 1,125 | | | 3 |
| Total fair value of identifiable intangible assets | $ | 1,125 | | | |
Acquisition of Glocal
On November 20, 2020, UpHealth Holdings entered into a stock purchase agreement to acquire 43.46% of Glocal. On March 26, 2021, UpHealth Holdings completed a step acquisition of an additional 45.94% of Glocal, bringing our total ownership to 89.40%. The acquisition resulted in our ownership exceeding 50.0%, requiring consolidation of Glocal as of March 26, 2021. On May 14, 2021, June 21, 2021, and August 27, 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8%, and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of December 31, 2021. Total purchase price consideration included a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $131.5 million, net of cash acquired of $0.4 million. The acquisition brought additional software and support synergies to our Virtual Care Infrastructure offerings.
We identified developed technology and intellectual property as definite-lived intangible assets. Glocal has intellectual property and computer software associated with its digital dispensary technology and its telemedicine software. This software platform has historically been used to provide patient care to health populations in India via technology-based hospital centers run by the government in a fee-for-service model based on usage.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Glocal. The goodwill is not deductible for tax purposes.
The following table sets forth the allocation of the purchase price to Glocal's identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of March 26, 2022.
| | | | | | | | | | | | | | | | | |
| (In thousands) | As of March 26, 2022 | | Measurement Period Adjustments | | As of March 26,
2021 |
| Accounts receivable, net | $ | 1,350 | | | $ | (5,111) | | | $ | 6,461 | |
| Inventories | 325 | | | — | | | 325 | |
| Identifiable intangible assets | 45,289 | | | 7,250 | | | 38,039 | |
| Property, equipment, and work in progress | 26,767 | | | (13,959) | | | 40,726 | |
| Other current assets, including short term advances | 15 | | | (1,965) | | | 1,980 | |
| Other noncurrent assets, including long term advances | 509 | | | — | | | 509 | |
| Goodwill | 121,913 | | | 30,042 | | | 91,871 | |
| Total assets acquired | 196,168 | | | 16,257 | | | 179,911 | |
| Accounts payable | 579 | | | — | | | 579 | |
| Accrued expenses and other current liabilities | 9,692 | | | 1,421 | | | 8,271 | |
| Income tax liability | 2,420 | | | 2,420 | | | — | |
| Deferred tax liability | 8,649 | | | 8,649 | | | — | |
| Debt | 19,937 | | | (2,275) | | | 22,212 | |
| Noncontrolling interest | 29,278 | | | 11,889 | | | 17,389 | |
| Total liabilities assumed and noncontrolling interest | 70,555 | | | 22,104 | | | 48,451 | |
| Net assets acquired | $ | 125,613 | | | $ | (5,847) | | | $ | 131,460 | |
In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $5.8 million during the three months ended June 30, 2021. During the three months ended June 30, 2021, Glocal recorded a deferred tax liability in the amount of $9.9 million relating to identifiable intangible and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended September 30, 2021, Glocal recorded a reserve against its accounts receivable in the amount of $2.0 million and a liability related to redeemable preferred shares as of the acquisition date in the amount of $11.9 million with offsetting increases in goodwill. During the three months ended December 31, 2021, Glocal recorded reserves against accounts receivable and other assets in the amount of $5.1 million and additions to accrued expenses for unrecorded liabilities in the amount of $1.2 million with an offsetting increase to goodwill. During the three months ended December 31, 2021, Glocal recorded debt forgiveness in the amount of $2.3 million, with an offsetting decrease to goodwill, as well as a deferred tax liability in the amount of $2.6 million relating to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended March 31, 2022, Glocal recorded a reduction in the fair value of property, equipment, and work in progress in the amount of $14.0 million, an increase in the value of intangible assets in the amount of $7.3 million, and an increase in accrued expenses related to unrecorded liabilities in the amount of $0.2 million, with offsetting increases to goodwill, as well as a reduction to the deferred tax liability in the amount of $2.6 million related to these adjustments, with an offsetting decrease in goodwill.
The acquired intangible assets from Glocal and their related estimated useful lives consisted of the following:
| | | | | | | | | | | |
| Approximate
Fair Value | | Estimated
Useful Life |
| (In thousands) | | | (in years) |
| Definite-lived intangible assets—Technology and intellectual property | $ | 45,289 | | | 7 |
| Total fair value of identifiable intangible assets | $ | 45,289 | | | |
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
Acquisition of Innovations Group
On April 27, 2021, UpHealth Holdings completed the 100% acquisition of Innovations Group in exchange for a promissory note for future cash consideration, as defined in the merger agreement, and common stock interests in UpHealth Holdings totaling $169.8 million, net of cash acquired of $0.3 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.
We identified developed technology and intellectual property, customer relationships, trade names, and a lease as definite-lived intangible assets. Developed technology and intellectual property consisted of Innovations Group’s eMedplus software, which is a full-service prescription management system licensed by the U.S. Drug Enforcement Agency and industry groups. Customer relationships consisted of Innovations Group’s relationships with physician groups, who made up a significant portion of its revenue and used the platform as a prescription management and delivery service without high levels of attrition. Trade names consisted of the MedQuest brand, which customers identified as the supplier of the product they used, and which is licensed by the government and industry groups.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Innovations Group prior to its sale in May 2023, as discussed in Note 1, Organization and Business. The goodwill is not deductible for tax purposes.
The following table sets forth the allocation of the purchase price to Innovation’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete, as the measurement period ended as of April 27, 2022.
| | | | | | | | | | | | | | | | | |
| (In thousands) | As of April 27, 2022 | | Measurement Period Adjustments | | As of April 27, 2021 |
| Accounts receivable | $ | 47 | | | $ | — | | | $ | 47 | |
| Inventories | 2,693 | | | — | | | 2,693 | |
| Prepaid expenses and other | 530 | | | — | | | 530 | |
| Identifiable intangible assets | 29,115 | | | 790 | | | 28,325 | |
| Property and equipment | 3,642 | | | (4,295) | | | 7,937 | |
| Other assets | — | | | (22) | | | 22 | |
| Goodwill | 143,654 | | | (76) | | | 143,730 | |
| Total assets acquired | 179,681 | | | (3,603) | | | 183,284 | |
| Accounts payable | 472 | | | — | | | 472 | |
| Accrued expenses and other current liabilities | 772 | | | (8) | | | 780 | |
| Deferred revenue | 302 | | | — | | | 302 | |
| Deferred tax liability | 8,017 | | | 180 | | | 7,837 | |
| Debt | — | | | (4,069) | | | 4,069 | |
| Noncontrolling interests | — | | | — | | | — | |
| Total liabilities assumed and noncontrolling interest | 9,563 | | | (3,897) | | | 13,460 | |
| Net assets acquired | $ | 170,118 | | | $ | 294 | | | $ | 169,824 | |
The acquired intangible assets from Innovations Group and their related estimated useful lives consisted of the following:
| | | | | | | | | | | |
| Approximate
Fair Value | | Estimated
Useful Life |
| (In thousands) | | | (in years) |
| Definite-lived intangible assets—Trade names | $ | 10,925 | | | 10 |
| Definite-lived intangible assets—Technology and intellectual property | 8,075 | | | 5-7 |
| Definite-lived intangible assets—Customer relationships | 9,325 | | | 10 |
| Definite-lived intangible assets—Lease | 790 | | | 4.8 |
| Total fair value of identifiable intangible assets | $ | 29,115 | | | |
As discussed in Note 1, Organization and Business, on February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of Innovations Group to Belmar pursuant to a stock purchase agreement dated February 26, 2023, by and among UpHealth, UpHealth Holdings, Innovations Group, and Belmar. 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 year ended December 31, 2022 and the period from January 1, 2023 through May 10, 2023 and the financial position of Innovations Group as of December 31, 2022 are included in our consolidated financial statements, and the financial results for the period from May 11, 2023 to December 31, 2023 and the financial position as of December 31, 2023 are not included in our consolidated financial statements.
Acquisition of Cloudbreak
On June 9, 2021, UpHealth (fka GigCapital2) completed the Cloudbreak Business Combination in an exchange of cash, notes, and common stock interests in UpHealth totaling $142.0 million, net of cash acquired of $0.9 million. The acquisition brings additional software and support synergies to our Virtual Care Infrastructure offerings.
We identified developed technology and intellectual property, customer relationships, and trade names as definite-lived intangible assets. Developed technology and intellectual property primarily consisted of Martti™, Cloudbreak’s core telehealth offering, which is a remote video enabled interpretation software that puts certified medical interpreters alongside clinical care teams at video endpoints in provider networks nationwide. Customer relationships consist of Cloudbreak's core customers, which are comprised of hospitals and health systems, Federally Qualified Healthcare Clinics, urgent care centers, standalone medical practices, and schools nationwide. Trade names consist of the Martti™ trademark.
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Cloudbreak. The goodwill is partially deductible for tax purposes.
The following table sets forth the allocation of the purchase price to Cloudbreak’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete, as the measurement period ended as of June 9, 2022.
| | | | | | | | | | | | | | | | | |
| (In thousands) | As of June 9, 2022 | | Measurement Period Adjustments | | As of June 9, 2021 |
| Accounts receivable | $ | 5,551 | | | $ | 741 | | | $ | 4,810 | |
| Prepaid expenses and other | 921 | | | — | | | 921 | |
| Identifiable intangible assets | 32,475 | | | — | | | 32,475 | |
| Property and equipment | 7,065 | | | 183 | | | 6,882 | |
| Other assets | 631 | | | (411) | | | 1,042 | |
| Goodwill | 107,219 | | | (3,749) | | | 110,968 | |
| Total assets acquired | 153,862 | | | (3,236) | | | 157,098 | |
| Accounts payable | 2,518 | | | — | | | 2,518 | |
| Accrued expenses and other current liabilities | 1,267 | | | 362 | | | 905 | |
| Deferred revenue | 15 | | | — | | | 15 | |
| Deferred tax liability | 3,912 | | | (3,994) | | | 7,906 | |
| Other long-term liabilities | 382 | | | 382 | | | — | |
| Debt | 3,752 | | | — | | | 3,752 | |
| Total liabilities assumed | 11,846 | | | (3,250) | | | 15,096 | |
| Net assets acquired | $ | 142,016 | | | $ | 14 | | | $ | 142,002 | |
During the three months ended June 30, 2022, Cloudbreak recorded a $0.1 million decrease in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting decrease in goodwill.
