Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following management’s discussion and analysis in conjunction with our consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report. Unless otherwise indicated or the context otherwise requires, references in this section to “we,” “our,” “us,” “UpHealth,” the “Company,” and other similar terms refer to UpHealth, Inc. and its consolidated subsidiaries.
Formation
UpHealth Services, Inc. was formed on November 5, 2019, and effectively began operations on January 1, 2020. It was formed for the purpose of effecting a combination of various companies engaged in digital health, and commenced negotiations with a number of companies, including those that are discussed below as having been acquired. UpHealth Holdings, 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 operating segments: (a) Services—through its subsidiaries TTC Healthcare, Inc. (“TTC”), Behavioral Health Services, LLC (“BHS”), and Innovations Group, Inc. (“Innovations Group”); (b) Virtual Care Infrastructure—through its subsidiary Glocal Healthcare Systems Private Limited (“Glocal”); and Integrated Care Management—through its subsidiary Thrasys, Inc. (“Thrasys”). As further described below, on June 9, 2021, UpHealth (fka GigCapital2, Inc.) completed the business combinations, pursuant to which it acquired UpHealth Holdings and its subsidiaries, and Cloudbreak Health, LLC (“Cloudbreak”) and its subsidiaries which were added to the Virtual Care Infrastructure segment.
Table of Contents
Completed Business Combinations
On November 20, 2020, UpHealth Holdings acquired BHS, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and BHS, in exchange for consideration in the form of a promissory note in the amount of $1.2 million and shares of UpHealth Holdings.
On November 20, 2020, UpHealth Holdings acquired Thrasys pursuant to the terms of an Amended and Restated Plan of Merger between the parties, in exchange for consideration in the form of a promissory note in the amount of $20.0 million and shares of UpHealth Holdings common stock.
On January 25, 2021, UpHealth Holdings acquired TTC, which became a wholly owned subsidiary, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and TTC, in exchange for consideration in the form of a promissory note in the amount of $12.1 million and shares of UpHealth Holdings common stock.
Glocal is now a super-majority owned (but not wholly owned) subsidiary of UpHealth Holdings. The acquisition of Glocal by UpHealth Holdings was structured to occur in multiple steps. Pursuant to the terms and conditions of a Share Purchase Agreement between UpHealth Holdings, Glocal, and certain Glocal shareholders, the first step concluded on November 20, 2020, when UpHealth Holdings acquired approximately 43.46% of the outstanding equity share capital of Glocal and delivered shares of UpHealth Holdings common stock and a $8.7 million note, which was paid in June 2021. As part of the second step, on March 26, 2021, UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 89.4% of the outstanding equity of Glocal, by way of capital investment into Glocal, with $3.0 million paid in March 2021. On May 14, 2021, UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 90.4% of the outstanding equity of Glocal, and delivered shares of UpHealth Holdings common stock. The third step concluded on June 21, 2021, when UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 92.2% of the outstanding equity of Glocal, and delivered $9.2 million in cash to the selling shareholders. The fourth step concluded on August 27, 2021, when UpHealth Holdings acquired additional equity share capital of Glocal, increasing its ownership to approximately 94.81% of the outstanding equity of Glocal, and delivered $20.0 million in cash to the selling shareholders. UpHealth Holdings, as the majority shareholder, will, in conjunction with the remaining Glocal shareholders, increase UpHealth Holdings’ ownership in Glocal through the acquisition of remaining shares, and/or any other manner acceptable to UpHealth Holdings and permitted under India law.
On April 27, 2021, UpHealth Holdings acquired Innovations Group, which became a wholly owned subsidiary, pursuant to the terms of an Agreement and Plan of Merger between UpHealth Holdings and Innovations Group, in exchange for consideration in the form of a promissory note in the amount of $30.0 million and shares of UpHealth Holdings common stock.
O n June 9, 2021, UpHealth acquired Cloudbreak, which became a wholly owned subsidiary, pursuant to the terms of a Business Combination Agreement between UpHealth and Cloudbreak, in exchange for consideration in the form of a promissory note in the amount of $36.6 million and shares of UpHealth common stock.
On June 9, 2021, UpHealth acquired UpHealth Holdings and its subsidiaries, which became wholly owned subsidiaries, in an exchange of cash, notes, and shares of common stock for all the shares of UpHealth Holdings ’ capital stock issued and outstanding immediately prior to the effective time of the acquisition. The acquisition was accounted for as a reverse recapitalization, which is the equivalent of UpHealth Holdings issuing stock for the net assets of UpHealth, accompanied by a recapitalization, with UpHealth treated as the accounting acquiree. The determination of UpHealth as the accounting acquiree was primarily based on the fact that subsequent to the acquisition, UpHealth Holdings owned a majority of the voting power of the combined company, UpHealth Holdings comprised 75% of the ongoing operations of the combined entity, UpHealth Holdings controlled a majority of the governing body of the combined company, and UpHealth Holdings ’ senior management comprised most of the senior management of the combined company.
Deconsolidation of Glocal and Subsidiaries
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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. As of March 31, 2024, the operations of Glocal remain deconsolidated from the rest of UpHealth.
Sale of Innovations Group and Subsidiaries
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, on February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of Innovations Group to Belmar MidCo, Inc., a Delaware corporation (“Belmar”) and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation and a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, 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
Table of Contents
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.
Chapter 11 Cases of UpHealth Holdings, Thrasys, and BHS
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, following an adverse legal judgement, 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. See Item 3, Legal Proceedings , of Part I of this Annual Report for additional information.
Deconsolidation of UpHealth Holdings and Subsidiaries
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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. Similarly, 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. As of March 31, 2024, the operations of UpHealth Holdings and its subsidiaries remain deconsolidated from the rest of UpHealth.
Thrasys entered into three transition agreements, dated as of November 15, November 16 and November 17, 2023, respectively, with its customers, (i) Local Initiative Health Authority for Los Angeles County, a local public entity operating and doing business as L.A. Care Health Plan; (ii) EmpiRx Health LLC, a Delaware corporation; and (iii) the County of Alameda, California, USA (each, a “Transition Agreement”), providing for, among other things, the grant to each customer of a perpetual, non-exclusive license of the applicable source code and related SyntraNet TM platform and the provision by Thrasys of certain transition services during the transition term provided under the applicable Transition Agreement, with the consummation of the transactions contemplated by each Transition Agreement subject to the entry by the Bankruptcy Court of an order authorizing and approving the Transition Agreements, which order was subsequently entered by the Bankruptcy Court.
