NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in dollars, unaudited)
1.Organization and Business
UpHealth, Inc. (“UpHealth,” “we,” “us,” “our,” “UpHealth,” or the “Company”) is the parent company of both UpHealth Holdings, Inc. (“UpHealth Holdings”) and Cloudbreak Health, LLC (“Cloudbreak”).
GigCapital2, Inc. (“GigCapital2”), the Company’s predecessor, was incorporated in Delaware on March 6, 2019. GigCapital2 was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The Company’s business combinations (the “Business Combinations”) were consummated on June 9, 2021, and in connection with the Business Combinations, GigCapital2 changed its corporate name to UpHealth, Inc.
Deconsolidation of Glocal
As a result of events which occurred during the three months ended September 30, 2022, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal Healthcare Systems Private Limited (“Glocal”) was a Variable Interest Entity (“VIE”) and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effective July 2022, we deconsolidated Glocal and recorded a $37.7 million loss on deconsolidation of equity investment in our unaudited condensed consolidated statements of operations, measured as the difference between the probability-weighted fair value of Glocal of $21.2 million and the carrying amount of Glocal’s assets and liabilities as of July 1, 2022. The probability-weighted fair value of Glocal, which is included in equity investment in our unaudited condensed consolidated balance sheets, incorporated scenarios where control of Glocal was gained and Glocal would continue as a going concern, control of Glocal was gained and Glocal would need to be liquidated, and control of Glocal was not gained and the equity investment in Glocal would be worthless. Further, we assessed the prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 321, Investments - Equity Securities (“ASC 321”) measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment. In addition, we derecognized $14.3 million of noncontrolling interests related to Glocal. If through legal processes we are able to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to achieve such a result, then we will further reassess the appropriate accounting treatment of our investment in Glocal.
The financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements. The only transactions between us and Glocal subsequent to July 1, 2022 was the transfer by us during the three months ended September 30, 2022 of $5.1 million to a designated “Share Account” maintained with a leading bank in India in the name of Glocal for which our Chief Financial Officer is the sole authorized signatory.
Reverse Stock Split
On December 5, 2022 our stockholders approved an amendment to our Second Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) to effect a reverse split of the outstanding shares of our common stock, par value $0.0001 per share, at a specific ratio within a range of 4:1 to 10:1, with the specific ratio to be fixed within this range by our board of directors in its sole discretion without further stockholder approval (the “Reverse Stock Split”). Our board of directors fixed the Reverse Stock Split ratio at 10:1, such that each ten shares of common stock were combined and reconstituted into one share of common stock effective December 8, 2022. Except as noted, all share, stock option, restricted stock unit (“RSU”), and per share information throughout this Quarterly Report on Form 10-Q (this “Quarterly Report”) has been retroactively adjusted to reflect this Reverse Stock Split.
Sale of Innovations Group
On February 26, 2023, we agreed to sell 100% of the outstanding capital stock of our wholly owned subsidiary, Innovations Group, Inc. (“Innovations Group”), to Belmar MidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and other adjustments. See Note 3, Assets and Liabilities Held for Sale, for further information.
2.Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Our unaudited condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. Our condensed consolidated balance sheet as of December 31, 2022 has been derived from our audited consolidated financial statements as of that date, but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, our accompanying unaudited condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with U.S. GAAP. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period. Our accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022.
Our unaudited condensed consolidated financial statements include the accounts of UpHealth and its consolidated subsidiaries. As described in Note 1, Organization and Business, our Glocal subsidiary was deconsolidated effective July 2022.
All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and accompanying notes thereto.
Significant estimates and assumptions made by management include the determination of:
•The identification and reporting of variable interest entities (“VIEs”). We consolidate VIEs when we have variable interests and are the primary beneficiary. We continually evaluate our involvement with VIEs to determine when these criteria are met.
•The valuation of equity investments, including our determination of the fair value of Glocal;
•The valuation of assets acquired and liabilities assumed for business combinations, including intangible assets and goodwill;
•The estimated economic lives and recoverability of intangible assets;
•The valuations prepared in connection with the review of goodwill, intangible assets, and other long-lived assets for impairment:
•The timing and amount of revenues to be recognized, including standalone selling price (“SSP”) of performance obligations for revenue contracts with multiple performance obligations;
•The identification of and provision for uncollectible accounts receivable;
•The capitalization and useful life of internal-use software development costs;
•The valuation of derivatives and warrants; and
•The recognition, measurement, and valuation of current and deferred income taxes and uncertain tax positions.
Actual results could differ materially from those estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.
Allowance for Expected Credit Losses
We closely monitor our accounts receivable balances and estimate the allowance for expected credit losses. The estimate is primarily based on historical collection experience and other factors, including those related to current market conditions and events. Credit losses associated with accounts receivable have not been material historically.