The acquired intangible assets from Cloudbreak and their related estimated useful lives consisted of the following:
| | | | | | | | | | | |
| Approximate
Fair Value | | Estimated
Useful Life |
| (In thousands) | | | (in years) |
| Definite-lived intangible assets—Trade names | $ | 12,975 | | | 10 |
| Definite-lived intangible assets—Technology and intellectual property | 5,825 | | | 5 |
| Definite-lived intangible assets—Customer relationships | 13,675 | | | 10 |
| Total fair value of identifiable intangible assets | $ | 32,475 | | | |
As discussed in Note 1, Organization and Business, on November 16, 2023, we entered into the Membership Interests Purchase Agreement with Cloudbreak and Forest Buyer, pursuant to which we agreed to sell all of the outstanding equity interests of Cloudbreak and the wholly-owned subsidiaries of Cloudbreak to Forest Buyer. On March 15, 2024, we completed the closing of the Sale. Pursuant to the terms of the Membership Interests Purchase Agreement, the Cash Consideration for the Sale was an amount equal to $180.0 million, with adjustments for debt as of the Calculation Time, Cloudbreak’s net working capital as of the Calculation Time, and unpaid expenses related to the Transactions. The Estimated Cash Consideration at the Closing was $180.0 million, less adjustments for the estimated closing debt and cash and the estimated unpaid expenses related to the Transactions.
Acquisition, Integration and Transformation Costs
For the years ended December 31, 2023 and 2022, we have incurred $44.5 million and $20.1 million, respectively, of costs related to the acquisition, integration, and transformation of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations Group), and Cloudbreak, which are included in acquisition, integration, and transformation costs in the consolidated statements of operations.
4. Assets and Liabilities Held for Sale
Innovations Group
On February 26, 2023, we entered into an agreement to sell Innovations Group, one of our subsidiaries within our Services segment. The transaction is closed in the second quarter of 2023. 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.
In connection with the held for sale classification, we recorded a total loss of $1.8 million on the remeasurement of the disposal group to its fair value, less cost to sell, which was recorded in goodwill and intangible asset impairment in the consolidated statement of operations.
Total assets and liabilities of the disposal group held for sale on the December 31, 2022 consolidated balance sheet consisted of the following:
| | | | | | | | |
| (In thousands) | | December 31, 2022 |
| Accounts receivable, net | | $ | 78 | |
| Inventories | | 2,058 | |
| Prepaid expenses and other current assets | | 612 | |
| Property, plant and equipment, net | | 4,602 | |
| Operating lease right-of-use assets | | 1,298 | |
| Intangible assets, net | | 23,063 | |
| Goodwill | | 35,353 | |
| Less: Impairment | | (1,791) | |
| Total assets held for sale | | $ | 65,273 | |
| | |
| Accounts payable | | $ | 1,104 | |
| Accrued expenses | | 1,544 | |
| Deferred revenue | | 242 | |
| Lease liabilities, current | | 429 | |
| Deferred tax liabilities | | 6,918 | |
| Lease liabilities, noncurrent | | 869 | |
| Total liabilities held for sale | | $ | 11,106 | |
5. Revenues
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
Revenues by service offering consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Services | $ | 110,039 | | | $ | 110,953 | |
| Licenses and subscriptions | 6,548 | | | 12,566 | |
| Products | 13,411 | | | 35,284 | |
| Total revenues | $ | 129,998 | | | $ | 158,803 | |
Revenues by geography consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Americas | $ | 129,998 | | | $ | 151,899 | |
| Asia | — | | | 6,904 | |
| Total revenues | $ | 129,998 | | | $ | 158,803 | |
Our revenues are entirely derived from the healthcare industry. Revenue recognized over-time was approximately 87% and 74% of total revenues during the years ended December 31, 2023 and 2022, respectively.
Contract Assets
There were no impairments of contract assets, consisting of unbilled receivables, during fiscal 2023 and 2022, respectively.
The change in contract assets was as follows:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Unbilled receivables, beginning of period | $ | 694 | | | $ | 784 | |
| Reclassifications to billed receivables | (694) | | | (784) | |
| Revenues recognized in excess of period billings | 603 | | | 694 | |
| Deconsolidation of subsidiaries | (603) | | | — | |
| Unbilled receivables, end of period | $ | — | | | $ | 694 | |
Contract Liabilities
The change in contract liabilities, consisting of deferred revenue, was as follows:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Deferred revenue, beginning of period | $ | 2,738 | | | $ | 2,649 | |
| Revenues recognized from balances held at the beginning of the period | (2,738) | | | (2,027) | |
| Revenues deferred from period collections on unfulfilled performance obligations | 3,694 | | | 2,980 | |
| Deconsolidation of subsidiary | (3,646) | | | (622) | |
| Reclassified to liabilities held for sale (See Note 4) | — | | | (242) | |
| Deferred revenue, end of period | $ | 48 | | | $ | 2,738 | |
Revenue recognized ratably over time is generally billed in advance and includes SaaS internet hosting, subscriptions, construction of digital dispensaries, and related consulting, implementation, services support, and advisory services.
Revenue recognized as delivered over time includes professional services billed on a time and materials basis, and fixed fee professional services and training classes that are primarily billed, delivered, and recognized within the same reporting period.
Approximately 2.1% of revenue recognized during the year ended December 31, 2023 was from the deferred revenue balance existing as of December 31, 2022. Approximately 1.3% of the revenue recognized during the year ended December 31, 2022 was from the deferred revenue balance existing as of December 31, 2021.
6. Supplemental Financial Statement Information
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
Impairment of goodwill, intangible assets, and other long-lived assets consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Impairment of goodwill | $ | 42,924 | | | $ | 94,643 | |
| Impairment of intangible assets | 4,203 | | | 17,627 | |
| Impairment of long-lived assets | 2,831 | | | 3,969 | |
| Total impairment of goodwill, intangible assets, and other long-lived assets: | $ | 49,958 | | | $ | 116,239 | |
For the year ended December 31, 2023, we recorded a $42.9 million goodwill impairment charge, consisting of a $34.6 million goodwill impairment charge in our Integrated Care Management segment, as discussed above, a $6.4 million goodwill impairment charge in our Services segment and a $1.9 million goodwill impairment charge 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.
An impairment charge of $4.2 million was recognized for the year ended December 31, 2023 in the Integrated Care Management segment. For the year ended December 31, 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. For the year ended December 31, 2022, we recorded a $94.6 million goodwill impairment charge, consisting of a $87.5 million goodwill impairment charge in our Integrated Care Management segment, as discussed above, a $5.5 million increase in goodwill resulting from measurement period adjustments in our Virtual Care Infrastructure
segment in the three months ended March 31, 2022, which was immediately impaired, and a $1.6 million goodwill impairment charge in our Services segment.
Property and equipment consisted of the following:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Leasehold improvements | — | | | 868 | |
| Electrical and other equipment | — | | | 21 | |
| Computer equipment, furniture and fixtures | 16,738 | | | 16,222 | |
| Vehicles | 9 | | | 302 | |
| Capitalized software development costs | 5,776 | | | 4,404 | |
| Construction in progress | 1,373 | | | 2,590 | |
| 23,896 | | | 24,407 | |
| Accumulated depreciation and amortization | (14,369) | | | (10,338) | |
| Total property and equipment, net | $ | 9,527 | | | $ | 14,069 | |
As discussed in Note 4, Assets and Liabilities Held for Sale, $4.6 million of property and equipment are included in assets held for sale, noncurrent, in the consolidated balance sheet as of December 31, 2022.
Depreciation expense was $6.5 million and $7.8 million for the years ended December 31, 2023 and 2022, respectively.
For the year ended December 31, 2023, we recorded an impairment charge on long-lived assets of $2.8 million in the Integrated Care Management segment.
Accrued expenses consisted of the following:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Accrued professional fees | $ | 3,265 | | | $ | 14,245 | |
| Accrued products and licenses | — | | | 17,820 | |
| Accrued payroll and bonuses | 6,283 | | | 5,163 | |
| Accrued interest on debt | 846 | | | 741 | |
| Other accruals | 196 | | | 794 | |
| Total accrued expenses | $ | 10,590 | | | $ | 38,763 | |
Other liabilities, noncurrent consisted of the following:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Derivative liability, noncurrent | $ | 59 | | | $ | 56 | |
| Warrant liabilities, noncurrent | 17 | | | 9 | |
| Other liabilities, noncurrent | — | | | 662 | |
| Total other liabilities, noncurrent | $ | 76 | | | $ | 727 | |
Other income, net, including interest income consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Gain (loss) on fair value of derivative liability | $ | (3) | | | $ | 7,529 | |
| Gain (loss) on fair value of warrant liabilities | (8) | | | 242 | |
| Other income, net, including interest income | 1,079 | | | 121 | |
| Total other income, net, including interest income | $ | 1,068 | | | $ | 7,892 | |
7. Intangible Assets
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
The following table summarizes the gross carrying amount and accumulated amortization for intangible assets as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Names | | Technology and Intellectual Property | | Customer Relationships | | Total |
| Gross carrying amount as of December 31, 2023 | $ | 12,975 | | | $ | 5,825 | | | $ | 13,675 | | | $ | 32,475 | |
| Accumulated amortization | (3,329) | | | (2,928) | | | (3,501) | | | (9,758) | |
| Intangible assets, net as of December 31, 2023 | $ | 9,646 | | | $ | 2,897 | | | $ | 10,174 | | | $ | 22,717 | |
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 | (3,247) | | | (4,784) | | | (4,096) | | | (12,127) | |
| Intangible assets, net as of December 31, 2022 | $ | 11,995 | | | $ | 5,850 | | | $ | 13,517 | | | $ | 31,362 | |
The changes in carrying amounts of intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Names | | Technology and Intellectual Property | | Customer Relationships | | Lease | | Total |
| Balance as of December 31, 2021 | $ | 29,506 | | | $ | 54,521 | | | $ | 30,612 | | | $ | 674 | | | $ | 115,313 | |
| Additions | — | | | 7,250 | | | — | | | — | | | 7,250 | |
| Amortization | (3,003) | | | (7,711) | | | (3,147) | | | (167) | | | (14,028) | |
| Impairments | (5,428) | | | (6,009) | | | (6,190) | | | — | | | (17,627) | |
| Deconsolidation of equity investment | — | | | (34,449) | | | — | | | — | | | (34,449) | |
| Intangible assets, net reclassified to assets held for sale (see Note 4) | (9,080) | | | (5,718) | | | (7,758) | | | (507) | | | (23,063) | |
| Foreign exchange | — | | | (2,034) | | | — | | | — | | | (2,034) | |
| Balance as of December 31, 2022 | 11,995 | | | 5,850 | | | 13,517 | | | — | | | 31,362 | |
| Amortization | (1,494) | | | (1,403) | | | (1,545) | | | — | | | (4,442) | |
| Impairments | (855) | | | (1,550) | | | (1,798) | | | — | | | (4,203) | |
| Balance as of December 31, 2023 | $ | 9,646 | | | $ | 2,897 | | | $ | 10,174 | | | $ | — | | | $ | 22,717 | |
An impairment charge of $4.2 million was recognized for the year ended December 31, 2023 in the Integrated Care Management segment. For the year ended December 31, 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.