Accordingly, on December 28, 2023, Thrasys consummated the closing of the transactions contemplated by the Transition Agreements. Following the closing, Thrasys no longer has any operations. Except as otherwise provided in the Transition Agreements, Thrasys will continue to own all intellectual property, subject to the non-exclusive licenses granted pursuant to the Transition Agreements.
Sale of Cloudbreak and Subsidiaries
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, on November 16, 2023, UpHealth 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 (the “Sale”). The Sale closed on March 15, 2024. Accordingly, Cloudbreak is included in the Virtual Care Infrastructure segment for the years ended December 31, 2022 and 2023.
UpHealth’s Prospective Business Overview
As a result of the events detailed above, as of March 16, 2024, UpHealth no longer offers Virtual Care Infrastructure or Integrated Care Management platforms and has repositioned its business efforts to continue growth in its Services division as a leading provider of a full continuum of behavioral health services. TTC, UpHealth’s remaining operating company, provides behavioral healthcare treatment services by utilizing psychiatrists, physicians, advanced nurse practitioners, physician assistants, psychologists, licensed therapists, and clinical social workers in a full continuum of care from inpatient to outpatient levels of care. However, until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan, the operations of UpHealth Holdings and its subsidiaries, including TTC, will remain deconsolidated from the rest of UpHealth. As a result, subsequent to the Sale of Cloudbreak on March 15, 2024, the financial position, results of operations, and cash flows of UpHealth will solely consist of the operations of UpHealth, which comprises a fourth non-operating business segment, Corporate, consisting solely of the operating expenses of UpHealth as the parent company of TTC.
Table of Contents
Services Segment
Overview
Our Services platform provides 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. Our Services platform is working to deliver an increasing volume of services, including telehealth services, to existing customers, as well as clients belonging to the Integrated Care Management and Virtual Care Infrastructure platforms.
Our behavioral health business provides comprehensive patient-centered care, addressing the physical, mental, and social well-being of our clients. We engage people in the most appropriate care settings, including clinical sites, out-patient and virtual. Our behavioral health business delivers behavioral health services; helps patients and providers navigate and address complex, chronic behavioral health needs; offers post-acute care planning services; and serves consumers and care providers through advanced, on-demand digital health technologies, such as telehealth. Our behavioral health business works directly with consumers, care delivery systems, providers, payors, and public-sector entities to provide high quality, accessible and equitable care with improved health outcomes and reduced total cost of care.
Our behavioral health business sells its services primarily through its direct sales force, and strategic collaborations in two key areas: payors including health plans, third-party administrators; and public entities including the U.S. Departments of Veterans Affairs and other federal, state, and local health care agencies.
We also had a pharmacy business, Innovations Group, which was sold on May 11, 2023. Innovations Group is powered by MedQuest Pharmacy, a full-service retail and compounding pharmacy licensed in all 50 U.S. states and the District of Columbia that dispenses prescribed medications shipped directly to patients.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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 discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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.
As a result of the sale of Innovations Group and the deconsolidation of UpHealth Holdings and its subsidiaries as described above, the Services segment had no operations during the three months ended December 31, 2023.
Components of Results of Operations
Revenues
Services . Services revenues from our behavioral health business are generated primarily through services provided to clients in both inpatient and outpatient treatment settings. Our behavioral health business bills third-party payors weekly for the services provided in the prior week. Client-related revenues, 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. Client service revenues are recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received. A significant or sustained decrease in reimbursement rates could have a material adverse effect on operating results.
Our behavioral health business also provides diagnostic laboratory testing services for its clients, which are recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. Diagnostic laboratory service revenues are recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received.
Services revenues from our behavioral health business are also generated 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. In addition, services revenues are generated from CME educational courses.
Table of Contents
Products . Products revenues through our pharmacy business were 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 revenues were billed and collected before the medications and products were shipped from the facility. The pharmacy business generated approximately 60% of its revenue from sales of compounded medications and approximately 40% of its revenue from sales of manufactured medications and supplements.
Products revenues are also generated by providing retail pharmacy services at our behavioral health business.
Costs of Revenues
Costs of revenues from our behavioral health business consist primarily of provider compensation expenses, the cost of pharmaceutical medications sold to patients, the cost of operating the facilities, professional/medical fees, and an allocation of facilities, information technology, and depreciation costs. Provider compensation expenses include consulting payments to healthcare providers, including medical doctors in psychiatry, psychologists, nurse practitioners, and clinical social workers. Our behavioral health business 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. Our behavioral health business primarily purchases pharmaceutical medications through a large industry distributor with many suppliers, but also purchases some directly from other suppliers.
Costs of revenues at the pharmacy business primarily consisted of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services and an allocation of facilities, information technology, and depreciation costs. The pharmacy business purchased these items through a large industry distributor with many suppliers and also sourced products and supplies directly with manufacturers. The pharmacy business was 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 (“S&M”) Expenses . S&M expenses consist of cost related to compensation and benefits, advertising and marketing programs, events, fees paid to third party marketing firms, and an allocation of facilities, information technology, and depreciation cost.
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 costs of revenues and S&M expenses.
Depreciation and Amortization Expenses . Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to costs of revenues. Amortization expense relates to the amortization of intangible assets from the acquisitions of TTC, BHS, and Innovations Group.
Virtual Care Infrastructure Segment
Overview
As discussed above, as of March 16, 2024, we no longer have a Virtual Care Infrastructure segment that we operate.
Our Virtual Care Infrastructure segment was a technology and technology-enabled services business that connects healthcare systems with platforms, analytics and services that make clinical and administrative processes simpler and more efficient. Hospital systems, physicians, and patients depend on the Virtual Care Infrastructure business to help them improve performance, reduce costs and advance care quality through technology-enabled services built directly into clinical workflows.
Powered by Martti™, the Virtual Care Infrastructure business was a provider of unified telehealth solutions and digital health tools aimed at increasing access to healthcare and resolving health disparities across the care continuum. The Virtual Care Infrastructure business had one of the largest installed user bases in the nation, performing more than 300,000 encounters per month on over 40,000 video endpoints at over 2,800 healthcare venues in over 250 languages across the United States. Through its integrated telehealth and language access services, the platform served as the digital front door to in-hospital care. The Martti TM platform provided digital health infrastructure enabling its partners to implement unique, private-label telehealth strategies customized to their specific needs and markets, with language access built-in.
