Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context otherwise requires, references in this report (this “Quarterly Report”) to “we,” “our,” “us,” “UpHealth” or the “Company” and other similar terms refer to UpHealth, Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek,” “may,” “might,” “plan,” “possible,” “potential,” “should, “would” and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on April 18, 2022 (our “Annual Report”) and in any more recent filings with the SEC. The company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
UpHealth, Inc. Business Overview
UpHealth Services, Inc. was formed on November 5, 2019, and effectively began operations on January 1, 2020. It was formed for the purpose of effecting a combination of various companies engaged in digital health, and commenced negotiations with a number of companies, including those that are discussed below as having been acquired. UpHealth Holdings, Inc. (“UpHealth Holdings”) became the sole shareholder of UpHealth Services, Inc. through a reorganization with UpHealth Services, Inc.’s original shareholders when UpHealth Holdings was formed on October 26, 2020 as a Delaware corporation. UpHealth Holdings then entered into a series of transactions to develop its business across three segments: (a) Integrated Care Management—through its subsidiary Thrasys, Inc. (“Thrasys”); (b)Virtual Care Infrastructure—through its subsidiary Glocal Healthcare Systems Private Limited (“Glocal”); and (c) Services—through its subsidiaries Innovations Group, Inc. (“Innovations Group”), Behavioral Health Services, LLC (“BHS”) and TTC Healthcare, Inc. (“TTC”). On June 9, 2021, UpHealth (fka GigCapital2, Inc.) acquired UpHealth Holdings and its subsidiaries and Cloudbreak Health, LLC and its subsidiaries (“Cloudbreak”), which added Cloudbreak to the Virtual Care Infrastructure segment.
Integrated Care Management Segment - Thrasys
Thrasys Overview
Thrasys provides its customers with an advanced, comprehensive, and extensible technology platform, marketed under the umbrella “SyntraNetTM,” to manage health, quality of care, and costs, especially for individuals with complex medical, behavioral health, and social needs. Thrasys focuses on both the United States and international markets. SyntraNetTM is offered as a software-as-a-service (“SaaS”) platform. Information, analytics, and applications are delivered to care team members on desktops, tablets, and phones, as needed. An advanced protected health information (“PHI”) framework controls access to information based on roles, rights, policies, and scope of consent. The platform includes innovations in a number of areas: application and information models for connected care communities (an extension of multi-tenant architectures), integration and normalization of heterogeneous data sources, configurable software services and open application programming interfaces (“APIs”), advanced analytics and intelligence, scalable workflows and rules, protected health information management, and user interfaces ready for the proliferation of device types and interaction modes.
Thrasys Key Business Metrics
Revenue
Thrasys derives revenue broadly from the sales of (a) products—with associated license, subscription, and hosting fees and (b) services—largely to implement, configure, and extend the technology, and train and on-board users on the use of the platform and applications.
Licenses and Subscriptions Revenue. License revenues are typically associated with rights granted to customers to deploy the platform to a certain number of care communities of a certain size, usually measured as the total population of patients that can be included within a care community. License revenues are recognized based on the nature of the license provided, either fully on the date license rights are granted to the customer if there are no further performance obligations or ratably over the license term beginning on the effective date of each contract, the date the customer takes possession of the license rights.
Subscription fees are recurring fees charged for access to the platform and applications. Subscription fees are typically pegged to a measure of use, such as population size, number of providers, members enrolled in programs, or number of members managed by applications. Subscription fees can grow as customers subscribe to additional application features or launch additional programs. Revenues from subscription fees are recognized ratably over the subscription term.
Services. The majority of Thrasys’ contracts to provide professional services are priced either on a time and materials basis, whereby revenues are recognized as the services are rendered, or as a fixed monthly retainer based on an estimate of the number of hours of work over the contract term, whereby revenues are recognized on a straight-line basis over the contract term. In some cases, Thrasys enters into professional services contracts where professional services fees are defined for specific milestones, whereby revenues are recognized upon achievement of the milestones.
Cost of Goods and Services
Cost of goods and services for Thrasys include: costs related to hosting SyntraNetTM in a HIPAA-compliant cloud environment; costs of third-party product licenses embedded with SyntraNetTM; costs of a core professional services team, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs. Added compliance requirements for security infrastructure is likely to add some additional costs for hosting services. Thrasys also anticipates added costs for third-party licenses that will be added as the scope and footprint of the technology platform expands.
Hosting Infrastructure. Thrasys’ technology and solutions are designed to be agnostic to any particular cloud services provider. Currently, customer environments are hosted through contracts with two cloud service providers. Thrasys anticipates capabilities of cloud service providers to grow, and costs to become increasingly competitive, and will continue to evaluate offerings in the marketplace to determine the optimum mix of security, reliability, scalability, and performance to meet customer needs. Hosting infrastructure costs for Thrasys are related to the number and size of environments deployed for customers and also on the service level agreements (“SLAs”) negotiated with customers. As the average size of customers continues to grow, hosting infrastructure costs are expected to grow as a percentage of revenue.
Third-Party Product Licenses. SyntraNetTM embeds certain third-party technology components to support some of its technology capabilities. There are multiple vendors for these components, and Thrasys is not dependent on any specific vendor.
Professional Services Team. Thrasys’ professional services team works closely with the product team and is best understood as an “A-team” created to lead showcase implementations. The goal is to keep the professional services team small in order to focus it on deploying reference customers and facilitating the on-boarding and coaching of systems integration partners.
Operating Expenses
Sales and Marketing (“S&M”) Expenses. S&M expenses include an internal sales and marketing team and contracts with business development consultants to generate and qualify leads, and an allocation of facilities, information technology, and depreciation costs.
Research and Development (“R&D”) Expenses. Thrasys continues to invest in R&D. The core R&D team consists of a small team of very experienced software developers. Beginning in 2019, Thrasys added considerable capacity via a consulting group with whom it has been working for over ten years. The team, based in Chicago, functioned much like the Thrasys internal team, until they were brought in-house in June 2021. R&D expenses attributed to internal-use software development are capitalized and amortized to cost of goods and services. R&D expenses also include an allocation of facilities, information technology, and depreciation costs.