As of December 31, 2022, $23.1 million of intangible assets were included in assets held for sale, noncurrent, in the consolidated balance sheets. See Note 4, Assets and Liabilities Held for Sale, for further information.
The estimated useful lives of trade names are 3-10 years, the estimated useful life of technology and intellectual property is 5-7 years, and the estimated useful life of customer relationships is 10 years.
Amortization expense was $4.4 million and $14.0 million for the years ended December 31, 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 |
| 2024 | $ | 1,359 | | | $ | 1,204 | | | $ | 1,403 | | | $ | 3,966 | |
| 2025 | 1,359 | | | 1,204 | | | 1,403 | | | 3,966 | |
| 2026 | 1,359 | | | 489 | | | 1,403 | | | 3,251 | |
| 2027 | 1,359 | | | — | | | 1,403 | | | 2,762 | |
| 2028 | 1,359 | | | — | | | 1,403 | | | 2,762 | |
| Thereafter | 2,851 | | | — | | | 3,159 | | | 6,010 | |
| $ | 9,646 | | | $ | 2,897 | | | $ | 10,174 | | | $ | 22,717 | |
8. Goodwill
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 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 goodwill impairment charge in our Integrated Care Management segment.
For the year ended December 31, 2023, we recorded a $42.9 million goodwill impairment charge, consisting of a $34.6 million goodwill impairment charge in our Integrated Care Management segment, as discussed above, a $6.4 million goodwill impairment charge in our Services segment and a $1.9 million goodwill impairment charge 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.
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
As a result of indicators of impairment identified during 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 changes in our market valuation and financial performance. As a result, in the three months ended September 30, 2022, we 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.
For the year ended December 31, 2022, we recorded a $94.6 million goodwill impairment charge, consisting of a $87.5 million goodwill impairment charge in our Integrated Care Management segment, as discussed above, a $5.5 million increase in goodwill resulting from
measurement period adjustments in our Virtual Care Infrastructure segment in the three months ended March 31, 2022, which was immediately impaired, and a $1.6 million goodwill impairment charge in our Services segment, as discussed above.
As discussed in Note 4, Assets and Liabilities Held for Sale, $35.4 million of goodwill was included in assets held for sale, noncurrent, in the consolidated balance sheet as of December 31, 2022.
The changes in the carrying amount of goodwill consisted of the following:
| | | | | |
| (In thousands) | Goodwill |
| Balance as of December 31, 2021 | 284,268 | |
| Measurement period adjustments | 5,403 | |
| Goodwill reclassified to assets held for sale (see Note 4) | (35,353) | |
| Impairments | (94,643) | |
| Balance as of December 31, 2022 | $ | 159,675 | |
| Impairments | (42,924) | |
| Deconsolidation of subsidiaries | (36,441) | |
| Balance as of December 31, 2023 | $ | 80,310 | |
9. Investment in Unconsolidated Entities
On November 20, 2020, we entered into a stock purchase agreement to acquire 43.46% of Glocal in exchange for a promissory note for future cash consideration, as defined in the stock purchase agreement, and common stock interests in UpHealth, for a purchase price of $57.4 million. Since we did not have a controlling financial interest, this investment was presented as an equity method investment in our consolidated balance sheets for the year ended December 31, 2020. For the period from November 20, 2020 through December 31, 2020, our share of the net income (loss) of Glocal included amortization expense of $0.5 million related to intangible assets being amortized into income over the estimated remaining lives of the assets. For the period from January 1, 2021 through March 25, 2021, our share of the net income (loss) of Glocal included amortization expense of $1.1 million.
We acquired a controlling financial interest in Glocal on March 26, 2021, increasing our ownership to 89.40%, and recognized a fair value gain on the step-acquisition of $0.6 million, prior to consolidation.
On May 14, 2021, June 21, 2021 and August 27, 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8%, and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of June 30, 2022.
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 consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
10. Debt
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
Debt consisted of the following:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| 2025 Notes | $ | 57,227 | | | $ | 67,500 | |
| 2026 Notes | 115,000 | | | 115,000 | |
| Total debt | 172,227 | | | 182,500 | |
| Less: unamortized original issue and debt discount | (25,703) | | | (36,538) | |
| Total debt, net of unamortized original issue and debt discount | 146,524 | | | 145,962 | |
| Less: current portion of debt | — | | | — | |
| Noncurrent portion of debt | $ | 146,524 | | | $ | 145,962 | |
2025 Senior Secured Convertible Notes and Indenture
On August 12, 2022, we entered into the Indenture governing our 2025 Notes with Wilmington Trust, National Association, a national banking association (“Wilmington Trust”) 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 and 14.41% for our December 15, 2023 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 we 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 our 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.
On February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into a supplemental indenture and amendment to security and pledge agreement which amended the terms of the Indenture governing our 2025 Notes. See Supplemental Indentures and Waivers and Rescission Agreements below for further information.
Total interest expense related to the 2025 Notes consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Contractual variable interest expense | $ | 9,163 | | | $ | 3,127 | |
| Debt issuance costs amortization | 846 | | | 241 | |
| Total interest expense | $ | 10,009 | | | $ | 3,368 | |
Included in the debt issuance costs amortization in the year ended December 31, 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 December 2023, Wilmington Trust, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.38% for our March 15, 2024 interest payment date. In March 2024, Wilmington Trust, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.33%. for our June 15, 2024 interest payment date.
2026 Secured Convertible Notes and Indenture
On January 20, 2021, GigCapital2 entered into convertible note subscription agreements, each dated January 20, 2021 and amended on June 8, 2021, with certain institutional investors, pursuant to which GigCapital2 agreed to issue and sell unsecured convertible notes in a private placement to close immediately prior to the closing of the Business Combinations.
On June 15, 2021, in connection with the closing of the Business Combinations, we entered into an Indenture with Wilmington Trust, National Association, a national banking association, in its capacity as trustee thereunder, in respect of the $160.0 million in aggregate principal amount of unsecured convertible notes due in 2026 (the “2026 Notes”) that were issued to certain institutional investors. The 2026 Notes bear interest at a rate of 6.25% per annum, payable semi-annually, and 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 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 December 31, 2023 and 2022, the fair value of the derivative was $0.1 million and $0.1 million, respectively, all of which was included in other liabilities, noncurrent, in our consolidated balance sheets.
On August 12, 2022, concurrently and in connection with the offering 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. Total other expense for the year ended December 31, 2022 included a loss on extinguishment of debt of $14.6 million attributed to the unexpended accretion and the write-off of the derivative value on the repurchased 2026 Notes. 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.
On February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into a supplemental indenture which amended the terms of the Indenture governing our 2026 Notes. See Supplemental Indentures and Waivers and Rescission Agreements below for further information.
Total interest expense related to the 2026 Notes consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands) | 2023 | | 2022 |
| Contractual variable interest expense | $ | 7,839 | | | $ | 8,981 | |
| Derivative accretion | 8,839 | | | 11,108 | |
| Debt issuance costs amortization | 1,150 | | | 1,439 | |
| Total interest expense | $ | 17,828 | | | $ | 21,528 | |
Supplemental Indentures
On February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, we entered into the First Lien Supplemental Indenture and Amendment to Security Agreement, which amends the terms of the indenture, dated as of August 18, 2022, by and among the Company, the Guarantors (as defined below) party thereto and Wilmington Trust, in its capacity as trustee and collateral agent thereunder, relating to the 2025 Notes (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the First Lien Indenture), and the security and pledge agreement, dated as of August 18, 2022, by and among the Company, the Guarantors from time to time party thereto and Wilmington Trust, as collateral agent, relating to the 2025 Notes (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the First Lien Documents. The First Lien Supplemental Indenture and Amendment to Security Agreement amends the terms of the First Lien Indenture to, among other things, (a) provide for certain changes to certain of the definitions in the First Lien Indenture, including “Permitted Indebtedness,” “Permitted Investments,” “Permitted Liens,” “Asset Sale,” “Excluded Subsidiary,” and “Significant Subsidiary;” (b) provide for certain modifications to covenants of the Company and certain changes with respects to events of default; (c) provide a carveout for the Sale from the terms of the First Lien Indenture with respect to mergers and sale transactions; (d) delete the rule prohibiting repurchases in connection with a Fundamental Change arising from the Sale at the time the 2025 Notes have been accelerated, and (e) modify the provisions in respect of repurchases of 2025 Notes as a result of a Fundamental Change for the Consenting 2025 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 certain segregated escrow accounts to be established prior to the Closing pursuant to one
or more escrow agreements in a customary form to be agreed upon as provided under the Membership Interests Purchase Agreement by Forest Buyer, the Company, the Required Noteholders (as defined in the Proxy Statement) and an escrow agent), in each case, at a 5.00% premium to the principal amount of such 2025 Notes pursuant to the terms of the Transaction Support Agreement.
Furthermore, the First Lien Supplemental Indenture and Amendment to Security Agreement amends the terms of the First Lien Security Agreement to (i) reduce the deadline for timely performance of certain covenants by the Company and the Guarantors from 20 business days to 7 business days, and (ii) provide that in the event the collateral agent exercises certain voting and other rights in respect of the capital stock and other securities of the Guarantors upon the occurrence or during the continuation of an event of default under the First Lien Indenture, the collateral agent’s notice to a Guarantor may be provided concurrently with such exercise.