In 2022, Martti TM expanded its operations by leveraging its existing platform to include other telemedicine use cases, such as telestroke, teleneurology, and telepsychiatry. We also launched a home health virtual visit platform enabling healthcare system partners to see their patients remotely on any device, at any time, anywhere the patient may be, and in any language they may speak.
The Virtual Care Infrastructure business' products and services were sold primarily through a direct sales force. The Virtual Care Infrastructure business’ products were also supported and distributed through an array of alliances and business partnerships with other technology vendors, who integrated and interfaced our products with their applications. The Virtual Care Infrastructure business offered an expanding suite of telehealth use cases, which were delivered under multi-year contracts that include fixed minimums with upside attributable to usage-based fees. The business' client base included hospitals and health systems, federally qualified healthcare clinics (“FQHCs”), urgent care centers, stand-alone clinics and medical practices.
Table of Contents
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, on November 16, 2023, UpHealth and Cloudbreak, entered into the Membership Interests Purchase Agreement with Forest Buyer and an affiliate of GTCR LLC, pursuant to which we agreed to the Sale, which closed on March 15, 2024. Accordingly, Cloudbreak is included in the Virtual Care Infrastructure segment for the years ended December 31, 2022 and 2023.
As a result of the deconsolidation of Glocal as described above, the Services segment consisted solely of the operations of Cloudbreak from July 2022 through December 2023.
Components of Results of Operations
Revenues
Services . Services revenues were generated primarily from the sale of subscription-based fixed monthly minute and variable rate per unit of service medical language interpretation services. Our Telehealth product line also recorded ancillary revenues from the rental of Martti™ devices and from the provision of information technology services that include connectivity and ongoing support of the Martti™ software platform. Generally, Telehealth’s medical language interpretation and information technology services were invoiced monthly. Fixed monthly minute medical language interpretation subscription and information technology services fees were 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) were invoiced monthly in arrears. Martti™ device leases were invoiced monthly in advance in the period preceding the usage. Invoiced amounts were typically due within 30 days of the invoice date. For the period from January 1, 2022 through June 30, 2022, services revenues also included revenues from Glocal, which were generated primarily from operating hospitals and clinics, including pharmacy and medicine sales, and transaction fees per telemedicine consultation.
Products . Products revenues consisted of the sale of Martti™ devices to its customers. Sale of Martti™ devices were generally invoiced at contract execution (50%) and upon the delivery of the devices to the customer (50%). Invoiced amounts were typically due within 30 days of the invoice date. For the period from January 1, 2022 through June 30, 2022, products revenues also included revenues from Glocal, which were generated primarily from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.
Costs of Revenues
Costs of revenues primarily consisted of costs related to supporting and hosting Telehealth’s product offerings and delivering services, and included the cost of maintaining Telehealth’s data centers, customer support team, and Telehealth’s professional services staff, in addition to third-party service provider costs such as data center and networking expenses, amortization of capitalized software development costs, the cost of purchased equipment inventory sold to customers, and an allocation of facilities, information technology, and depreciation costs. For the period from March 26, 2021 through June 30, 2022, costs of revenues also included costs of revenues from Glocal, which primarily consisted 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 consisted of compensation and benefits, costs related to advertising, marketing programs, and events, and an allocation of facilities, information technology, and depreciation costs.
General and Administrative Expenses . G&A expenses consisted 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 costs of revenues and S&M.
Depreciation and Amortization Expenses . Depreciation expense related to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to costs of revenues. Amortization expense related to the amortization of intangible assets from the acquisitions of Cloudbreak and Glocal.
Table of Contents
Integrated Care Management Segment
Overview
As discussed above, as of December 28, 2023, we no longer have an Integrated Care Management segment that we operate.
Integrated Care Management was our healthcare technology business that served organizations that pay for healthcare, including health plans and state, federal and municipal agencies that ensure the people they sponsor receive high-quality care, administered and delivered efficiently and effectively, all while driving health equity so that every individual, family, and community has access to the care they need.
“Integrated care” is the collaboration among health professionals to provide complete treatment to patients and improve overall well-being. The Integrated Care Management business was powered by the SyntraNet TM technology platform and applications, which under the Transition Agreements, we have provided non-exclusive licenses of the applicable source code to our three customers on this business. SyntraNet TM was a configurable integrated health management platform that enabled clinical and community-based care teams to share information, coordinate care, manage utilization, and improve health outcomes and costs for individuals and populations—especially individuals with complex medical, behavioral health, and social needs.
SyntraNet TM created virtual “care communities” – logical networks of organizations, care managers and service providers – that functioned as an integrated care team to deploy programs to improve health, quality, performance, efficiency, and costs.
Core features of the platform included the ability to:
• Create virtual, cross-sector care communities;
• Integrate and organize information from a wide range of health and social health data sources;
• Gain insight into health, risks, and opportunities with advanced analytics;
• Qualify and enroll groups into programs;
• Coordinate care teams across the continuum of care; and
• Analyze and report on various measures of success.
Our Integrated Care Management platform provided health plans and provider groups the ability to manage health with new value-based models of care. Our clients included the largest public health plan in the United States, entities that are part of the nation’s most comprehensive “whole person care” initiatives, and one of the fastest growing value-based pharmacy benefit managers.
Our Integrated Care Management business sold its products primarily through its direct sales force, strategic collaborations and external producers in two key areas: payors including health plans and third-party administrators and public entities including state and local health care agencies. Prior to the entry into the Transition Agreements, revenue was derived from license fees, recurring subscription fees, and professional services for implementation.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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. As of March 31, 2024, the operations of UpHealth Holdings and its subsidiaries remain deconsolidated from the rest of UpHealth.
Thrasys entered into three transition agreements, dated as of November 15, November 16, and November 17, 2023, respectively, with its customers, (i) Local Initiative Health Authority for Los Angeles County, a local public entity operating and doing business as L.A. Care Health Plan; (ii) EmpiRx Health LLC, a Delaware corporation; and (iii) the County of Alameda, California, USA (each, a “Transition Agreement”), providing for, among other things, the grant to each customer of a perpetual, non-exclusive license of the applicable source code and related SyntraNetTM platform and the provision by Thrasys of certain transition services during the transition term provided under the applicable Transition Agreement, with the consummation of the transactions contemplated by each Transition Agreement subject to the entry by the Bankruptcy Court of an order authorizing and approving the Transition Agreements, which order was subsequently entered by the Bankruptcy Court.