General and Administrative (“G&A”) Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services, S&M expenses and R&D expenses.
Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Thrasys.
Virtual Care Infrastructure Segment - Glocal and Cloudbreak
Glocal Overview
Glocal is a technology and process-based healthcare platform providing its customer comprehensive primary care and specialty consultations for a fraction of the cost of traditional healthcare delivery systems, through telemedicine, digital dispensaries, and technology-based hospital centers. Glocal has been awarded by the United Nation’s (“UN”) Innovation Exchange with the Public Appreciation Award 2020 as a cutting-edge technology to meet the sustainable development goals of the UN.
Glocal pioneered the development of a semantic algorithm and AI-based clinical decision support system called LitmusDX, which helps deliver healthcare through telemedicine in its HelloLyf CX digital dispensaries and HelloLyf HX digital hospital, utilizing a telemedicine terminal called LitmusMX and an automated medicine dispenser called LitmusRX.
LitmusMX is used for recording the vitals of the patient, consultations with a doctor over video conferencing from miles away, and routine card-based point-of-care tests, and also contains a fully automatic biochemistry analyzer. The software may also suggest further investigations. If the doctor agrees, they can order further rapid tests, such as for dengue or malaria, for which kits are available. When the doctor selects a prescription, LitmusMX talks to the LitmusRX automated medicine dispensing unit, which delivers the required dosages of the medicines. Theoretically, the algorithm can be fine-tuned to arrive at a final diagnosis and prescription on its own. In addition to these solutions is one of the world’s top end-to-end Clinical Decision Support System (“CDSS”), named LitmusDX, along with a web interface, named HelloLyf, which integrates practice management with diagnostic algorithms, investigation interpretation, treatment protocols, drug safety checks, and electronic medical records.
Glocal’s HelloLyf CX digital dispensary was selected by United Nations AID as a cutting-edge technology solution to reach the UN’s sustainable development goals. Unlike other telemedicine centers seen today, Glocal’s HelloLyf CX digital dispensary is an innovative, hybrid, brick-and-mortar center, which provides complete primary and emergency healthcare solutions, such as consultation, confirmatory tests, and medicines, from a single point through the use of LitmusMX and LitmusRX. During the COVID-19 pandemic, Glocal’s innovative HelloLyf CX digital dispensaries successfully used ultraviolet C light disinfection, acrylic separation, and positive air pressure to create the first line for defense of health workers and patients against all forms of infectious and contagious diseases, including COVID-19.
In September 2021, Glocal delivered its first digital hospital in the Indian state of Nagaland, providing 88 e-ICU beds with connected ventilators and injection syringe pump. This digital hospital utilizes Glocal’s HelloLyf patient management, digital health, and decision support software to provide and coordinate outpatient care, emergency care, radiology and imaging, intensive care, high-dependency care, inpatient care, and dialysis.
While Glocal’s customers are located in regions in India and Southeast Asia, Glocal generates the majority of its revenue in India. Glocal’s telemedicine/HelloLyf CX digital dispensaries have been functional in India mainly through the government and are primarily housed in government facilities, which provide services that are free to the beneficiaries. After successful implementation of projects in the Indian states of Rajasthan, Odisha, and West Bengal, Glocal won a contract to set-up 550+ HelloLyf CX digital dispensaries in the Indian State of Madhya Pradesh, resulting in a total of 750+ government-placed nodes across India.
Glocal has begun focusing on a business-to-business (“B2B”) model where the HelloLyf CX digital dispensaries are sold to B2B partners/customers, who operate them with a revenue-share to Glocal. This results in lower revenues but higher margins.
Glocal also owns nine hospitals, four of which it operates and five of which it has contracted with third parties to operate with Glocal receiving a revenue-share.
Glocal Key Business Metrics
Revenue
Services. Services revenue is generated primarily from operating hospitals and clinics, including pharmacy and medicine sales, and transaction fees per telemedicine consultation.
Products. Products revenue is generated primarily from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.
Cost of Goods and Services
Cost of goods and services consists primarily of costs of building and operating hospitals, including costs for the purchase of medicines, professional/doctor fees, the cost to build HelloLyf CX digital dispensaries and HelloLyf HX digital hospitals, and an allocation of information technology and depreciation costs.
Operating Expenses
Sales and Marketing Expenses. S&M expenses are comprised of compensation and benefits related to Glocal’s sales personnel, travel expenses, and expenses related to advertising, marketing programs, and events, and an allocation of facilities, information technology, and depreciation costs.
General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.
Depreciation and Amortization Expenses. Glocal’s operations are capital intensive. Depreciation expense relates to the depreciation of buildings, computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Glocal.
Cloudbreak Overview
Cloudbreak is a leading provider of unified telemedicine solutions and digital health tools aimed at increasing access to healthcare and resolving health disparities across the care continuum, at each stage of healthcare acuity. Cloudbreak powers its client’s healthcare digital transformation initiatives and provides digital health infrastructure enabling its partners to address healthcare disparities and implement unique, private-label, telehealth strategies customized to their specific needs and markets.
Cloudbreak’s core offering, known as Martti™, is a video remote interpreting solution that puts qualified and certified medical interpreters at the fingertips of clinical care teams nationwide through Cloudbreak’s proprietary software platform. Having one of the largest installed bases of video endpoints in the nation, Cloudbreak has expanded its operations to include other telemedicine use cases as well, including tele-stroke, tele-psychiatry, tele-urology, and tele-quarantine, among others, all over the same infrastructure. Cloudbreak has also recently launched a home health virtual visit platform enabling its healthcare system partners to see their patients remotely on any device, at anytime, anywhere the patient may be, and in any language they may speak. Cloudbreak’s client base spans the entire healthcare continuum including hospitals and health systems, Federally Qualified Healthcare Clinics, urgent care centers, stand-alone clinics and medical practices, employers, and schools.