In addition, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, the Company entered into the Supplemental Indentures by and between the Company and BNY Mellon, in its capacity as successor trustee and as collateral agent thereunder (as amended, restated, supplemented or otherwise modified from time to time, including pursuant to the Indentures), the terms of which amend the Second Lien Indenture to, among other things, (a) add the Guarantors, as a guarantor of the obligations under the 2026 Notes pursuant to the Second Lien Indenture; (b) cause UpHealth and the Guarantors to grant a second-priority security interest on the same collateral that secures the 2025 Notes; (c) in connection with those items described in clauses (a) and (b) above, incorporate provisions similar to those in the First Lien Indenture, including with respect to covenants and events of default, as previously disclosed by the Company and as modified by the First Lien Supplemental Indenture; and (d) provide a carveout for the Sale from the terms of the Second Lien Indenture with respect to mergers and sale transactions.
Pursuant to the terms of the Second Lien Indenture, the 2026 Notes are secured by a second-priority lien, subject only to certain permitted liens, in substantially all assets of the Company and the Guarantors, subject to customary exclusions, pursuant to the Second Lien Documents, by and among the Company, the Guarantors and BNY Mellon, as collateral agent on behalf of the 2026 Noteholders.
At any time when the Company and its subsidiaries receive Net Proceeds (as defined in the Second Lien Indenture) from an Asset Sale (as defined in the Second Lien Indenture), so long as the 2025 Notes have been repaid in full or to the extent the Company’s Fundamental Change Repurchase Offer in respect of the 2025 Notes has been declined by the holders of the 2025 Notes then outstanding, the Company will make an Asset Sale Offer to all 2026 Noteholders to repurchase 2026 Notes for an aggregate amount of cash equal to 100.0% of such Net Proceeds (excluding, for the avoidance of doubt, any Net Proceeds previously applied to the repurchase of any 2025 Notes or 2026 Notes pursuant to any preceding Asset Sale Offer), at a repurchase price per 2026 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any, plus any remaining amounts that would be owed to, but not excluding, the Maturity Date.
In addition, each party to the Supplemental Indentures has expressly agreed that the Supplemental Indentures will be deemed not to affect any rights or obligations of any subsidiary of the Company that is, as of the date of the Supplemental Indentures, a debtor or debtor in possession in the Chapter 11 Proceedings. In accordance with the terms of the Indentures, the Company received consents to the Supplemental Indentures from the holders of $43,357,000 in aggregate principal amount of 2025 Notes, representing approximately 75.76% of the aggregate principal amount of the outstanding 2025 Notes, and the holders of $86,329,000 in aggregate principal amount of 2026 Notes, representing approximately 75.07% of the aggregate principal amount of the outstanding 2026 Notes.
The amendments set forth in the Supplemental Indentures will become effective as of the date upon which the Company has paid all reasonable costs and expenses, disbursements and advances incurred or made by Wilmington Trust and BNY Mellon, respectively, in connection with the Supplemental Indentures to the extent due and payable pursuant to the terms of the First Lien Documents and the Second Lien Supplemental Indenture, respectively. As previously disclosed by the Company in the November 20 Current Report, pursuant to the terms of the Transaction Support Agreement, the Supplemental Indentures may not be amended, modified or terminated in a manner that is material and adverse to Forest Buyer without its prior written consent.
In connection with the entry into the Supplemental Indentures, on February 9, 2024, Wilmington Trust, in its capacity as trustee and collateral agent on behalf of the 2025 Noteholders, and BNY Mellon, in its capacity as successor trustee and collateral agent on behalf of the 2026 Noteholders, entered into an intercreditor agreement, dated as of February 9, 2024, and acknowledged by the Company and the Guarantors (the “Intercreditor Agreement”), the terms of which, among other things, confirm the relative priority of their respective Liens (as defined in the applicable Indenture) in the Collateral (as defined in the applicable Indenture) and provide for the application, in accordance with such priorities, of proceeds of such Collateral.
The foregoing description of the First Lien Supplemental Indenture and Amendment to Security Agreement, the Second Lien Supplemental Indenture, and the Second Lien Security Agreement and the transactions contemplated thereby is not complete and is subject to, and qualified in its entirety by reference to, the full text of the First Lien Supplemental Indenture and Amendment to Security Agreement, the Second Lien Supplemental Indenture, and the Second Lien Security Agreement, respectively.
Waivers and Rescission Agreements
In connection with the entry into the Supplemental Indentures, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, the Company, Cloudbreak and the Consenting 2025 Noteholders entered into the Waiver and Recission Agreement, pursuant to which the Consenting 2025 Noteholders have agreed to waive, with respect to the Company and Cloudbreak, the specified events of default under Indenture governing the 2025 Notes and rescind, with respect to the Company and Cloudbreak, the 2025 Notes Acceleration.
Furthermore, on February 9, 2024, in accordance with the terms of the Membership Interests Purchase Agreement and the Transaction Support Agreement, the Company and the Consenting 2026 Noteholders entered into the Waivers and Rescission Agreements, pursuant to which the Consenting 2026 Noteholders have agreed to waive, with respect to the Company and Cloudbreak, the events of default under Indenture governing the 2026 Notes.
Upon the effectiveness of the Waivers and Rescission Agreements and until the earlier of (i) the completion of the Company’s initial Fundamental Change Repurchase Offer in respect of the 2026 Notes or (ii) the termination of the Transaction Support Agreement in accordance with the terms thereof, each of the Consenting Noteholders has agreed not to consent to, execute or otherwise participate in any way in any declaration of acceleration of the principal amount of the 2025 Notes and 2026 Notes (as applicable) as a result of the failure of the Company to issue a Fundamental Change Company Notice (as defined in the applicable Indenture) or to conduct or consummate a Fundamental Change repurchase pursuant to Article 15 of the Indenture, in each case, in the event of the Delisting Fundamental Change.
The events of default were waived and we do not anticipate any provisions will be violated during the next reporting period, accordingly, we classified the $146.5 million of debt as noncurrent at December 31, 2023.
Provider Relief Funds
Provider Relief Funds (“PRF”) were made available by the U.S. Department of Health and Human Services (“HHS”) as part of a $100 billion appropriation as part of the CARES Act’s Provider Relief Fund. In April and July 2020, one of our subsidiaries received PRF proceeds aggregating $0.2 million, and in January 2021, another subsidiary received PRF proceeds aggregating $0.5 million. The PRF amounts received will not require repayment as long as the subsidiaries comply with certain terms and conditions outlined by HHS. The terms and conditions first require the subsidiaries to identify health care-related expenses attributed to COVID-19 that another source has not reimbursed or is obligated to reimburse. If those expenses do not exceed the funding received, the subsidiaries then apply the funds to patient care lost revenue. On January 15, 2021 HHS released a Post-Payment Notice of Reporting Requirements Notice that provides healthcare providers three options to calculate patient care lost revenue.
During the three months ended March 31, 2022, one subsidiary had used $0.1 million of the PRF funds and returned the remaining $0.1 million to HHS and the other subsidiary had used all $0.5 million of the PRF funds under the terms and conditions and restrictions for the CARES Act relative to these funds.
Related Party Debt
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our consolidated financial statements.
The following information discloses our related party debt at deconsolidation:
One of our subsidiaries had notes payable to related parties totaling $0.2 million and $0.2 million as of September 30, 2023 and December 31, 2022, respectively. The notes bear interest at rates of 3.50% per annum. The notes are payable in eight quarterly installments starting from October 1, 2022, or upon a liquidity event, as defined in the note agreement. The accrued interest payable was zero as of both September 30, 2023 and December 31, 2022. Interest expense was $8 thousand and $42 thousand for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively. Payments of $0.1 million and $0.4 million were made during the years ended December 31, 2022 and 2021, respectively.
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 December 31, 2023 and 2022, the seller notes totaled zero. Interest expense was $1.2 million for the year ended December 31, 2022.
Contractual Maturities
As of December 31, 2023, long-term debt contractual maturities, excluding unamortized original issue discount, were as follows:
| | | | | |
| (In thousands) | |
| 2024 | $ | — | |
| 2025 | 57,227 | |
| 2026 | 115,000 | |
| 2027 | — | |
| 2028 | — | |
| Total | $ | 172,227 | |
11. 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 December 31, 2023 and 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.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. Fair value measurements are categorized into one of three levels of the fair value hierarchy based on the lowest level of significant input used. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. These estimates may differ from the actual amounts that we could realize upon settlement.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
•Quoted prices for similar assets/liabilities in active markets;
•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and
•Inputs that are derived principally from or corroborated by other observable market data.
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 December 31, 2023, we had no cash equivalents. As of 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 during the year ended December 31, 2023 or 2022.
The fair value and amortized cost of our cash equivalents - money market funds were both zero as of December 31, 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
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. As of December 31, 2023 and 2022, the fair value of the derivative was $0.1 million and $0.1 million, respectively, all of which were included in other liabilities, noncurrent, in the consolidated balance sheets. See Note 10, Debt, for further information. Total other income for the years ended December 31, 2023 and 2022, included a $3.0 thousand loss on the fair value of derivative liability and a $7.5 million gain on the fair value of the derivative liability, 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:
| | | | | | | | | | | |
| | December 31, 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 years-4 years |
| Future share price | $5.90-$594.30 | | $0.10-$405.60 |
The change in the fair value of the Level 3 derivative liability for the years ended December 31, 2023 and 2022 are as follows:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Fair value, beginning of period | $ | 56 | | | $ | 7,977 | |
| Settlement | — | | | (392) | |
| Change in fair value | 3 | | | (7,529) | |
| Fair value, end of period | $ | 59 | | | $ | 56 | |
The settlement is included in loss on extinguishment of debt in the consolidated statement of operations.
2021 Private Placement Warrants and 2021 PIPE Warrants
We have classified the 2021 Private Placement Warrants and 2021 PIPE Warrants (the “2021 Private Placement Warrants”) and the 2021 PIPE Warrants (the “2021 PIPE Warrants”) as liabilities at fair value, due to their redemption characteristics, with subsequent changes in their fair values to be recognized in the consolidated financial statements at each reporting date. See Note 12, Capital Structure, for further information. As of December 31, 2023, the fair value of the 2021 Private Placement Warrants and the 2021 PIPE Warrants was determined to be $0.02 per warrant, totaling $11 thousand and $6 thousand, respectively, and are included in warrant liabilities in the 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 warrant liabilities in the 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 consolidated statements of operations, consisted of the following:
| | | | | | | | | | | |
| (In thousands) | For the year ended December 31, |
| 2023 | | 2022 |
| Gain (loss) on fair value of Private Placement warrant liabilities | $ | (5) | | | $ | 158 | |
| Gain (loss) on fair value of PIPE warrant liabilities | (3) | | | 84 | |
| $ | (8) | | | $ | 242 | |
The fair value of the Private Placement Warrants and PIPE Warrants is considered a Level 2 valuation as we have derived their value by using quoted market prices. The transfer of the Private Placement Warrants and PIPE Warrants to anyone other than the purchasers or their permitted transferees, would result in these Private Placement Warrants and PIPE Warrants having substantially the same terms as the Public Warrants, which are traded in active markets.