Accordingly, on December 28, 2023, Thrasys consummated the closing of the transactions contemplated by the Transition Agreements. Following the closing, Thrasys no longer has any operations. Except as otherwise provided in the Transition Agreements, Thrasys will continue to own all intellectual property, subject to the non-exclusive licenses granted pursuant to the Transition Agreements.
Table of Contents
As a result of the deconsolidation of UpHealth Holdings and its subsidiaries as described above, the Integrated Care Management segment had no operations during the three months ended December 31, 2023.
Components of Results of Operations
Revenues
Integrated Care Management derived revenues 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 Revenues . License revenues were 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 were 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 were recurring fees charged for access to the platform and applications. Subscription fees were 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 could grow as customers subscribed to additional application features or launched additional programs. Revenues from subscription fees were recognized ratably over the subscription term.
Services . The majority of Integrated Care Management’s contracts to provide professional services were priced on a time and materials basis, whereby revenues were recognized as the services are rendered. In some cases, Integrated Care Management entered into professional services contracts where professional services fees were defined for specific milestones, whereby revenues were recognized upon achievement of the milestones.
Costs of Revenues
Costs of revenues for Integrated Care Management included: costs related to hosting SyntraNet TM in a HIPAA-compliant cloud environment; costs of third-party product licenses embedded with SyntraNet TM ; costs of a core professional services team; and an allocation of facilities, information technology, and depreciation costs. Added compliance requirements for security infrastructure added additional costs for hosting services. Integrated Care Management also added costs for third-party licenses that were added as the scope and footprint of the technology platform expanded.
Hosting Infrastructure . Integrated Care Management’s technology and solutions were designed to be agnostic to any particular cloud services provider. Currently, customer environments were hosted through contracts with two cloud service providers. Integrated Care Management anticipated capabilities of cloud service providers to grow, and costs to become increasingly competitive, and continued 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 Integrated Care Management were 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 continued to grow, hosting infrastructure costs were expected to grow as a percentage of revenue.
Third-Party Product Licenses . SyntraNet TM embeded certain third-party technology components to support some of its technology capabilities. There were multiple vendors for these components, and Integrated Care Management was not dependent on any specific vendor.
Professional Services Team . Our Integrated Care Management’s professional services team worked closely with the product team and was best understood as an “A-team” created to lead showcase implementations. The goal was 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 Expenses . S&M expenses included an internal sales and marketing team and contracts with business development consultants to generate and qualify leads, and included an allocation of facilities, information technology, and depreciation costs.
Research and Development (“R&D”) Expenses . Integrated Care Management invested in R&D. The core R&D team consisted of a small team of very experienced software developers. R&D expenses also included an allocation of facilities, information technology, and depreciation costs.
General and Administrative Expenses . G&A expenses included compensation and benefits expense, and other administrative costs, related to Integrated Care Management's executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to costs of revenues, S&M expenses, and R&D expenses.
Table of Contents
Depreciation and Amortization Expenses . Depreciation expense related to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to costs of revenues. Amortization expense related to the amortization of intangible assets from the acquisition of Thrasys.
UPHEALTH, INC. RESULTS OF OPERATIONS
Operating Results
As certain businesses have been sold or deconsolidated, as described above, the numbers presented above are not directly comparable between periods.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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 discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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. Similarly, 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. As of March 31, 2024, the operations of UpHealth Holdings and its subsidiaries remain deconsolidated from the rest of UpHealth.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, on November 16, 2023, UpHealth and Cloudbreak, entered into the Membership Interests Purchase Agreement with Forest Buyer and an affiliate of GTCR LLC, pursuant to which we agreed to the Sale, which closed on March 15, 2024. Accordingly, Cloudbreak is included in the Virtual Care Infrastructure segment for the years ended December 31, 2022 and 2023.
Table of Contents
The following table sets forth the consolidated results of operations of UpHealth:
Consolidated results of operations data
For the year ended December 31,
( in thousands)
$ Change
% Change
Revenues:
Services
Licenses and subscriptions
Products
Total revenues
Costs of revenues:
Services
License and subscriptions
Products
Total costs of revenues
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Depreciation and amortization
Stock-based compensation
Goodwill, intangible asset, and other long-lived asset impairments
Acquisition, integration, and transformation costs
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Gain (loss) on deconsolidation of subsidiaries
Loss on extinguishment of debt
Other income (expense), net, including interest income
Total other income (expense)
Net loss before income tax benefit
Income tax benefit
Net loss
Less: net income attributable to noncontrolling interests
Net loss attributable to UpHealth, Inc.
Table of Contents
The following table sets forth the consolidated results of operations of UpHealth as a percentage of total revenues:
For the year ended December 31,
Revenues:
Services
Licenses and subscriptions
Products
Total revenues
Costs of revenues:
Services
License and subscriptions
Products
Total costs of revenues
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Depreciation and amortization
Stock-based compensation
Goodwill, intangible asset, and other long-lived asset impairments
Acquisition, integration, and transformation costs
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Gain (loss) on deconsolidation of subsidiaries
Loss on extinguishment of debt
Other income (expense), net, including interest income
Total other income (expense)
Net loss before income tax benefit
Income tax benefit
Net loss
Less: net income attributable to noncontrolling interests
Net loss attributable to UpHealth, Inc.
For the Years Ended December 31, 2023 and 2022
Revenues
In the year ended December 31, 2023, revenues were $130.0 million, representing a decrease of $28.8 million, or 18%, compared to $158.8 million in the year ended December 31, 2022.
Services revenues decreased $0.9 million, primarily due to a decrease in the Services segment of $7.0 million, partially offset by an increase in the Virtual Care Infrastructure segment of $5.5 million and a $0.6 million increase in the Integrated Care Management segment. The decrease in revenues in the Services segment was primarily due to no services revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023, a $3.8 million decrease in services revenues due to the wind-down of a company within our Behavioral business in the second quarter of 2023, and a $1.3 million decrease in services revenues resulting from the strategic sale of Innovations Group in the second quarter of 2023. The increase in the Virtual Care Infrastructure segment was primarily due to a $12.3 million increase in revenues resulting from overall business growth due to an increase in minutes from both new and existing U.S. Telehealth customers, partially offset by no revenues being recognized for Glocal for the year ended December 31, 2023 as a result of its deconsolidation in the third quarter of 2022. The increase in the Integrated Care Management segment was primarily due to an increase in professional services revenues for existing customers in the first three quarters of 2023, partially offset by no services revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
License and subscriptions revenues decreased $6.0 million in the Integrated Care Management segment for the year ended December 31, 2023, primarily due to no license and subscription revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of
Table of Contents
UpHealth Holdings and its subsidiaries as of September 30, 2023, as well as due to the loss of a customer in the Integrated Care Management segment in the third quarter of 2023.