Cloudbreak’s Telemedicine-as-a-Service (“TaaS”) business model aligns interests between Cloudbreak and its clients, creating a partnership targeted towards forming long-term agreements with sustainable and mutually beneficial growth models for all stakeholders. Cloudbreak has specifically structured itself to not have a captive medical group as it believes that creates a conflict of interest with its client base, as local health systems do not want to suffer patient leakage to a technology partner or be forced to use a provider network. As a result, Cloudbreak has the freedom to match its partners with centers of excellence on its network, who can satisfy their specific needs and strategy without fear of competing for the patient’s attention, and thereby avoid the employment and maintenance of a medical group, which is a lower margin and a more labor intensive activity.
Cloudbreak Key Business Metrics
Revenue
Services. Services revenue is generated primarily from the sale of subscription-based fixed monthly minute and variable rate per unit of service medical language interpretation services. Cloudbreak also records ancillary revenue from the rental of Martti™ devices and from the provision of information technology services that include connectivity and ongoing support of the Martti™ software platform. Generally, Cloudbreak’s medical language interpretation and information technology services are invoiced monthly. Fixed monthly minute medical language interpretation subscription and information technology services fees are invoiced in advance in the period preceding the service. Variable rate per unit medical language interpretation and information technology services fees (including overage fees related to minutes used by the customer in excess of the fixed monthly minute subscription) are invoiced monthly in arrears. Martti™ device leases are invoiced monthly in advance in the period preceding the usage. Invoiced amounts are typically due within 30 days of the invoice date.
Products. Products revenue consists of the sale of Martti™ devices to its customers. Sale of Martti™ devices are generally invoiced at contract execution (50%) and upon the delivery of the devices to the customer (50%). Invoiced amounts are typically due within 30 days of the invoice date.
Cost of Goods and Services
Cost of goods and services primarily consists of costs related to supporting and hosting Cloudbreak’s product offerings and delivering services, and include the cost of maintaining Cloudbreak’s data centers, customer support team, and Cloudbreak’s professional services staff, in
addition to third-party service provider costs such as data center and networking expenses, amortization of capitalized internal-use software development costs, the cost of purchased equipment inventory sold to customers, and an allocation of facilities, information technology, and depreciation costs.
Operating Expenses
Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, and an allocation of facilities, information technology, and depreciation costs.
General and Administrative Expenses. G&A expenses consist of compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M.
Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Cloudbreak.
Services Segment - Innovations Group, TTC and BHS
Innovations Group Overview
Innovations Group is the parent company of the following wholly-owned operating subsidiaries: MedQuest Pharmacy, Inc. (“MedQuest Pharmacy”), WorldLink Medical, Inc (“WorldLink Medical”), Medical Horizons, Inc. (“Medical Horizons”), and Pinnacle Labs, Inc. (doing business as MedQuest Testing Services (“MTS”)).
MedQuest Pharmacy is a full-service retail and compounding pharmacy licensed in 50 states and the District of Columbia that has relationships with both prescribers and patients, dispenses patient-specific medications, and ships directly to patients. The business model is driven by cash-pay and prescription volume-based revenue generated by physician electronic prescription order entry, as well as traditional prescriber-patient-pharmacist interactions, mailed, verbal, and faxed orders. It delivers both compounded and legend (also referred to as manufactured) drugs and is capable of serving as a retail or national fulfillment center, as a personalized medication administration partner with prescribers, and as a lifestyle wellness direct-to-consumer offering. Its proprietary software and operating system, eMedplus, is Electronic Prescribing of Controlled Substances (“EPCS”) certified by the U.S. Drug Enforcement Administration (“DEA”) and provides prescribers with a full-service prescription management system. In January 2020, eMedplus became SureScripts certified (SureScript’s process is to validate that the software meets certain industry standards related to sending and receiving electronic messages and that it is providing open choice for medication selection and dispensing location), allowing any user of the SureScripts platform to prescribe medications dispensed by MedQuest Pharmacy.
MedQuest Pharmacy is accredited and recognized by the Accreditation Commission for Health Care and its Pharmacy Compounding Accreditation Board, among other high-quality providers and suppliers. MedQuest Pharmacy has achieved this elite level of quality by exceeding standards set by national accreditation bodies and quality-centered organizations.
MedQuest Pharmacy is currently working on expanding its prescriber base, through both current prescribers and new prescribers, through the SureScripts platform and testing services with new and existing lab companies and relationships. Medical Horizons is also expanding their sales of supplements through the new NutraScriptives-Direct program, which allows physicians and others to use the NutraScriptives-Direct program to service their patients’ needs and thus expand their services and provide growth opportunities for their practices.
Also under the Innovations Group suite of services is WorldLink Medical, Medical Horizons, and MedQuest Testing Services. WorldLink Medical is the educational services arm of Innovations Group, providing Continuing Medical Education (“CME”) educational courses accredited as a joint provider through the Accreditation Council for Continuing Medical Education (“ACCME”). Medical Horizons specializes in customized formulations and contract dietary supplement and nutraceuticals manufacturing as an own label distributor with its brand NUTRAscriptivesTM, as well as other brands. Its turnkey solutions include label design, printing, and application; custom packaging; daily packs; a selection of capsule sizes and colors; and convenient auto-reorder services. It features a staff of experts that is committed to excellence and outstanding customer service. MedQuest Testing Services focuses specifically on facilitating diagnostic testing between lab companies, such as LabCorp and Quest Diagnostics, patients, and providers.
Innovations Group Key Business Metrics
Revenue
Products. Products revenue is generated primarily from the sale of prescription medications directly to patients, as well as through the sale of supplemental products to providers. The majority of the customer revenue is billed and collected before the medications and products are shipped from the facility. MedQuest Pharmacy is Innovation’s largest subsidiary in terms of revenue and generates approximately 60% of its revenue from sales of compounded medications and approximately 40% of its revenue from sales of manufactured medications and supplements.