There were no transfers between fair value levels during the years ended December 31, 2023 or 2022.
12. Capital Structure
Preferred Stock
Our Second Amended and Restated Certificate of Incorporation authorizes the issuance of 1,000,000 shares of preferred stock, par value $0.0001 with such designation, rights and preferences as may be determined from time to time by our board of directors. As of December 31, 2023 and 2022 there were no shares of preferred stock outstanding.
Common Stock
Our Second Amended and Restated Certificate of Incorporation authorizes the issuance of 300,000,000 shares of common stock, par value of $0.0001. As of December 31, 2023, there were 18,841,142 shares of common stock issued, and 18,671,142 shares of common stock outstanding. As of December 31, 2022, there were 15,224,431 shares of common stock issued and 15,054,431 shares of common stock outstanding.
As discussed in Note 1, Organization and Business, we have retroactively adjusted the shares issued and outstanding prior to December 8, 2022, to give effect to the 10:1 Reverse Stock Split.
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance as of December 31, 2023 (recorded on a post-reverse split basis) were as follows:
| | | | | |
| (In thousands) | Number of Shares |
| Restricted stock units outstanding under 2021 EIP | 522 | |
| Restricted stock units outstanding under 2023 IEIP | 200 | |
| Stock options outstanding under Cloudbreak Plan | 48 | |
| 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 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 2021 Private Warrants | 57 | |
| Shares issuable upon conversion of 2021 PIPE Warrants | 30 | |
| Shares available for future grant under 2021 EIP | 1,316 | |
| Shares available for future grant under 2023 IEIP | 400 | |
| 15,235 | |
2021 Public Warrants
Warrants (the “Public Warrants”) issued in connection with GigCapital2’s initial public offering are exercisable for $115.00 per share (on a post-reverse split basis), and the exercise price and number of Public Warrant shares issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or recapitalization, reorganization, merger, or consolidation of GigCapital2 (now UpHealth, Inc.).
Each Public Warrant will become exercisable on the later of 30 days after the completion of the Business Combinations or 12 months from the closing of GigCapital2’s initial public offering and will expire five years after the completion of the Business Combinations or earlier upon redemption or liquidation. If UpHealth is unable to deliver registered shares of common stock to the holder upon exercise of the Public
Warrants during the exercise period, there will be no net cash settlement of these Public Warrants and the Public Warrants will expire worthless, unless they may be exercised on a cashless basis in the circumstances described in the warrant agreement. Once the Public Warrants become exercisable, UpHealth may redeem the outstanding Public Warrants in whole and not in part at a price of $0.10 per Public Warrant (on a post-reverse split basis) upon a minimum of 30 days’ prior written notice of redemption, only in the event that the last sale price of UpHealth’s shares of common stock equals or exceeds $180.00 per share for any 20 trading days within the 30-trading day period ending on the third trading day before UpHealth sends the notice of redemption to the Public Warrant holders.
Under the terms of the warrant agreement, UpHealth has agreed to use its best efforts to file a new registration statement under the Securities Act, following the completion of the initial business combination, for the registration of the shares of common stock issuable upon exercise of the Public Warrants included in private placement units.
As of December 31, 2023, there were 1,811,749 warrants outstanding, including 1,725,000 Public Warrants, 56,750 Private Placement Warrants, and 29,999 PIPE Warrants (on a post-reverse split basis) (see Private Placement and Pipe Subscription Agreements below).
2021 Private Placement
The GigCapital2 (now UpHealth, Inc.) founders purchased in a private placement sale (the “2021 Private Placement”), that occurred simultaneously with the completion of the closing of the GigCapital2 initial public offering, an aggregate of 49,250 units (the “Private Placement Units”) at a price of $100.00 per unit (on a post-reverse split basis). The founders also purchased from GigCapital2 an aggregate of 7,500 private placement units at a price of $100.00 per unit (on a post-reverse split basis) in a private placement that occurred simultaneously with the completion of the second closing of the GigCapital2 initial public offering with the exercise of the over-allotment option, for a total of 56,750 Private Placement Units. Among the Private Placement Units, 48,125 units (on a post-reverse split basis) were purchased by GigCapital2's sponsor, 2,990 units (on a post-reverse split basis) were purchased by EarlyBirdCapital, Inc., a GigCapital2 underwriter, and 5,635 units (on a post-reverse split basis) were purchased by Northland Gig2 Investment LLC, a GigCapital2 underwriter. Each Private Placement Unit consists of one share of GigCapital2’s common stock, $0.0001 par value, one warrant, and one right to receive one-twentieth (1/20) of a share of common stock upon the consummation of GigCapital2’s initial business combination. Warrants (the “Private Placement Warrants”) will be exercisable for $115.00 per share (on a post-reverse split basis), and the exercise price of the Private Placement Warrants may be adjusted in certain circumstances as described in terms of the warrant agreement.
Northland Gig2 Investment LLC purchased 10,000 private underwriter shares (the “Private Underwriter Shares”), at a purchase price of $100.00 per share in a private placement that occurred simultaneously with the completion of the initial closing of the GigCapital2 initial public offering. Northland Gig2 Investment LLC also purchased from GigCapital2 an aggregate of 2,000 Private Underwriter Shares at a price of $100.00 per share in a private placement that occurred simultaneously with the completion of the second closing of the GigCapital2 initial public offering with the exercise of the over-allotment option. The Private Underwriter Shares are identical to the shares of common stock included in the Private Placement Units.
We accounted for the Private Placement Warrants as liabilities at fair value on the consolidated balance sheets, due to their redemption characteristics, with changes in fair value recognized as a component of other income (expense) in the consolidated statements of operations. See Note 11, Fair Value of Financial Instruments, for further information. As of December 31, 2023, the fair value of the 2021 Private Placement Warrants was $11 thousand, which is included in warrant liabilities in the consolidated balance sheets. During the year ended December 31, 2023, we recorded a $5 thousand loss due to the fair value changes in the 2021 Private Placement Warrants, which is included in gain (loss) in fair value of warrant liabilities in the consolidated statement of operations.
2021 PIPE Subscription Agreements
On January 20, 2021, GigCapital2 (now UpHealth, Inc.) entered into subscription agreements, each dated January 20, 2021 and amended June 8, 2021 (the “2021 PIPE Subscription Agreements”), with certain institutional investors (collectively the “PIPE Investors”), pursuant to which GigCapital2 agreed to issue and sell to the PIPE Investors, in private placements to close immediately prior to the closing of the Business Combinations, an aggregate of 300,000 shares (the “2021 PIPE Shares”) at $100.00 per share, plus warrants to purchase up to an additional 29,999 shares of common stock (one warrant for every 10 PIPE Shares purchased) at an exercise price of $115.00 per share (the “2021 PIPE Warrants”), for an aggregate purchase price of $30.0 million (collectively the “2021 PIPE Investment”). The PIPE Investment was consummated immediately prior to the closing of the Business Combinations. The total proceeds received from the PIPE Investment were $28.5 million, net of placement fee costs of $1.5 million.
We accounted for the PIPE Warrants as liabilities at fair value in the consolidated balance sheets, due to their redemption characteristics, with changes in fair value recognized in gain (loss) on fair value of warrant liabilities in the consolidated statements of operations. See Note 11, Fair Value of Financial Instruments, for further information. As of December 31, 2023, the fair value of the PIPE Warrants was $6 thousand, which is included in warrant liabilities in the consolidated balance sheets. During the year ended December 31, 2023, we recorded a $3 thousand loss due to the fair value changes in the 2021 PIPE Warrants, which is included in gain (loss) in fair value of warrant liabilities in the consolidated statement of operations.
2023 Private Placement
On March 9, 2023, we entered into a Securities Purchase Agreement, with a single institutional investor, pursuant to which we agreed to issue and sell (i) 1,650,000 shares of our common stock, par value $0.0001 per share (the “Shares”); (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 “2023 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 “2023 Series B Warrants” and, collectively with 2023 Series A Warrants, the “2023 Common Stock Purchase Warrants”); and (iv) pre-funded warrants (the “2023 Pre-Funded Warrants,” and together with the 2023 Common Stock Purchase Warrants, the “2023 Private Placement Warrants”) to purchase an additional 1,350,000 shares of our common stock (all of such shares issuable upon exercise of the 2023 Private Placement Warrants), in a private placement (the “ 2023 Private Placement”). On March 13, 2023, we completed the closing of the 2023 Private Placement. The purchase price of each Share was $1.50, the exercise price of each 2023 Common Stock Purchase Warrant is $2.04, and the exercise price of each 2023 Pre-Funded Warrant is $0.0001, and the purchase price of each 2023 Pre-Funded Warrant was $1.4999. The aggregate gross proceeds to us from the 2023 Private Placement were approximately $4,500,000, before deducting the 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 2023 Pre-Funded Warrants were exercised, on August 17, 2023, 549,000 2023 Pre-Funded Warrants were exercised and on November 21, 2023, 701,000 Pre-Funded Warrants were exercised, bringing the total outstanding to zero as of December 31, 2023.
Forward Share Purchase Agreement
On June 3, 2021, we entered into a forward share purchase agreement (the “FPA”) with Kepos Alpha Fund L.P. (“KAF”), a Cayman Islands limited partnership, pursuant to which KAF may elect to sell and transfer to us and we will purchase from KAF, on September 8, 2021 or, in KAF’s sole discretion, any one calendar month anniversary of that date (the “Closing Date”), up to 170,000 shares of our common stock (on a post-reverse split basis) that are held by KAF at the closing of the Business Combinations. In August 2021, we entered into an amendment to the FPA, which deferred the Closing Date to no earlier than January 9, 2022, provided if (a) we issue any new equity securities, whether of existing or new classes, or (b) an event occurs having a material adverse effect on our management operations, KAF will have the right to designate a Closing Date following such issuance or occurrence on three business days' notice to us. The per share price at which KAF has the right to sell the KAF Shares to us is (a) $103.02 per KAF Share, plus (b) in the event that the Closing Date occurs after September 8, 2021, $0.8460 per KAF Share for each month (prorated for a partial month) following September 8, 2021.