Products revenues decreased $21.9 million due to a decrease in the Services segment of $21.5 million and a decrease in the Virtual Care Infrastructure segment of $0.3 million. The decrease in the Services segment was primarily due to a $18.4 million decrease in the sale of prescriptions in the Pharmacy business due to the strategic sale of Innovations Group in the second quarter of 2023, as well as no products revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023. The decrease in the Virtual Care Infrastructure segment was primarily due to the shift away from equipment sales in the U.S. Telehealth business, as well as no revenues being recognized for Glocal for the year ended December 31, 2023 as a result of its deconsolidation in the third quarter of 2022.
We expect revenues to decrease significantly in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, we will report no revenues unless and until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan and we are able to reconsolidate TTC.
Costs of Revenues
In the year ended December 31, 2023, costs of revenues was $60.4 million, representing a decrease of $28.2 million, or 32%, compared to $88.6 million in the year ended December 31, 2022.
Services costs of revenues decreased $11.9 million, primarily due to decreases in the Services segment of $9.0 million and decreases in the Virtual Care Infrastructure segment of $3.7 million, partially offset by increases in the Integrated Care Management segment of $0.8 million. The decrease in the Services segment was primarily due to no services costs of revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023, a $3.0 million decrease in services costs of revenues due to the wind-down of a company within our Behavioral business in the second quarter of 2023, and a $0.3 million decrease in costs of revenues resulting from the strategic sale of Innovations Group in the second quarter of 2023. The decrease in the Virtual Care Infrastructure segment was primarily due to no costs of revenues being recognized for Glocal for the year ended December 31, 2023 as a result of its deconsolidation in July 2022, partially offset by a $1.7 million increase in costs of revenues associated with overall business growth resulting from higher revenues and a shift in mix from audio to video minutes in the U.S. Telehealth business.
License and subscriptions costs of revenues decreased $0.1 million in the Integrated Care Management segment for the year ended December 31, 2023, primarily due to no license and subscription costs of revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
Products costs of revenues decreased $16.3 million primarily due to a decrease in the Services segment of $16.2 million. The decrease in the Services segment was primarily due to a $15.6 million decrease in costs of revenues from the sale of prescriptions in the Pharmacy business due to the strategic sale of Innovations Group in the second quarter of 2023, as well as no products costs of revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
We expect cost of revenues to decrease significantly in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, we will report no costs of revenues unless and until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan and we are able to reconsolidate TTC.
Operating Expenses
Sales and Marketing . In the year ended December 31, 2023, S&M expenses were $11.3 million, representing a decrease of $4.7 million, or 29%, compared to $16.0 million in the year ended December 31, 2022, primarily due to a decrease in compensation, benefits, and contractor expenses as a result of the strategic sale of Innovations Group in the second quarter of 2023, a decrease in S&M expenses in the fourth quarter of 2023 resulting from the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023, and the reversal of a $0.7 million accrual as a result of a settlement.
We expect S&M expenses to decrease significantly in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, we will report no S&M expenses unless and until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan and we are able to reconsolidate TTC.
Research and Development. In the year ended December 31, 2023, R&D expenses were $4.4 million, representing a decrease of $3.5 million, or 45%, compared to $7.9 million in the year ended December 31, 2022, primarily due an increase in capitalized software development costs, reduced headcount, and a decrease in R&D expenses in the fourth quarter of 2023 resulting from the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
We expect R&D expenses to decrease significantly in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, we will report no R&D expenses uunless and until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan and we are able to reconsolidate TTC.
Table of Contents
General and Administrative . In the year ended December 31, 2023, G&A expenses were $38.9 million, representing a decrease of $9.9 million, or 20%, compared to $48.8 million in the year ended December 31, 2022, primarily due to a decrease in compensation and benefits resulting from reduced headcount, a decrease in contractor expenses, and a decrease in G&A expenses in the fourth quarter of 2023 resulting from the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
We expect G&A expenses to decrease in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, G&A expenses will solely consist of the operations of UpHealth, as the parent company of TTC, in the executive, finance, human resources, and legal departments, unless and until UpHealth Holdings emerges from bankruptcy pursuant to a restructuring plan and we are able to reconsolidate TTC.
Depreciation and Amortization . In the year ended December 31, 2023, depreciation and amortization expenses were $6.5 million, primarily consisting of $4.4 million of amortization of intangible assets and $2.1 million of depreciation related to property and equipment, net of allocations to costs of revenues. In the year ended December 31, 2022, depreciation and amortization expenses were $16.1 million, primarily consisting of $14.0 million of amortization of intangible assets and $2.1 million of depreciation related to property and equipment, net of allocations to costs of revenues. The decrease in depreciation and amortization expenses in 2023 was largely due to no depreciation and amortization expense being recorded at Innovations Group from May 11, 2023 through December 31, 2023 due to its sale, decreased amortization expenses due to a decrease in capitalized software development in the Integrated Care Management segment, and a decrease in depreciation and amortization expenses in the fourth quarter of 2023 resulting from the deconsolidation of UpHealth Holdings and subsidiaries as of September 30, 2023.
We expect depreciation and amortization expenses to decrease in the year ending December 31, 2024. Subsequent to the Sale of Cloudbreak on March 15, 2024, depreciation and amortization expenses will solely consist of the operations of UpHealth, as the parent company of TTC, in its executive, finance, human resources, and legal departments.
Stock-Based Compensation . In the year ended December 31, 2023, stock-based compensation expenses were $3.7 million, representing a decrease of $2.7 million, or 42%, compared to $6.5 million in the year ended December 31, 2022. The decrease in stock-based compensation expenses is primarily due to lower equity grants outstanding.
We expect stock-based compensation expenses to decrease in the year ending December 31, 2024, primarily due to lower equity grants outstanding.
Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets . In the year ended December 31, 2023, we recorded a $50.0 million goodwill and intangible asset impairment charge, consisting of a $41.2 million goodwill, intangible asset and long-lived asset impairment charge in our Integrated Care Management segment, a $6.4 million goodwill impairment resulting from the decision to wind-down a company within our behavioral business, $1.9 million from the remeasurement of the Innovations Group disposal group to the expected proceeds, less cost to sell, and a $0.4 million right-of-use asset impairment in our Integrated Care Management segment. In the year ended December 31, 2022, we recorded a goodwill and intangible asset impairment of $116.2 million, which included a $5.5 million measurement period adjustment at Glocal that was immediately impaired and a $0.7 million trade name intangible asset impairment in our Services segment in the three months ended March 31, 2022, an $89.1 million goodwill impairment charge and a $16.9 million intangible asset charge resulting from tests performed in the three months ended September 30, 2022, and a $1.8 million 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 Group.