Services. Services revenue is generated primarily from CME educational courses provided by WorldLink Medical.
Cost of Goods and Services
Cost of goods and services primarily consists of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs. MedQuest Pharmacy purchases these items through a large industry distributor with many suppliers and also sources products and supplies directly with manufacturers. MedQuest Pharmacy is also able to leverage the size of its operations to purchase larger quantities of certain ingredients and materials at lower prices.
Operating Expenses
Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, an allocation of facilities, information technology, and depreciation costs.
General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.
Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, lab equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Innovations Group.
TTC Overview
TTC provides inpatient and outpatient mental health and substance abuse treatment services for individuals with behavioral health issues, including post-traumatic stress disorder and drug and alcohol addiction. TTC offers a complete continuum of care from its detoxification services, residential care, partial hospitalization programs, and intensive outpatient, and outpatient programs. During the COVID-19 pandemic, outpatient programs have been virtual for a majority of visits.
In March 2020, TTC formed Transformations Mending Fences, LLC to provide mental health and substance abuse disorder treatment, including equine therapy, to patients. TTC has an 80% controlling interest in the entity with the remaining 20% interest owned by an unrelated party. Operations began in December 2020, with the admission of the first patient occurring in January 2021.
In addition to inpatient and outpatient substance abuse treatment services, TTC performs screenings, urinalysis, and diagnostic laboratory services, and provides physician services to clients. TTC operates three subsidiaries located in Delray Beach, Florida and one facility in Morriston, Florida. These facilities consist of inpatient substance abuse treatment facilities, standalone outpatient centers, and sober living facilities focused on delivering effective clinical care and treatment solutions.
TTC Key Business Metrics
Revenue
Services. TTC generates revenue primarily through services provided to clients in both inpatient and outpatient treatment settings. TTC bills third-party payors weekly for the services provided in the prior week. Client-related services, such as inpatient and outpatient programs, are generally recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. TTC receives the majority of payments from commercial payors at out-of-network rates. Client service revenue is recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received. A significant or sustained decrease in reimbursement rates could have a material adverse effect on operating results.
Laboratory Testing. TTC provides diagnostic laboratory testing services for its clients, which are recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. Diagnostic laboratory service revenue is recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received.
Cost of Goods and Services
Cost of goods and services consists primarily of the costs of operating the facilities, professional/doctor fees, and an allocation of information technology and depreciation costs.
Operating Expenses
Sales and Marketing Expenses. S&M expenses consist of costs related to advertising, marketing programs, and events.
General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.
Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of TTC.
BHS Overview
BHS operates through Psych Care Consultants, LLC, BHS Pharmacy, LLC, and Reimbursement Solutions, LLC, wholly-owned subsidiaries of BHS. Psych Care Consultants, LLC is a medical group that has four medical offices located in the St. Louis Metropolitan area (Missouri) and provides psychiatric and mental health services. BHS Pharmacy, LLC provides retail pharmacy services specializing in behavioral health through services, such as medication management, screenings, online portals, and delivery. Reimbursement Solutions, LLC provides billing services for Psych Care Consultants, LLC (which has allowed for more efficient payment for BHS clinicians) and third-party customers. Services include billings, collections, verification of benefits, authorization, and credentialing.
BHS provides its patients and providers with a reliable platform where a provider can address their patients’ needs efficiently with an infrastructure built to support the providers and address patient needs. This infrastructure consists of medical offices placed strategically for the convenience of providers and patients and trained staff to assist providers and patients in the delivery of quality health services that is timely and efficient, provide prescription dispensing for patients that is convenient to maintain compliance, and assist providers with billing and collection services through Reimbursement Solutions, LLC.
BHS providers work in collaboration with multiple area hospital systems (both in leadership and clinical positions) to provide and direct inpatient treatment. BHS’ business is generated by various referral sources developed over the years by BHS’ providers and their presence in the market for over twenty-five years. BHS offers in-office, virtual, and in-patient treatment. Common conditions treated by BHS practitioners include depression, bipolar disorder, attention disorders, schizophrenia, substance use disorders, post-traumatic stress disorder, Alzheimer’s disease and related disorders, and personality disorders.
BHS Key Business Metrics
Revenue
Services. Services revenue is generated primarily by providing psychiatric and mental health services and billing services. Although the underlying tasks will vary by service and by patient, medical professionals perform inquiries, obtain vital statistics, perform certain lab tests, administer therapy, and provide any additional goods and services as necessary depending on the information obtained.
Products. Products revenue is generated primarily by providing retail pharmacy services through BHS Pharmacy, LLC.
Cost of Goods and Services
Cost of goods and services consists primarily of provider compensation expenses, the cost of pharmaceutical medications sold to patients, and an allocation of facilities, information technology, and depreciation costs. Provider compensation expenses include consulting payments to BHS’ healthcare providers, including medical doctors in psychiatry, psychologists, nurse practitioners, and clinical social workers. BHS has adopted an incentive-based compensation plan with provider agreements that compensate the providers based upon a percentage of
revenue generated and ultimately collected for services provided. BHS primarily purchases pharmaceutical medications through a large industry distributor with many suppliers, but also purchases some directly from other suppliers.
Operating Expenses
General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services.
Depreciation Expense. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of BHS.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected.
Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, the following accounting policies and specific estimates involve a greater degree of judgment and complexity:
•Business combinations;
•Goodwill and intangible assets;
•Revenue recognition; and
•Income taxes.
There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a significant impact on our condensed consolidated financial statements and related notes.
UpHealth, Inc. Consolidated Results of Operations
Operating Results
As of June 30, 2022 and for the three and six months then ended, UpHealth’s operating results consist of the results of operations for UpHealth and its subsidiaries Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak. As of June 30, 2021 and for the three and six months then ended, UpHealth’s operating results consist of (1) the results of operations for UpHealth Holdings and its subsidiaries Thrasys, BHS, TTC and Glocal and (2) the results of operations for its subsidiaries Innovations Group and Cloudbreak subsequent to their acquisitions on April 27, 2021 and June 9, 2021, respectively.