On January 7, 2022, we entered into a second amendment to the FPA, which deferred the Closing Date to no earlier than April 9, 2022, provided if (a) we issue any new equity securities, whether of existing or new classes, or (b) an event occurs having a material adverse effect on our management operations, KAF will have the right to designate a Closing Date following such issuance or occurrence on three business days' notice to us. The per share price at which KAF has the right to sell the KAF Shares to us is (a) $106.41 per KAF Share, plus (b) in the event that the Closing Date occurs after January 9, 2022, $0.8460 per KAF Share for each month (prorated for a partial month) following January 9, 2022.
Notwithstanding anything to the contrary in the FPA, KAF is allowed at its election to sell any or all of the KAF Shares in the open market commencing after the closing of the Business Combinations, as long as the sales price is above $101.00 per Share. Nothing in the FPA prohibits or restricts KAF with respect to the purchase or sale of our warrants. In exchange for our commitment to purchase the KAF Shares on the Closing Date, KAF agreed to continue to hold, and not offer, sell, contract to sell, pledge, transfer, assign, or otherwise dispose of, directly or indirectly, or hedge (including any transactions involving any derivative securities and including any Short Sales (as defined below) involving any of our securities) the KAF Shares prior to Closing Date. “Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Securities and Exchange Act of 1934 (the “Exchange Act”), whether or not against the box, and all types of direct and indirect stock pledges, forward sales contracts, options, puts, calls, short sales, swaps, “put equivalent positions” (as defined in Rule 16a-1(h) under the Exchange Act) and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker dealers or foreign regulated brokers. KAF is permitted to pledge the KAF Shares in connection with a bona fide margin agreement (and such a pledge is not considered to be a transfer, sale or assignment of the KAF Shares).
In April 2022, in accordance with the FPA, KAF transferred the 170,000 shares of our common stock (such amount prior to the reverse split of shares) to us and we transferred to KAF the $18.1 million in cash previously held in escrow and $0.4 million of interest.
2015 Cloudbreak Incentive Plan
On June 19, 2015, Cloudbreak created the 2015 Unit Incentive Plan (the “Cloudbreak Plan”), which had a maximum aggregate number of 2,200,000 common units. Cloudbreak measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period.
Upon completion of the Business Combinations, UpHealth assumed 1,576,670 options with a fair value of $99.0 million, which were included in purchase consideration, and 134,943 unvested options with a fair value of $0.6 million, which are subject to continued vesting and will be recorded as stock-based compensation prospectively; and Cloudbreak ceased granting awards under the Cloudbreak Plan.
The following table summarizes stock option activity under the Cloudbreak Plan (recorded on a post-reverse split basis):
| | | | | | | | |
| (In thousands, except per share amounts) | Number of Stock Options | Weighted Average Exercise Price per Stock Option |
| Outstanding as of December 31, 2021 | 151 | | $ | 48.15 | |
| Options exercised | (10) | | 2.40 | |
| Options forfeited or expired | (3) | | 73.80 | |
| Outstanding as of December 31, 2022 | 138 | | 50.76 | |
| Options forfeited or expired | (90) | | 54.55 | |
| Outstanding as of December 31, 2023 | 48 | | 43.63 | |
As of December 31, 2023, there was $35 thousand of unrecognized stock-based compensation expense related to stock options, expected to be recognized over a weighted-average period of 0.55.
On March 15, 2024, we completed the Sale of Cloudbreak to Forest Buyer, and in accordance with the Cloudbreak Plan, the 48,035 unvested outstanding options as of such date were immediately vested and will expire on September 15, 2024 if unexercised.
2021 Equity Incentive Plan
On June 4, 2021, the GigCapital2 stockholders considered and approved the 2021 Equity Incentive Plan (“2021 EIP”) and reserved 1,642,081 shares (on a post-reverse split basis) of UpHealth common stock for issuance thereunder. The 2021 EIP was previously approved, subject to stockholder approval, by the Board of Directors of GigCapital2 on February 7, 2021. The 2021 EIP became effective immediately upon the closing of the Business Combinations. The number of shares of common stock reserved for issuance under the 2021 EIP will automatically increase on January 1 of each year, beginning on January 1, 2022 and each anniversary thereof during the effectiveness of the 2021 EIP, by an amount equal to the lesser of (i) five percent (5%) of the total number of shares of our common stock outstanding on such date, and (ii) such lesser number of shares as may be determined by our Board of Directors. On January 1, 2022, the number of shares of common stock reserved for issuance under the 2021 EIP was automatically increased by 721,395 shares (on a post-reverse split basis).
In conjunction with the approval of the 2021 EIP, our Board of Directors also adopted a form of Restricted Stock Units Agreement (the “RSU Agreement”) and a form of Stock Option Agreement (the “Stock Option Agreement”) that we will generally use for grants under our 2021 EIP. The RSU Agreement provides that RSUs will vest over a fixed period and be paid as shares of common stock, and that the unvested RSUs will expire upon certain terminations of the grantees’ employment or other service relationship with us. The Stock Option Agreement provides that stock options will vest over a fixed period, and that the unvested options will expire upon certain terminations of the grantees’ employment or other service relationship with us.
We had 1,315,646 and 1,086,452 shares available for grant as of December 31, 2023 and 2022, respectively.
The following table summarizes our RSU activity under the 2021 EIP (recorded on a post-reverse split basis):
| | | | | | | | |
| (In thousands, except per share amounts) | Number of RSUs | Weighted Average Grant Date Fair Value Per Share |
| Outstanding as of December 31, 2021 | 1,070 | | $ | 54.62 | |
| RSUs granted | 1,206 | | $ | 5.08 | |
| RSUs vested and issued | (846) | | $ | 62.09 | |
| RSUs forfeited | (552) | | $ | 9.98 | |
| Outstanding as of December 31, 2022 | 878 | | $ | 7.42 | |
| RSUs granted | 1,664 | | $ | 1.79 | |
| RSUs vested and issued | (757) | | $ | 5.85 | |
| RSUs forfeited | (1,263) | | $ | 2.31 | |
| Outstanding as of December 31, 2023 | 522 | | $ | 3.10 | |
Subsequent to December 31, 2023, 53,516 performance-based RSUs were accelerated and 128,122 RSUs were accelerated under the 2021 EIP in connection with the Sale of Cloudbreak, as discussed in Note 1, Organization and Business.
As of December 31, 2023, there was $1.3 million of unrecognized stock-based compensation expense related to RSUs, expected to be recognized over a weighted-average period of 1.76.
2023 Inducement Equity Incentive Plan
On May 1, 2023, for purposes of facilitating grants of equity awards to individuals as an inducement to the commencement of employment with us, our Board of Directors approved and adopted each of the UpHealth, Inc. Inducement Equity Incentive Plan (the “2023 IEIP”) providing for the issuance of an aggregate of up to 600,000 shares of UpHealth common stock pursuant to awards granted thereunder, and a form of Inducement RSU Agreement and Notice of Grant (the “Inducement RSU Agreement”) that we will generally use for grants under the
2023 IEIP. The Inducement RSU Agreement provides that RSUs will vest over a fixed period and be paid as shares of common stock, and that the unvested RSUs will expire upon certain terminations of the grantees’ employment or other service relationship with us. The 2023 IEIP does not provide for an automatic increase in the number of shares of common stock reserved for issuance pursuant to awards granted under the 2023 IEIP.
We had 400,000 and zero shares available for grant as of December 31, 2023 and 2022, respectively.
The following table summarizes our RSU activity under the 2023 IEIP:
| | | | | | | | |
| (In thousands, except per share amounts) | Number of RSUs | Weighted Average Grant Date Fair Value Per Share |
| Outstanding as of December 31, 2022 | — | | $ | — | |
| RSUs granted | 360 | | $ | 1.14 | |
| RSUs forfeited | (160) | | $ | 1.01 | |
| Outstanding as of December 31, 2023 | 200 | | $ | 1.24 | |
As of December 31, 2023, there was $0.1 million of unrecognized stock-based compensation expense related to RSUs, expected to be recognized over a weighted-average period of 2.03 years.
Stock-based Compensation
During the year ended December 31, 2023 and 2022, we recorded stock-based compensation expense totaling $3.7 million and $6.5 million, respectively, all of which was attributed to our general and administrative function.