Acquisition, Integration, and Transformation Costs . In the year ended December 31, 2023, acquisition, integration and transformation costs were $44.5 million, primarily related to legal and litigation expenses associated with the prior acquisitions, as well as costs related to our integration and transformation of the businesses, including the additional accrual in the third quarter of 2023 of $29.8 million for the Needham Action. In the year ended December 31, 2022, acquisition, integration and transformation costs were $20.1 million, primarily related to legal and litigation expenses associated with the prior acquisitions, as well as costs related to our integration and transformation of the businesses, including management consulting fees and severance.
We expect acquisition, integration and transformation costs expenses to decrease in the year ending December 31, 2024.
Other Income (Expense)
In the year ended December 31, 2023, other income was $31.9 million, primarily consisting of a $59.1 million gain on the deconsolidation of UpHealth Holdings and its subsidiaries and $1.1 million of other income, net, including interest income, partially offset by $28.2 million of interest expense. In the year ended December 31, 2022, other expense was $70.9 million, primarily consisting of a $37.7 million loss on the deconsolidation of Glocal, $26.5 million of interest expense, and a $14.6 million loss on extinguishment of debt, partially offset by $7.5 million gain on fair value of derivative liability, a $0.2 million gain on fair value of warrant liabilities, and $0.1 million of other income, net, including interest income.
We expect other income to decrease in the year ending December 31, 2024 due to the one-time gains recorded in the year ending December 31, 2023, partially offset by an anticipated decrease in interest expense for the 2025 Notes and 2026 Notes resulting from the plan to utilize the proceeds from the Cloudbreak Sale for payment in full or in part of the 2026 Notes and 2025 Notes and anticipated interest income from the Notes, Taxes, and Working Capital escrows associated with the Cloudbreak Sale proceeds.
Table of Contents
Income Tax Expense (Benefit)
In the year ended December 31, 2023, the income tax benefit was $1.2 million, primarily related to a current year adjustment to the valuation allowance recorded in the prior year. In the year ended December 31, 2022, the income tax benefit was $9.4 million, primarily due to nondeductible acquisition, integration, and transformation costs and nondeductible goodwill impairment, partially offset by a $51.7 million valuation allowance we placed on certain deferred tax assets.
Income tax expense (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. We expect minimal income tax expense (benefit) in the year ended December 31, 2024 since any resulting deferred tax assets are expected to offset with a corresponding valuation allowance.
Segment Information
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 , in the Notes to Consolidated Financial Statements of this Annual Report, 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 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 , in the Notes to Consolidated Financial Statements of this Annual Report, as a result of the proceedings described above and the designation of UpHealth Holdings, Thrasys, BHS and the subsidiaries of Thrasys and BHS, as “debtors-in-possession,” 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 Martti TM , aimed at increasing access to healthcare and resolving health disparities across the care continuum. As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, 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 “SyntraNet TM ” 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 , in the Notes to Consolidated Financial Statements of this Annual Report, 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
Table of Contents
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
Revenues by segment consisted of the following:
For the year ended December 31,
(In thousands)
Services
Virtual Care Infrastructure
Integrated Care Management
Total revenues
Year Ended December 31, 2023 and 2022 . Revenues from the Virtual Care Infrastructure segment increased $5.2 million, consisting of a $5.5 million increase in services revenues, partially offset by a $0.3 million decrease in products revenues. The increase in services revenues was primarily due to continued growth in both customers and fees. The decrease in products revenues was primarily due to no revenues being recognized for Glocal for the year ended December 31, 2023 compared to a partial year recognized for Glocal for the year ended December 31, 2022 as a result of its deconsolidation in July 2022.
Revenues from the Services segment decreased $28.6 million, consisting of a $21.5 million decrease in products revenues and a $7.0 million decrease in services revenues. The decrease in products revenue was primarily due to a $15.6 million decrease in the sale of prescriptions in the Pharmacy business due to the strategic sale of Innovations Group in the second quarter of 2023. The decreases in both products revenues and services revenues were also due to no revenues being recognized in the Services segment in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
Revenues from the Integrated Care Management segment decreased $5.4 million, primarily due to no license and subscription revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023, as well as due to the loss of a customer in the Integrated Care Management segment in the third quarter of 2023.
Gross profit by segment consisted of the following:
For the year ended December 31,
In thousands
Services
Virtual Care Infrastructure
Integrated Care Management
Total gross profit
Year Ended December 31, 2023 and 2022 . Gross profit from the Virtual Care Infrastructure segment increased $8.9 million, primarily consisting of a $9.2 million increase in services gross profit, partially offset by a $0.3 million decrease in products gross profit. The increase in services gross profit was primarily due to continued growth in both customers and fees. The decrease in products gross profit was primarily due to no revenues being recognized for Glocal for the year ended December 31, 2023 compared to a partial year recognized for Glocal for the year ended December 31, 2022 as a result of its deconsolidation in July 2022.
Gross profit from the Services segment decreased $3.4 million, consisting of a $5.3 million decrease in products gross profit, partially offset by $2.0 million increase in services gross profit. The decrease in products gross profit was primarily due to a decrease in the sale of prescriptions in the Pharmacy business due to the strategic sale of Innovations Group in the second quarter of 2023. The decreases in both products gross profit and services gross profit were also due to no revenues or costs of revenues being recognized in the Services segment in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023.
Table of Contents
Gross profit from the Integrated Care Management segment decreased $6.1 million, primarily as a result of a $5.9 million decrease in licenses and subscriptions gross profit primarily due to no license and subscription revenues or costs of revenues being recognized in the fourth quarter of 2023 due to the deconsolidation of UpHealth Holdings and its subsidiaries as of September 30, 2023, as well as due to the loss of a customer in the Integrated Care Management segment in the third quarter of 2023, partially offset by a $0.2 million increase in services costs of revenues.
Total long-lived assets by segment consisted of the following:
In thousands
December 31, 2023
December 31, 2022
Services
Virtual Care Infrastructure
Integrated Care Management
Corporate
Total long-lived assets
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2023 and 2022, UpHealth, Inc. had cash and cash equivalents of $2.5 million and $15.6 million, respectively.