The following table sets forth the consolidated results of operations of UpHealth:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited, in thousands) | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | $ Change | | % Change | | 2022 | | 2021 | | $ Change | | % Change |
| Revenue: | | | | | | | | | | | | | | | |
| Services | $ | 28,096 | | | $ | 15,448 | | | $ | 12,648 | | | 82 | % | | $ | 53,782 | | | $ | 23,586 | | | $ | 30,196 | | | 128 | % |
| Licenses and subscriptions | 6,812 | | | 9,145 | | | (2,333) | | | (26) | % | | 8,593 | | | 12,803 | | | (4,210) | | | (33) | % |
| Products | 8,760 | | | 7,289 | | | 1,471 | | | 20 | % | | 17,265 | | | 8,309 | | | 8,956 | | | 108 | % |
| Total revenue | 43,668 | | | 31,882 | | | 11,786 | | | 37 | % | | 79,640 | | | 44,698 | | | 34,942 | | | 78 | % |
| Cost of goods and services: | | | | | | | | | | | | | | | |
| Services | 14,762 | | | 9,590 | | | 5,172 | | | 54 | % | | 29,207 | | | 14,063 | | | 15,144 | | | 108 | % |
| License and subscriptions | 217 | | | 6,173 | | | (5,956) | | | (96) | % | | 450 | | | 6,670 | | | (6,220) | | | (93) | % |
| Products | 6,296 | | | 4,727 | | | 1,569 | | | 33 | % | | 12,286 | | | 5,643 | | | 6,643 | | | 118 | % |
| Total cost of goods and services | 21,275 | | | 20,490 | | | 785 | | | 4 | % | | 41,943 | | | 26,376 | | | 15,567 | | | 59 | % |
| Gross margin | 22,393 | | | 11,392 | | | 11,001 | | | 97 | % | | 37,697 | | | 18,322 | | | 19,375 | | | 106 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
| Sales and marketing | 3,486 | | | 1,695 | | | 1,791 | | | 106 | % | | 6,212 | | | 2,580 | | | 3,632 | | | 141 | % |
| Research and development | 1,782 | | | 2,273 | | | (491) | | | (22) | % | | 3,369 | | | 3,843 | | | (474) | | | (12) | % |
| General and administrative | 14,632 | | | 7,306 | | | 7,326 | | | 100 | % | | 28,291 | | | 11,029 | | | 17,262 | | | 157 | % |
| Depreciation and amortization | 4,700 | | | 2,966 | | | 1,734 | | | 58 | % | | 9,936 | | | 3,870 | | | 6,066 | | | 157 | % |
| Stock-based compensation | 1,088 | | | — | | | 1,088 | | | — | % | | 2,462 | | | — | | | 2,462 | | | — | % |
| Lease abandonment expenses | — | | | — | | | — | | | — | % | | 75 | | | — | | | 75 | | | — | % |
| Goodwill and intangible asset impairment | — | | | — | | | — | | | — | % | | 6,174 | | | — | | | 6,174 | | | — | % |
| Acquisition, integration, and transformation costs | 6,749 | | | 32,653 | | | (25,904) | | | (79) | % | | 9,133 | | | 35,339 | | | (26,206) | | | (74) | % |
| Total operating expenses | 32,437 | | | 46,893 | | | (14,456) | | | (31) | % | | 65,652 | | | 56,661 | | | 8,991 | | | 16 | % |
| Loss from operations | (10,044) | | | (35,501) | | | 25,457 | | | (72) | % | | (27,955) | | | (38,339) | | | 10,384 | | | (27) | % |
| Other income (expense): | | | | | | | | | | | | | | | |
| Interest expense | (6,603) | | | (4,904) | | | (1,699) | | | 35 | % | | (13,598) | | | (5,615) | | | (7,983) | | | 142 | % |
| Gain on consolidation of equity method investment | — | | | — | | | — | | | — | % | | — | | | 640 | | | (640) | | | (100) | % |
| Gain on fair value of derivative liability | 1,841 | | | — | | | 1,841 | | | — | % | | 6,670 | | | — | | | 6,670 | | | — | % |
| Gain on fair value of warrant liabilities | 95 | | | 1,075 | | | (980) | | | (91) | % | | 190 | | | 1,075 | | | (885) | | | (82) | % |
| Gain on extinguishment of debt | — | | | 151 | | | (151) | | | (100) | % | | — | | | 151 | | | (151) | | | (100) | % |
| Other income (expense), net, including interest income | 14 | | | (256) | | | 270 | | | (105) | % | | (2) | | | (219) | | | 217 | | | (99) | % |
| Total other expense | (4,653) | | | (3,934) | | | (719) | | | 18 | % | | (6,740) | | | (3,968) | | | (2,772) | | | 70 | % |
| Loss before income tax benefit | (14,697) | | | (39,435) | | | 24,738 | | | (63) | % | | (34,695) | | | (42,307) | | | 7,612 | | | (18) | % |
| Income tax benefit | 2,232 | | | 6,646 | | | (4,414) | | | (66) | % | | 4,525 | | | 7,052 | | | (2,527) | | | (36) | % |
| Net loss before loss from equity method investment | (12,465) | | | (32,789) | | | 20,324 | | | (62) | % | | (30,170) | | | (35,255) | | | 5,085 | | | (14) | % |
| Loss from equity method investment | — | | | — | | | — | | | — | % | | — | | | (561) | | | 561 | | | (100) | % |
| Net loss | (12,465) | | | (32,789) | | | 20,324 | | | (62) | % | | (30,170) | | | (35,816) | | | 5,646 | | | (16) | % |
| Less: net loss attributable to noncontrolling interests | (27) | | | (6) | | | (21) | | | 350 | % | | (287) | | | (84) | | | (203) | | | 242 | % |
| Net loss attributable to UpHealth, Inc. | $ | (12,438) | | | $ | (32,783) | | | $ | 20,345 | | | (62) | % | | $ | (29,883) | | | $ | (35,732) | | | $ | 5,849 | | | (16) | % |
| | | | | | | | | | | | | | | |
The following table sets forth the consolidated results of operations of UpHealth as a percentage of total revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue: | | | | | | | |
| Services | 64 | % | | 48 | % | | 68 | % | | 53 | % |
| Licenses and subscriptions | 16 | % | | 29 | % | | 11 | % | | 29 | % |
| Products | 20 | % | | 23 | % | | 22 | % | | 19 | % |
| Total revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Cost of goods and services: | | | | | | | |
| Services | 34 | % | | 30 | % | | 37 | % | | 31 | % |
| License and subscriptions | — | % | | 19 | % | | 1 | % | | 15 | % |
| Products | 15 | % | | 15 | % | | 15 | % | | 13 | % |
| Total cost of goods and services | 49 | % | | 64 | % | | 53 | % | | 59 | % |
| Gross margin | 51 | % | | 36 | % | | 47 | % | | 41 | % |
| Operating expenses: | | | | | | | |
| Sales and marketing | 8 | % | | 5 | % | | 8 | % | | 6 | % |
| Research and development | 4 | % | | 7 | % | | 4 | % | | 9 | % |
| General and administrative | 34 | % | | 23 | % | | 36 | % | | 25 | % |