13. Income Taxes
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings as of December 31, 2022 and financial results of UpHealth Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
The sources of loss before income tax benefit are as follows:
| | | | | | | | | | | |
| (In thousands) | For the year ended December 31, |
| Current: | 2023 | | 2022 |
| Domestic | $ | (57,634) | | | $ | (346,468) | |
| Foreign | — | | | 114,149 | |
| Total | $ | (57,634) | | | $ | (232,319) | |
Income tax benefit consisted of the following:
| | | | | | | | | | | |
| (In thousands) | For the year ended December 31, |
| Current: | 2023 | | 2022 |
| Federal | $ | — | | | $ | — | |
| State | (18) | | | 159 | |
| Foreign | — | | | — | |
| Total current expense | (18) | | | 159 | |
| Deferred: | | | |
| Federal | (1,301) | | | (7,192) | |
| State | 101 | | | (1,435) | |
| Foreign | — | | | (916) | |
| Total deferred benefit | (1,200) | | | (9,543) | |
| Income tax benefit | $ | (1,218) | | | $ | (9,384) | |
Income tax benefit differed from the amount that would be provided by applying the U.S. federal statutory rate due to the following:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | For the year ended December 31, 2023 | For the year ended December 31, 2022 |
| Amount | | Tax Rate | Amount | | Tax Rate |
| Loss before income taxes | $ | (57,634) | | | | $ | (232,319) | | | |
| Federal statutory income tax | (12,103) | | | 21.00 | % | (48,787) | | | 21.00 | % |
| State income tax, net of federal benefit | 110 | | | (0.19) | % | (9,324) | | | 4.01 | % |
| Foreign differential rate | — | | | — | % | (357) | | | 0.15 | % |
| Goodwill impairment | 7,273 | | | (12.62) | % | 18,380 | | | (7.91) | % |
| Transactions costs | 3,147 | | | (5.46) | % | 187 | | | (0.08) | % |
| Permanently disallowed interest expense | 1,646 | | | (2.86) | % | 2,544 | | | (1.10) | % |
| Valuation allowance | (2,750) | | | 4.77 | % | 51,670 | | | (22.24) | % |
| Deconsolidation of subsidiary | (2,412) | | | 4.19 | % | (24,766) | | | 10.66 | % |
| Tax gain on sale of Innovations Group | 1,760 | | | (3.05) | % | — | | | — | % |
| Other | 2,111 | | | (3.66) | % | 1,069 | | | (0.46) | % |
| Effective income tax rate | $ | (1,218) | | | 2.11 | % | $ | (9,384) | | | 4.04 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes are as follows:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Deferred Tax Assets | | | |
| Accrued expenses | $ | 1,553 | | | $ | 5,863 | |
| Transactions costs | 7,453 | | | 88 | |
| Net operating loss carryforwards | 9,112 | | | 10,208 | |
| Stock compensation | 2,048 | | | 2,109 | |
| Provision for expected credit losses | 102 | | | 4,097 | |
| Disallowed interest expense | 4,041 | | | 789 | |
| Unrealized loss from fair market value adjustment on derivatives | — | | | 14 | |
| Investment in Glocal | 40,193 | | | 40,432 | |
| Other | 440 | | | 865 | |
| Total deferred tax assets | 64,942 | | | 64,465 | |
| Deferred Tax Liabilities | | | |
| Property, plant and equipment | (882) | | | (1,169) | |
| Intangibles | (5,251) | | | (5,156) | |
| Convertible debt accretion | (5,420) | | | (7,670) | |
| Investment in deconsolidated entities | (4,611) | | | — | |
| Total deferred tax liabilities | (16,164) | | | (13,995) | |
| Less: valuation allowance | (48,778) | | | (51,670) | |
| Net deferred tax asset (liability) | $ | — | | | $ | (1,200) | |
We evaluate our deferred tax assets periodically to determine if valuation allowances are required. Ultimately, the realization of deferred tax assets is dependent upon generation of future taxable income during those periods in which temporary differences become deductible and/or tax attributes can be utilized. To this end, we consider the level of historical taxable income, the scheduled reversal of deferred tax liabilities, tax-planning strategies, and projected future taxable income. Based on these above considerations, and consistent with our conclusion as of December 31, 2022, we continue to believe it is more likely than not that a portion of the benefit from the deferred tax assets will not be realized, and as such has recorded a valuation allowance of $48.8 million against our deferred tax assets as of December 31, 2023. The net change in the valuation allowance for the years ended December 31, 2023 and 2022 are $(2.9) million and $51.7 million, respectively.
As a result of the voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, deferred tax assets and liabilities related primarily to certain intangibles, fixed assets and accrued liabilities were written off, and we recorded a deferred tax liability related to the book to tax basis difference in the Thrasys and TTC investments.
As of December 31, 2023, the Company had approximately $7.5 million of federal net operating loss (“NOL”) carryforward and $1.6 million of state NOL carryforward. The federal NOL carryforward will carry forward indefinitely. The state NOL carryforward will begin expiring in 2032. A valuation allowance has been recorded against these deferred tax assets.
As of December 31, 2023 and 2022, respectively, we had no accumulated unremitted earnings from foreign subsidiaries.
The following table summarizes the activity related to our unrecognized tax benefits:
| | | | | | | | | | | |
| For the year ended December 31, |
| 2023 | | 2022 |
| Beginning balance | $ | — | | | $ | 1,703 | |
| Changes for prior year tax positions | 4,519 | | | (1,703) | |
| Ending balance | $ | 4,519 | | | $ | — | |
As of December 31, 2023 and 2022 we had uncertain tax positions of $4.5 million and zero, respectively.
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 in income of an approximately $15 million payment on the license of certain intellectual property rights. The business originally included the $15 million payment in income 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 million for 2008, or in the alternative, the business owes C Corporation tax of approximately $5 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% to 10% per year, compounded annually, resulting in potential interest of approximate $4 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 to be paid by the business. 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.
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.
The business filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) commencing a chapter 11 case (the “Bankruptcy Case”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on October 20, 2023. As a result, the automatic stay imposed by section 362(a) 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. On November 17, 2023, the IRS filed before the Bankruptcy Court an amended proof of claim asserting a priority claim under section 507(a)(8) of the Bankruptcy Code in the amount of $17,282,914.83 (the “IRS Proof of Claim”) based on both of the IRS’s alternative positions. On March 14, 2024, the business filed a motion in the Bankruptcy Court to estimate the IRS Proof of Claim pursuant to sections 502(c) and 105 (a) of the Bankruptcy Code, or, alternatively pursuant to section 505 of the Bankruptcy Code, and believe that it should be substantially reduced to an amount between $0 to approximately $166,835. The ultimate outcome of this matter is unknown at this time. This business is a subsidiary of UpHealth Holdings, which we deconsolidated as of September 30, 2023 (as discussed in Note 1, Organization and Business).
14. Earnings (Loss) Per Share
Basic earnings (loss) per share applicable to common stockholders is computed by dividing earnings (loss) 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.
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands, except per share data) | 2023 | | 2022 |
| Numerator: | | | |
| Net loss attributable to UpHealth, Inc. | $ | (57,839) | | | $ | (223,000) | |
| Denominator: | | | |
Weighted average shares outstanding | 17,724 | | | 14,699 | |
| Net loss per share attributable to UpHealth, Inc.: | | | |
| Basic and diluted | $ | (3.26) | | | $ | (15.17) | |
The calculation of basic and dilutive earnings per share excluded the following because the effect would be anti-dilutive:
| | | | | | | | | | | |
| For the year ended December 31, |
| (In thousands, except per share data) | 2023 | | 2022 |
2021 Public, Private and PIPE Warrants at a $115.00 per share conversion price | 1,812 | | | 1,812 | |
2023 Private Placement Series A and B Warrants at a $2.04 per share conversion price | 6,000 | | | — | |
| Stock options | 48 | | | 138 | |
| Restricted stock units | 722 | | | 878 | |
2025 Notes at a $17.50 per share conversion price(1) | 3,857 | | | 3,857 | |
2026 Notes at a $106.50 per share conversion price | 1,080 | | | 1,502 | |
| Forward share purchase agreement | — | | | 170 | |
(1) Subject to the occurrence of certain corporate events.
15. Employee Benefit Plans
As discussed in Note 1, Organization and Business, we deconsolidated UpHealth Holdings and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings and its subsidiaries as of December 31, 2022 and financial results of UpHealth
Holdings and its subsidiaries for the year ended December 31, 2022 and for the nine months ended September 30, 2023 are included in our consolidated financial statements and the financial position of UpHealth Holdings as of December 31, 2023 and the financial results of UpHealth Holdings and its subsidiaries for the three months ended December 31, 2023 are not included in our 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 discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; therefore, the financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the year ended December 31, 2023 are not included in our consolidated financial statements.
In connection with the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak, we had six defined contribution plans, which cover substantially all employees, as of December 31, 2021. During fiscal year 2022, we migrated from six defined contribution plans to one, covering substantially all employees. The plans provide for discretionary matching and profit-sharing contributions. For the years ended December 31, 2023 and 2022, there were $0.6 million and $0.4 million employer matching contributions to the plans, respectively.
16. Related-Party Transactions
See Note 10, Debt, for related party long-term debt.
See Note 18, Leases, for leases with related parties.
We make guaranteed payments to related parties. Guaranteed payments aggregated $0.6 million and $4.3 million for the years ended December 31, 2023 and 2022, respectively. These amounts are presented in costs of revenues in the consolidated statement of operations. We had unpaid guaranteed payments of zero and $0.5 million as of December 31, 2023 and 2022, respectively, which is included in accrued liabilities on the consolidated balance sheets.
Due to and from related parties consisted of the following:
| | | | | | | | | | | |
| (In thousands) | December 31, 2023 | | December 31, 2022 |
| Due from related parties | $ | — | | | $ | 14 | |
| Due to related parties | $ | 948 | | | $ | 229 | |
17. Segment Reporting
Our business is organized into three operating business segments and one non-operating business segment:
•Services—consisting of Behavioral and Pharmacy businesses(1);
•Virtual Care Infrastructure—consisting of U.S. Telehealth and International Telehealth businesses(2);
•Integrated Care Management—consisting of SaaS business(3); and
•Corporate—consisting of parent company(4).
(1) In the Services segment, we provide behavioral health and pharmacy services in the United States, which are critically important to managing whole person care and its associated costs. Our comprehensive behavioral health capabilities provide evidence-based and tech-enabled behavioral health and substance abuse services via onsite care delivery and telehealth. We provide inpatient and outpatient substance abuse and mental health treatment services for individuals with drug and alcohol addiction and other behavioral health issues. We also offer a complete continuum of care from detoxification services, residential care, partial hospitalization programs, and intensive outpatient and outpatient programs. As discussed in Note 1, Organization and Business, on February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of Innovations Group to Belmar pursuant to a stock purchase agreement dated February 26, 2023, by and among UpHealth, UpHealth Holdings, Innovations Group, and Belmar. The sale closed on May 11, 2023. Accordingly, the information set forth below includes the results of operations, liquidity, and capital resources of Innovations Group in the Services segment for the year ended December 31, 2022 and for the period from January 1, 2023 through May 10, 2023, and excludes the results of operations, liquidity, and capital resources of Innovations Group in the Services segment for the period from May 11, 2023 through December 31, 2023. As also discussed in Note 1, Organization and Business, 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,” effective September 30, 2023, UpHealth deconsolidated UpHealth Holdings and its subsidiaries. Accordingly, the information set forth below includes the results of operations, liquidity, and capital resources of both TTC and BHS in the Services
segment for the year ended December 31, 2022 and for first nine months of 2023, and excludes the results of operations, liquidity, and capital resources of both TTC and BHS from the Services segment for the latter three months of 2023.