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.
Cash Flows
The following tables summarize cash flows for the periods indicated:
For the years ended December 31,
(In thousands)
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
As certain businesses have been sold or deconsolidated, as described above, the numbers presented above are not directly comparable between periods.
In the year ended December 31, 2023, cash used in operating activities was $17.7 million, primarily attributed to net loss of $56.4 million, partially offset by and the changes in operating assets and liabilities, net of effects of deconsolidations, of $23.3 million and $15.5 million of non-cash items (impairment of property, plant and equipment, intangible assets and goodwill, depreciation and amortization, amortization of debt issuance costs and discount on convertible debt, stock-based compensation, non-cash impact of operating lease right-of-use assets, loss on fair value of warrant liabilities and loss on fair value of derivative liability, partially offset by gain on deconsolidation of subsidiary, a gain from intercompany impairment and provision for credit losses). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts payable and accrued expenses of $25.2 million, primarily due to the accrual of $29.8 million as a result of the summary judgment related to the Needham Action in the third quarter of 2023 partially offset by a reduction due to net payments to vendors, a decrease in accounts receivable of $3.1 million resulting from collections, and an increase in deferred revenue of $1.0 million, partially offset by a $2.7 million decrease in other liabilities, a $1.8 million decrease in operating lease liabilities, and a $1.4 million increase in prepaid expenses and other current assets.
In the year ended December 31, 2022, cash used in operating activities was $22.4 million, primarily attributed to net loss of $222.9 million, partially offset by $197.7 million of non-cash items (impairment of property, plant and equipment, intangible assets and goodwill, depreciation and amortization, stock-based compensation, loss on extinguishment of debt, amortization of debt issuance costs and discount on
Table of Contents
convertible debt, loss on deconsolidation of subsidiary, and non-cash impact of operating lease right-of-use assets, partially offset by a gain on fair value of derivatives, gain on fair value of warrants and deferred tax adjustments) and the changes in operating assets and liabilities, net of effects of acquisitions, of $2.9 million. The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts payable and accrued expenses of $13.1 million due to delayed payments to vendors and an increase in deferred revenue of $1.0 million, partially offset by an increase in accounts receivable of $5.8 million resulting from increased revenues in our Virtual Care Infrastructure segment, a $4.0 million decrease in operating lease liabilities, and a $1.2 million decrease in other liabilities.
In the year ended December 31, 2023, cash provided by investing activities was $15.3 million, primarily consisting of net cash received from sale of business of $54.8 million, partially offset by deconsolidated cash of $35.6 million and purchases of property and equipment, including capitalized software development costs, of $4.0 million. In the year ended December 31, 2022, cash used in investing activities was $15.6 million, primarily consisting of the deconsolidated Glocal cash of $8.7 million and purchases of property and equipment, including capitalized software development costs, of $6.8 million.
In the year ended December 31, 2023, cash used in financing activities was $10.6 million, primarily consisting of repayments of debt of $10.3 million, payments of finance lease obligations of $3.3 million, and distribution to noncontrolling interest of $1.0 million, partially offset by proceeds from equity issuance of $4.2 million. In the year ended December 31, 2022, cash used in financing activities was $22.7 million primarily consisting of repayments of debt of $48.2 million, repayments of the seller notes of $18.7 million, repayment of the forward share purchase agreement of $18.5 million, payments of finance and capital lease obligations of $3.1 million, and payments of debt issuance costs of $1.5 million, partially offset by proceeds from convertible debt of $67.5 million.
Long-Term Debt
See Note 10, Debt , in the Notes to Consolidated Financial Statements of this Annual Report for our long-term debt.
Contractual Obligations and Commitments
See Note 19, Commitments and Contingencies , in the Notes to Consolidated Financial Statements of this Annual Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.
Off-Balance Sheet Arrangements
As of December 31, 2023, 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 Consolidated Financial Statements of this Annual Report for the recently issued accounting standards that could have an effect on us.
Critical Accounting Policies and Estimates
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, revenues and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected.
Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements of this Annual Report, the following accounting policies and specific estimates involve a greater degree of judgments and complexity:
• Business combinations;
• Identification and reporting of variable interest entities (“VIEs”);
• Accounting for equity investments;
• Goodwill and intangible assets;
• Revenue recognition; and
• Income taxes.
Business Combinations
We account for our business combinations using the acquisition method of accounting. The purchase price is attributed to the fair value of the assets acquired and liabilities assumed. Acquisition-related transaction costs incurred by us are not included as a component of consideration transferred but are accounted for as an operating expense in the period in which the costs are incurred. Identifiable assets and liabilities
Table of Contents
acquired or assumed are measured separately at their fair values as of the acquisition date. The excess of the purchase price of acquisition over the fair value of the identifiable net assets of the acquiree is recorded as goodwill. The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of acquisition. When we issue stock-based or cash awards to an acquired company’s shareholders, we evaluate whether the awards are consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the acquired company’s stockholders beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as expense over the requisite service period. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and selection of comparable companies. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions, and competition. In connection with determination of fair values, we may engage a third-party valuation specialist to assist with the valuation of intangible and certain tangible assets acquired and certain assumed obligations.
Identification and Reporting of Variable Interest Entities (“VIE”)
When analyzing whether an entity is a VIE, we assess if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity’s operations, and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, the entity is considered a VIE and is assessed for consolidation.
The party that has a controlling financial interest is called a primary beneficiary and consolidates the VIE. The party is deemed to have a controlling financial interest if it has both:
• The power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and
• The obligation to absorb the entity’s losses that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
We assess whether we have a controlling financial interest in an entity and, thus, are the primary beneficiary. We identify the activities that most significantly impact the entity’s performance and determine whether we have the power to direct those activities. In conducting the analysis, we consider the purpose, the design, and the risks that the entity was designed to create and pass through to its variable interest holders. Additionally, we assess if we have the obligation to absorb losses or if we have the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, we have a controlling financial interest in the VIE and consolidate the entity. We monitor changes to the facts and circumstances of the existing involvement with legal entity to determine whether it requires reconsideration of the entity’s designation as a VIE or voting interest entity. For VIEs, we regularly reassess the primary beneficiary determination.