| Depreciation and amortization | 11 | % | | 9 | % | | 12 | % | | 9 | % |
| Stock-based compensation | 2 | % | | — | % | | 3 | % | | — | % |
| Lease abandonment expenses | — | % | | — | % | | — | % | | — | % |
| Goodwill and intangible asset impairment | — | % | | — | % | | 8 | % | | — | % |
| Acquisition, integration, and transformation costs | 15 | % | | 102 | % | | 11 | % | | 79 | % |
| Total operating expenses | 74 | % | | 147 | % | | 82 | % | | 127 | % |
| Loss from operations | (23) | % | | (111) | % | | (35) | % | | (86) | % |
| Other income (expense): | | | | | | | |
| Interest expense | (15) | % | | (15) | % | | (17) | % | | (13) | % |
| Gain on consolidation of equity method investment | — | % | | — | % | | — | % | | 1 | % |
| Gain on fair value of derivative liability | 4 | % | | — | % | | 8 | % | | — | % |
| Gain on fair value of warrant liabilities | — | % | | 3 | % | | — | % | | 2 | % |
| Gain on extinguishment of debt | — | % | | — | % | | — | % | | — | % |
| Other income (expense), net, including interest income | — | % | | (1) | % | | — | % | | — | % |
| Total other expense | (11) | % | | (12) | % | | (8) | % | | (9) | % |
| Loss before income tax benefit | (34) | % | | (124) | % | | (44) | % | | (95) | % |
| Income tax benefit | 5 | % | | 21 | % | | 6 | % | | 16 | % |
| Net loss before loss from equity method investment | (29) | % | | (103) | % | | (38) | % | | (79) | % |
| Loss from equity method investment | — | % | | — | % | | — | % | | (1) | % |
| Net loss | (29) | % | | (103) | % | | (38) | % | | (80) | % |
| Less: net loss attributable to noncontrolling interests | — | % | | — | % | | — | % | | — | % |
| Net loss attributable to UpHealth, Inc. | (28) | % | | (103) | % | | (38) | % | | (80) | % |
Due to the timing of UpHealth’s acquisitions of TTC, Glocal, Innovations Group, and Cloudbreak, the numbers presented above are not directly comparable between periods.
Three months ended June 30, 2022 and 2021
Revenue
In the three months ended June 30, 2022, revenue was $43.7 million, an increase of $11.8 million, or 37%, compared to $31.9 million in the three months ended June 30, 2021. Services revenue increased $12.6 million, primarily due to a $10.6 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Products revenue increased $1.5 million, primarily due to an increase in the Services segment resulting from to a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Licenses and subscriptions revenue declined $2.3 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.
We expect revenue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.
Cost of Goods and Services
In the three months ended June 30, 2022, cost of goods and services was $21.3 million, an increase of $0.8 million, or 4%, compared to $20.5 million in the three months ended June 30, 2021. Cost of services increased $5.2 million, primarily due to a $4.5 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Cost of products increased $1.6 million, primarily due to an increase in the Services segment resulting from a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Cost of licenses and subscriptions declined $6.0 million, primarily due to Thrasys' loss of a contract with a European customer.
We expect cost of goods and services to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect cost of goods and services to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of goods and services may fluctuate as a percentage of our total revenue (gross margin %) from period to period due to the changes in the percentage of revenue contributed by each of our segments.
Operating Expenses
Sales and Marketing. In the three months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $3.5 million, compared to $1.7 million in the three months ended June 30, 2021. The increase in S&M expenses was largely due to a $1.6 million increase in S&M expenses at Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as corporate S&M expenses related to additional headcount.
We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect our S&M expenses to increase for the foreseeable future as we invest in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities.
Research and Development. In the three months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $1.8 million compared to $2.3 million in the three months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.
We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021, and for the foreseeable future, as we continue to invest in the development and integration of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as software development costs.
General and Administrative. In the three months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $14.6 million, compared to $7.3 million in the three months ended June 30, 2021. The increase in G&A expenses of $7.3 million was largely due an increase of approximately $5.8 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.
We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021, and an increase in expenses at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to increase for the foreseeable future as we continue to grow our business. Our G&A expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our G&A expenses.
Depreciation and Amortization. In the three months ended June 30, 2022, depreciation and amortization expenses were $4.7 million, primarily consisting of $4.2 million of amortization of intangible assets and $0.7 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the three months ended June 30, 2021 depreciation and amortization expenses
were $3.0 million, primarily consisting of $2.7 million of amortization of intangible assets and $0.3 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.