(2) In the Virtual Care Infrastructure segment, which consisted of the U.S. Telehealth business, we provided our customers with a unified telehealth solution and digital health tools, marketed under the name MarttiTM, aimed at increasing access to healthcare and resolving health disparities across the care continuum. As discussed in Note 1, Organization and Business, as a result of ongoing control issues and legal proceedings with Glocal, UpHealth deconsolidated Glocal in July 2022. Accordingly, Glocal is included in the Virtual Care Infrastructure segment operating results for the first six months of 2022, and excluded from the Virtual Care Infrastructure segment operating results for the latter six months of 2022 and for the year ended December 31, 2023. As such, the information set forth below includes the results of operations, liquidity, and capital resources of Glocal in the Virtual Care Infrastructure segment for the first six months of 2022, and excludes the results of operations, liquidity, and capital resources of Glocal in the Virtual Care Infrastructure segment for the latter six months of 2022 and for the year ended December 31, 2023.
(3) In the Integrated Care Management segment, we provided our customers with an advanced, comprehensive, and extensible technology platform, marketed under the umbrella “SyntraNetTM” to manage health, quality of care, and costs, especially for individuals with complex medical, behavioral health, and social needs. As discussed in Note 1, Organization and Business, 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,” effective September 30, 2023, UpHealth deconsolidated UpHealth Holdings and its subsidiaries. Accordingly, the information set forth below includes the results of operations, liquidity, and capital resources of Thrasys in the Integrated Care Management segment for the year ended December 31, 2022 and for first nine months of 2023, and excludes the results of operations, liquidity, and capital resources of Thrasys from the Integrated Care Management segment for the latter three months of 2023.
(4) In the Corporate segment, we perform executive, administrative, finance, human resources, legal, and information technology services for UpHealth, Inc. and for its subsidiaries, managed in a corporate shared services environment. Since they are not the responsibility of segment operating management, they are not allocated to the operating segments and instead reported within Corporate.
The reportable segments are consistent with how management views our services and products and the financial information reviewed by the chief operating decision makers. We manage our businesses as components of an enterprise for which separate information is available and is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and assess performance.
We evaluate performance based on several factors, of which Revenues, Gross Profit and Total Assets by service and product, are the primary financial measures:
Revenues by segment consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| In thousands | 2023 | | 2022 |
| Services | $ | 47,225 | | | $ | 75,796 | |
Virtual Care Infrastructure | 70,151 | | | 64,997 | |
| Integrated Care Management | 12,622 | | | 18,010 | |
| Total revenues | $ | 129,998 | | | $ | 158,803 | |
Gross profit by segment consisted of the following:
| | | | | | | | | | | |
| For the year ended December 31, |
| In thousands | 2023 | | 2022 |
| Services | $ | 23,232 | | | $ | 26,586 | |
| Virtual Care Infrastructure | 38,764 | | | 29,882 | |
| Integrated Care Management | 7,599 | | | 13,687 | |
| Total gross profit | $ | 69,595 | | | $ | 70,155 | |
Total long-lived assets by segment consisted of the following:
| | | | | | | | | | | |
| In thousands | December 31, 2023 | | December 31, 2022 |
| Services | $ | — | | | $ | 5,216 | |
Virtual Care Infrastructure | 1,074 | | | 11,949 | |
| Integrated Care Management | — | | | 2,723 | |
| Corporate | 10,355 | | | 1,394 | |
| Total long-lived assets | $ | 11,429 | | | $ | 21,282 | |
| | | |
18. Leases
Adoption of ASC 842
We lease real estate for our offices, customer care centers, and warehouse space as well as certain equipment under operating leases with varying expiration dates through 2027. We also lease certain computer devices and network equipment within our Virtual Care Infrastructure segment under finance leases with varying expiration dates through 2026. In addition to purchasing Martti™ units for use as inventory, we also lease units through an arrangement with third-party lessors to be used as equipment. Leased units are used as part of our promotional program whereby we loan out Martti™ units for trial purposes to various customers. Leases are categorized at their commencement date, which is the date we take possession or control of the underlying asset. Generally, the term of real estate leases ranges from 1 to 5 years at inception of the contract and the term for equipment leases ranges from 1 to 3 years at the inception of the contract.
We elected the package of transitional practical expedients, under which we (1) did not reassess whether any expired or existing contracts are or contain leases, (2) we did not reassess the lease classification for any expired or existing leases and (3) we did not reassess initial direct costs for any existing leases. Additionally, we elected the short-term lease recognition exemption for all leases that qualify, meaning it does not recognize right-of-use assets or lease liabilities for those leases. We also elected the practical expedient to not separate lease and non-lease components for all asset classes.
Leases
The components of lease expense consisted of the following as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| In thousands | Third Party | | Related Party | | Total | | Third Party | | Related Party | | Total |
| Finance lease costs: | | | | | | | | | | | |
| Amortization of right-of-use assets | $ | 3,349 | | | $ | — | | | $ | 3,349 | | | $ | 3,083 | | | $ | — | | | $ | 3,083 | |
| Interest on lease liabilities | 319 | | | — | | | 319 | | | 312 | | | — | | | 312 | |
| Operating lease costs | 1,991 | | | 294 | | | 2,285 | | | 3,209 | | | 392 | | | 3,601 | |
| Short-term lease costs | 112 | | | 67 | | | 179 | | | 108 | | | 356 | | | 464 | |
| Variable lease costs | 631 | | | — | | | 631 | | | 354 | | | — | | | 354 | |
| Sublease income | (408) | | | — | | | (408) | | | (643) | | | — | | | (643) | |
| Total lease costs | $ | 5,994 | | | $ | 361 | | | $ | 6,355 | | | $ | 6,423 | | | $ | 748 | | | $ | 7,171 | |
Lease-related assets and liabilities recorded on the consolidated balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| In thousands | Third Party | | Third Party | | Related Party | | Total |
| Assets | | | | | | | |
| Finance lease right-of-use assets (included in property, plant and equipment, net) | $ | 3,893 | | | $ | 5,916 | | | $ | — | | | $ | 5,916 | |
| Operating lease right-of-use assets | 1,902 | | | 5,819 | | | 1,394 | | | 7,213 | |
| Total leased assets | $ | 5,795 | | | $ | 11,735 | | | $ | 1,394 | | | $ | 13,129 | |
| | | | | | | |
| Liabilities | | | | | | | |
| Lease liabilities, current: | | | | | | | |
| Finance lease liabilities | $ | 2,713 | | | $ | 3,023 | | | $ | — | | | $ | 3,023 | |
| Operating lease liabilities | 809 | | | 2,130 | | | 322 | | | 2,452 | |
| Lease liabilities, current | $ | 3,522 | | | $ | 5,153 | | | $ | 322 | | | $ | 5,475 | |
| | | | | | | |
| Lease liabilities, noncurrent: | | | | | | | |
| Finance lease liabilities | $ | 1,348 | | | $ | 2,976 | | | $ | — | | | $ | 2,976 | |
| Operating lease liabilities | 1,925 | | | 4,672 | | | 1,093 | | | 5,765 | |
| Lease liabilities, noncurrent | 3,273 | | | 7,648 | | | 1,093 | | | 8,741 | |
| Total leased liabilities | $ | 6,795 | | | $ | 12,801 | | | $ | 1,415 | | | $ | 14,216 | |
Accumulated amortization related to the finance lease assets was $3.3 million and $3.1 million as of December 31, 2023 and 2022, respectively.
Other information consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 | $ | 2,179 | | | $ | 286 | | | $ | 2,465 | | | $ | 3,632 | | | $ | 371 | | | $ | 4,003 | |
| Operating cash flows from finance leases | $ | 327 | | | $ | — | | | $ | 327 | | | $ | 310 | | | $ | — | | | $ | 310 | |
| Financing cash flows from finance leases | $ | 3,329 | | | $ | — | | | $ | 3,329 | | | $ | 3,106 | | | $ | — | | | $ | 3,106 | |
| | | | | | | | | | | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | | | | |
| Finance leases | $ | 1,148 | | | $ | — | | | $ | 1,148 | | | $ | 4,110 | | | $ | — | | | $ | 4,110 | |
| Operating leases | $ | 80 | | | $ | — | | | $ | 80 | | | $ | 10,843 | | | $ | 1,706 | | | $ | 12,549 | |
The following table summarizes our lease term and discount rate assumptions as of December 31, 2023:
| | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Third Party | | Related Party | | Total |
| Weighted-average remaining lease term (years): | | | | | |
| Finance leases | 1.60 | | N/A | | 1.60 |
| Operating leases | 3.16 | | N/A | | 3.16 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Finance leases | 7.3% | | N/A | | 7.3% |
| Operating leases | 7.6% | | N/A | | 7.6% |
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 December 31, 2023, have been reconciled to the total operating and finance lease liabilities recognized on the consolidated balance sheets as of December 31, 2023 as follows:
| | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Finance Leases | | Operating Leases |
| In thousands | | Third Party | | Third Party |
| 2024 | | $ | 2,896 | | | $ | 975 | |
| 2025 | | 1,202 | | | 954 | |
| 2026 | | 205 | | | 851 | |
| 2027 | | — | | | 275 | |
| | | | |
| | | | |
| Total lease payments | | 4,303 | | | 3,055 | |
| Less: Interest | | 242 | | | 321 | |
| Present value of lease liabilities | | $ | 4,061 | | | $ | 2,734 | |
19. Commitments and Contingencies
Commitments
Operating leases
See Note 18, 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 and matters described below. See Note 13, Income Taxes, for further information. 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 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 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’ 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’ 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 a fee 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 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 of the court in New York entered the judgment in favor of Needham 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 to appeal the New York court’s judgment (and for Needham to be able to participate in the appeal). The Bankruptcy Court entered an order approving this stipulation on November 30, 2023. On December 6, 2023, UpHealth Holdings and UpHealth Services, Inc. appealed the judgment entered in New York state court to the New York Supreme Court’s Appellate Division, First Department. Briefing in the appeal is complete and UpHealth Holdings expects oral argument, which has not yet been scheduled, to be set in April or May of 2024. The ultimate outcome of this matter is unknown at this time.
Included in accrued expenses in our consolidated balance sheet as 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 months ended September 30, 2023, we recorded additional expense of $29.8 million, which was included in acquisition, integration, and transformation costs in our 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 and its subsidiaries as of September 30, 2023; accordingly, the financial position of UpHealth Holdings subsequent to September 30, 2023 is not included in our 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.
20. Subsequent Events
Management has determined that no material events or transactions have occurred subsequent to the consolidated balance sheet date, other than those events noted below, that require disclosure in the consolidated financial statements.
On March 15, 2024, we completed the Sale of Cloudbreak. See Sale of Cloudbreak in Note 1, Organization and Business, for further information.