Deconsolidation of Glocal
As a result of events which occurred during the three months ended September 30, 2022, as discussed under the heading Arbitration Regarding Control of Glocal Board of Directors in Item 3. Legal Proceedings, of Part I of this Annual Report, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal was a VIE and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, 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 June 30, 2022. The probability-weighted fair value of Glocal is included in equity investment in our consolidated balance sheets. Further, we assessed the prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the ASC 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. If through the legal processes discussed under the heading Arbitration Regarding Control of Glocal Board of Directors in Item 3. Legal Proceedings, of Part I of this Annual Report, we are to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to such a result, then we will further reassess the appropriate accounting treatment of our investment in Glocal.
The financial results of Glocal in the six months ended June 30, 2022 are included in our consolidated financial statements, and the financial position of Glocal as of December 31, 2023 and December 31, 2022 and the financial results of Glocal in the six months ended December 31, 2022 and the twelve months ended December 31, 2023 are not included in our consolidated financial statements.
Deconsolidation of UpHealth Holdings, Inc. and Subsidiaries
As a result of the bankruptcy proceedings as described in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report 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
Table of Contents
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 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 the financial results of UpHealth Holdings and its subsidiaries in the nine months ended September 30, 2023 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.
Accounting for Equity Investments
As of December 31, 2020, and 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 Deconsolidation of Equity Investment in Note 1, Organization and Business , as of December 31, 2022, and for 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.
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.
Goodwill and Other Intangible Assets
Goodwill
As of December 31, 2023 and 2022, our balance of goodwill was $80.3 million and $159.7 million, respectively. Goodwill represents the excess of the total purchase consideration over the fair value of the identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is tested for impairment at the reporting unit level annually on October 1 or more frequently if events or changes in circumstances indicate that it is more likely than not to be impaired. These events include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization, as indicated by the Company’s publicly quoted share price, below our net book value. We currently operate as six reporting units under the guidance in ASC 350, Intangibles- Goodwill and Other . When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill test. Under the quantitative goodwill test, if our reporting unit’s carrying amount exceeds its fair value, we will record an charge based on that difference. To determine reporting unit fair value as part of the quantitative test, we use a weighting of fair values derived from the income approach and the market approach. Under the income approach, we project our future cash flows and discount these cash flows to reflect their relative risk. The cash flows used are consistent with those the Company uses in its internal planning, which reflects actual business trends experienced and our long-term business strategy. As such, key estimates and factors used in this method include, but are not limited to, revenues, margin, and operating expense growth rates, as well as a discount rate, and a terminal growth rate. Under the market approach, we use the guideline company method to develop valuation multiples and compare our reporting unit to similar publicly traded companies. In order to further validate the reasonableness of fair value as determined by the income and market approaches described above, a reconciliation to market capitalization is then performed by estimating a
Table of Contents
reasonable control premium and other market factors. Future changes in the judgments, assumptions and estimates that are used in the impairment testing for goodwill could result in significantly different estimates of fair value.
As discussed in Note 1, Organization and Business , in the Notes to Consolidated Financial Statements of this Annual Report, UpHealth Holdings filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on September 19, 2023. This was determined to be an indicator of impairment; therefore, we performed a goodwill impairment assessment as of September 30, 2023, which included both qualitative and quantitative assessments. Based on this assessment, we concluded the fair value of one segment was below the carrying value primarily due to changes in financial performance. 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 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 a result of the sale of Innovations Group in fiscal 2022, and as discussed in Note 4, Assets and Liabilities Held for Sale , in the Notes to Consolidated Financial Statements of this Annual Report, $35.4 million of goodwill is included in assets held for sale, noncurrent, in the consolidated balance sheet as of December 31, 2022.
Intangible Assets
Intangible assets include trade names, technology and intellectual property, and customer relationships resulting from business acquisitions. As of December 31, 2023 and 2022, the aggregate balance of these assets was $22.7 million and $31.4 million, respectively. We amortize these definite-lived intangible assets over their estimated useful lives. We also review the useful lives on a periodic basis to determine if the period of economic benefit has changed. Potential changes in useful lives, whether due to strategic decisions involving our brands, competitive forces, or other factors could result in additional amortization expense taking effect prospectively in the period of the change and could have a material impact on our consolidated financial statements. 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. Definite-lived intangible assets are re-evaluated whenever events or changes in circumstances indicate that their estimated useful lives may require revision and/or the carrying value of the related asset group may not be recoverable by its projected undiscounted cash flows. If the carrying value of the asset group is determined to be unrecoverable, an impairment charge would be recognized in an amount equal to the amount by which the carrying value of the asset group exceeds its fair value.
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 , in the Notes to Consolidated Financial Statements of this Annual Report for further information.
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.
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
Table of Contents
factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, dollar size, and new business linearity within the period.
From time to time, we may enter into contracts that contain multiple performance obligations, particularly with our SaaS internet hosting, licenses, subscriptions, and services, and our construction of clinics and sales of digital dispensaries. Judgement is required to identify the distinct performance obligations in the contract, allocate the transaction price to each performance obligation based on relative standalone selling prices or estimates of such prices, and determine when to recognize revenue once control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations.
Construction of clinics are typically billed based on milestones and sales of digital dispensaries are typically billed upon contract signing and delivery of the digital dispensaries. 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. The recognition of revenue is influenced by several factors, such as our estimation of our costs to complete a contract and the timing of our delivery of the product.
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.
Income Taxes
We account for income taxes using the liability method. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted statutory tax rates in effect for the year in which the differences are expected to reverse.
Since tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in our financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, which gives rise to a deferred tax asset or liability. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery does not meet the more likely than not criteria, we must establish a valuation allowance. Management judgment is required in determining any valuation allowance recorded against our deferred tax assets.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax expense together with assessing temporary differences that may result in deferred tax assets or liabilities.
Assessing the realizability of our deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. We forecast taxable income by considering all available positive and negative evidence, including our history of operating income and losses and our financial plans and estimates that we use to manage the business. These assumptions require significant judgment about future taxable income. As a result, the amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.
Future changes in various factors, such as the amount of stock-based compensation we record during the period and the related tax benefit we realize upon the exercise of employee stock options and vesting of restricted stock units; potential limitations on the use of our federal and state net operating loss credit carry forwards; pending or future tax law changes including rate changes and the tax benefit from or limitations on our ability to utilize research and development credits; the amount of non-deductible acquisition, integration, and transformation costs; and changes in our valuation allowance and state and foreign taxes, would impact our estimates, and as a result, could affect our effective tax rate and the amount of income tax expense we record, and pay, in future periods.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Not required.
Table of Contents