We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of amortization of intangibles assets and depreciation of property, plant, and equipment related to TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021.
Stock-Based Compensation. In the three months ended June 30, 2022, stock-based compensation expenses were $1.1 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the three months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.
Acquisition, Integration and Transformation Costs. In the three months ended June 30, 2022, acquisition, integration and transformation costs were $6.7 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the three months ended June 30, 2021, acquisition, integration and transformation costs were $32.7 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.
Other Expense
In the three months ended June 30, 2022, other expense was $4.7 million, primarily consisting of $6.6 million of interest expense, partially offset by a $1.8 million of gain on fair value of derivative liability and a $0.1 million gain on fair value of warrant liabilities. In the three months ended June 30, 2021, other expense was $3.9 million, primarily consisting of $4.9 million of interest expense and $0.3 million of other expense, net, partially offset by a $1.1 million gain on fair value of warrants and a $0.2 million gain on extinguishment of debt.
Income Tax Benefit
In the three months ended June 30, 2022, the income tax benefit was $2.2 million. In the three months ended June 30, 2021, the income tax benefit was $6.6 million.
Income tax benefit reflects management’s best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements.
Six months ended June 30, 2022 and 2021
Revenue
In the six months ended June 30, 2022, revenue was $79.6 million, an increase of $34.9 million, or 78%, compared to $44.7 million in the six months ended June 30, 2022. Services revenue increased $30.2 million, primarily due to an increase of $25.4 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $7.7 million in the Services segment resulting from a period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Products revenue increased $9.0 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Licenses and subscriptions revenue declined $4.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.
We expect revenue to continue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.
Cost of Goods and Services
In the six months ended June 30, 2022, cost of goods and services was $41.9 million, an increase of $15.6 million, or 59%, compared to $26.4 million in the six months ended June 30, 2021. Cost of services increased $15.1 million, primarily due to an increase of $12.3 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $2.6 million in the Services segment resulting from a full period of operations in the six months ended June 30,
2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Cost of products increased $6.6 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Cost of licenses and subscriptions revenue declined $6.2 million, primarily due to Thrasys' loss of a contract with a European customer.
We expect cost of goods and services to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect cost of goods and services to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of goods and services may fluctuate as a percentage of our total revenue (gross margin %) from period to period due to the changes in the percentage of revenue contributed by each of our segments.
Operating Expenses
Sales and Marketing. In the six months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $6.2 million, compared to $2.6 million in the six months ended June 30, 2021. The increase in S&M expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.
We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect our S&M expenses to increase for the foreseeable future as we invest in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities.
Research and Development. In the six months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $3.4 million compared to $3.8 million in the six months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.
We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021, and for the foreseeable future, as we continue to invest in the development and integration of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as software development costs.
General and Administrative. In the six months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $28.3 million, compared to $11.0 million in the six months ended June 30, 2021. The increase in G&A expenses of $17.3 million was largely due an increase of approximately $12 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.
We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021, and an increase in expenses at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to increase for the foreseeable future as we continue to grow our business. Our G&A expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our G&A expenses.
Depreciation and Amortization. In the six months ended June 30, 2022, depreciation and amortization expenses were $9.9 million, primarily consisting of $9.3 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the six months ended June 30, 2021 depreciation and amortization expenses were $3.9 million, primarily consisting of $3.5 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.
We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of amortization of intangibles assets and depreciation of property, plant, and equipment related to TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021.
Stock-Based Compensation. In the six months ended June 30, 2022, stock-based compensation expenses were $2.5 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the six months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.
Lease Abandonment Expenses. In the six months ended June 30, 2022, we recorded a lease abandonment accrual in the amount of $0.1 million related to office spaces we vacated during the period. There were no lease abandonment expenses in the six months ended June 30, 2021.
Goodwill and Intangible Asset Impairment. In the six months ended June 30, 2022, we recorded a goodwill and intangible asset impairment of $6.2 million, primarily consisting of a $5.5 million measurement period adjustment at Glocal that was immediately impaired, and a $0.7 million trade name intangible asset impairment at TTC. No impairment charge was recognized in the six months ended June 30, 2021.
Acquisition, Integration and Transformation Costs. In the six months ended June 30, 2022, acquisition, integration and transformation costs were $9.1 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the six months ended June 30, 2021, acquisition, integration and transformation costs were $35.3 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.
Other Expense
In the six months ended June 30, 2022, other expense was $6.7 million, primarily consisting of $13.6 million of interest expense, partially offset by a $6.7 million of gain on fair value of derivative liability and a $0.2 million gain on fair value of warrant liabilities. In the six months ended June 30, 2021, other expense was $4.0 million, primarily consisting of $5.6 million of interest expense, partially offset by a $1.1 million gain on fair value of warrant liabilities and a $0.6 million gain on consolidation of equity method investment.
Income Tax Benefit
In the six months ended June 30, 2022, the income tax benefit was $4.5 million. In the six months ended June 30, 2021, the income tax benefit was $7.1 million.
Income tax benefit reflects management’s best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements.
Segment Information
We evaluate performance based on several factors, of which revenue and gross margin by operating segment are the primary financial measures.
Revenue
Revenue by segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| In thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Integrated Care Management | $ | 7,823 | | | $ | 11,280 | | | $ | 10,435 | | | $ | 17,569 | |
| Virtual Care Infrastructure | 16,815 | | | 6,964 | | | 32,445 | | | 7,554 | |
| Services | 19,030 | | | 13,638 | | | 36,760 | | | 19,575 | |
| Total revenue | $ | 43,668 | | | $ | 31,882 | | | $ | 79,640 | | | $ | 44,698 | |
Three Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care Infrastructure segment increased $9.9 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Revenue from the Services segment increased $5.4 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Revenue from the Integrated Care Management segment decreased $3.5 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.
Six Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care Infrastructure segment increased $24.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which were acquired in the first half of 2021. Revenue from the Services segment increased $17.2 million, primarily due to a full year of operations at Innovations Group and TTC, which were acquired in the first half of 2021. Revenue from the Integrated Care Management segment decreased $7.1 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.
Gross margin
Gross margin by segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| In thousands | 2022 | | 2021 | | 2022 | | 2021 |
| Integrated Care Management | $ | 6,894 | | | $ | 4,504 | | | $ | 8,531 | | | $ | 9,723 | |
| Virtual Care Infrastructure | 8,179 | | | 2,634 | | | 15,588 | | | 2,933 | |
| Services | 7,320 | | | 4,254 | | | 13,578 | | | 5,666 | |
| Total gross margin | $ | 22,393 | | | $ | 11,392 | | | $ | 37,697 | | | $ | 18,322 | |
Three Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care Infrastructure segment increased $5.5 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Gross margin from the Services segment increased $3.1 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Gross margin from the Integrated Care Management segment increased $2.4 million, primarily due to Thrasys' increased revenue with minimal cost from an amended contract with an existing customer, net of the loss of a contract with a European customer.
Six Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care Infrastructure segment increased $12.7 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which was acquired in the first half of 2021. Gross margin from the Services segment increased $7.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Gross margin from the Integrated Care Management segment decreased $1.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue with minimal cost from an amended contract with an existing customer.
Liquidity and Capital Resources
As of June 30, 2022 and December 31, 2021, we had free cash on hand of $40.6 million and $58.2 million, respectively. As of June 30, 2022, we had restricted cash of $0.5 million, representing funds held at our Glocal business. As of December 31, 2021, we had restricted cash of $18.6 million, representing $18.1 million of funds held in an escrow account as agreed in a forward share purchase agreement (see Note 10, Capital Structure, for further information) and $0.5 million of funds held at our Glocal business.
We believe our current cash, restricted cash, and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q.
Cash Flows
The following tables summarize cash flows for the six months ended June 30, 2022 and 2021 (unaudited):
| | | | | | | | | | | |
| | Six Months Ended June 30, |
| (In thousands) | 2022 | | 2021 |
| Net cash used in operating activities | $ | (7,841) | | | $ | (37,228) | |
| Net cash (used in) provided by investing activities | (3,783) | | | 3,859 | |
| Net cash (used in) provided by financing activities | (23,580) | | | 129,801 | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (460) | | | (99) | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (35,664) | | | 96,333 | |
As UpHealth Holdings effectively began operations on January 1, 2020 and operations from UpHealth’s subsidiaries are included from their dates of acquisition, as described above, the numbers presented above are not directly comparable between periods.
In the six months ended June 30, 2022, cash used in operating activities was $7.8 million, primarily attributed to the net loss of $30.2 million and gain on fair value of derivative liability, gain on fair value of warrant liabilities, partially offset by $16.1 million of non-cash items
(impairments, depreciation, intangible amortization, debt issuance cost amortization, and stock-based compensation) and the changes in operating assets and liabilities, net of effects of acquisitions, of $6.2 million. The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to a decrease in accounts receivable of $6.2 million due to net collections of receivables and an increase in accounts payable and accrued expenses of $7.9 million due to delayed payments to vendors. In the six months ended June 30, 2021, cash used in operating activities was $37.2 million, primarily attributed to the net loss of $35.8 million and the changes in operating assets and liabilities, net of effects of acquisitions, of $1.1 million, partially offset by $2.5 million of non-cash items (depreciation, deferred tax adjustments, gain on extinguishment of debt, loss on fair value of warrant liabilities, and debt issuance cost amortization). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts receivable of $21.0 million due to billed and unbilled receivables from two customers during the quarter that were not collected as of June 30, 2021, partially offset by an increase in accounts payable and accrued expenses of $15.6 million due to delayed payments to vendors, and proceeds from Provider Relief Funds of $0.5 million.
In the six months ended June 30, 2022, cash used in investing activities was $3.8 million, primarily consisting of purchases of property and equipment. In the six months ended June 30, 2021, cash provided by investing activities was $3.9 million, primarily consisting of net cash acquired in acquisition of businesses.
In the six months ended June 30, 2022, cash used in financing activities was $23.6 million, primarily consisting of the repayment of the forward share purchase of $18.5 million, payments of capital lease obligations of $1.6 million and repayments of debt obligations of $3.2 million. In the six months ended June 30, 2021, cash provided by financing activities was $129.8 million, primarily consisting of proceeds from convertible debt of $164.5 million and proceeds from merger and recapitalization transaction of $83.4 million, partially offset by repayments of seller notes of $88.1 million, repayments of debt of $17.3 million and payments of amounts due to members of $4.3 million.
Long-Term Debt
See Note 8, Debt, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for our long-term debt.
On August 12, 2022, we entered into senior secured convertible note subscription agreements with certain institutional investors, pursuant to which we agreed to issue and sell $67.5 million in aggregate principal amount of a new series of variable rate convertible senior secured notes due December 15, 2025 (the “2025 Notes”) to holders of our 6.25% convertible senior notes due June 15, 2026 (see Note 8, Debt) in a private placement transaction, raising approximately $22.5 million in gross cash proceeds, after paying for a repurchase of $45.0 million of the 2026 Notes, which proceeds will be used in part to fully repay the seller notes. The 2025 Notes are convertible into shares of UpHealth common stock at a conversion price, subject to the occurrence of certain corporate events, of $1.75 per share. The 2025 Notes will be senior secured obligations of UpHealth, secured by substantially all of our assets and those of our domestic subsidiaries, and will accrue interest at a rate equal to the daily secured overnight financing rate (“SOFR”) plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require UpHealth to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that UpHealth sells assets with net proceeds in excess of $15.0 million, then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any. UpHealth may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. UpHealth will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.
Contractual Obligations and Commitments
See Note 11, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.
Off-Balance Sheet Arrangements
As of June 30, 2022, we have not entered into any off-balance sheet financing arrangements, established any additional special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for the recently issued accounting standards that could have an effect on us.