Equity Investment
As discussed in Deconsolidation of Equity Investment in Note 1, Organization and Business, as of March 31, 2023 and December 31, 2022, we held an interest in the privately-held equity securities of Glocal in which we did not have a controlling interest and were unable to exercise significant influence. Based on the terms of these privately-held securities, we concluded the investment should be accounted for utilizing the Accounting Standards Codification (“ASC”) 321 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment.
Held for Sale
Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into assets and liabilities held for sale on our consolidated balance sheets. The reclassification occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.
New Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This ASU will be effective for us on January 1, 2024. Early adoption is permitted, but no earlier than the fiscal year beginning on January 1, 2021, including interim periods within that fiscal year. We are currently evaluating the effect of the adoption of this ASU will have on our unaudited condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequently issued several supplemental/clarifying ASUs (collectively, “ASC 326”). This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, other long-term financings including available for sale and held-to-maturity debt securities, and loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASC 326 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with ASC 842. This ASU was effective for us on January 1, 2023, and the adoption did not have a material effect on our condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation as shown below:
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| As Reported | Reclassifications | As Adjusted |
| Revenues: | | | |
| Services | $ | 25,686 | | $ | — | | $ | 25,686 | |
| Licenses and subscriptions | 1,781 | | — | | 1,781 | |
| Products | 8,505 | | — | | 8,505 | |
| Total revenues | 35,972 | | — | | 35,972 | |
| Costs of revenues: | | | |
| Services | 14,445 | | 1,313 | | 15,758 | |
| License and subscriptions | 233 | | — | | 233 | |
| Products | 5,990 | | — | | 5,990 | |
| Total costs of revenues | 20,668 | | 1,313 | | 21,981 | |
| Gross profit | 15,304 | | (1,313) | | 13,991 | |
| Operating expenses: | | | |
| Sales and marketing | 2,726 | | 708 | | 3,434 | |
| Research and development | 1,587 | | 171 | | 1,758 | |
| General and administrative | 13,659 | | (2,192) | | 11,467 | |
| Depreciation and amortization | 5,236 | | — | | 5,236 | |
| Stock-based compensation | 1,374 | | — | | 1,374 | |
| Lease abandonment expenses | 75 | | — | | 75 | |
| Goodwill and intangible asset impairment | 6,174 | | — | | 6,174 | |
| Acquisition, integration, and transformation costs | 2,384 | | — | | 2,384 | |
| Total operating expenses | 33,215 | | (1,313) | | 31,902 | |
| Loss from operations | (17,911) | | — | | (17,911) | |
| Other expense: | | | |
| Interest expense | (6,995) | | — | | (6,995) | |
| Gain on fair value of derivative liability | 4,829 | | — | | 4,829 | |
| Gain on fair value of warrant liabilities | 95 | | — | | 95 | |
| Other expense, net, including interest income | (16) | | — | | (16) | |
| Total other expense | (2,087) | | — | | (2,087) | |
| Loss before income tax benefit | (19,998) | | — | | (19,998) | |
| Income tax benefit | 2,293 | | — | | 2,293 | |
| Net loss | (17,705) | | — | | (17,705) | |
| Less: net loss attributable to noncontrolling interests | (260) | | — | | (260) | |
| Net loss attributable to UpHealth, Inc. | $ | (17,445) | | $ | — | | $ | (17,445) | |
3. Assets and Liabilities Held for Sale
On February 26, 2023, we entered into an agreement to sell Innovations Group, one of our subsidiaries within our Services segment. The transaction closed on May 11, 2023. In connection with entering into this agreement, we concluded that the disposal group met the held for sale criteria and classified the assets and liabilities as held for sale as of March 31, 2023.
In connection with the held for sale classification, we recorded a total loss of $0.5 million in the three months ended March 31, 2023 and $1.8 million in the three months ended December 31, 2022 on the remeasurement of the disposal group to its fair value, less cost to sell, which was recorded in goodwill and intangible asset impairment in the condensed consolidated statements of operations.
Total assets and liabilities of the disposal group held for sale on the March 31, 2023 and December 31, 2022 condensed consolidated balance sheets consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Accounts receivable, net | | $ | 117 | | | $ | 78 | |
| Inventories | | 2,425 | | | 2,058 | |
| Prepaid expenses and other current assets | | 636 | | | 612 | |
| Property and equipment, net | | 4,602 | | | 4,602 | |
| Operating lease right-of-use assets | | 1,193 | | | 1,298 | |
| Intangible assets, net | | 23,063 | | | 23,063 | |
| Goodwill | | 33,561 | | | 35,353 | |
| Less: Impairment | | (495) | | | (1,791) | |
| Total assets held for sale | | $ | 65,102 | | | $ | 65,273 | |
| | | | |
| Accounts payable | | $ | 978 | | | $ | 1,104 | |
| Accrued expenses | | 1,329 | | | 1,544 | |
| Deferred revenue | | 234 | | | 242 | |
| Lease liabilities, current | | 434 | | | 429 | |
| Deferred tax liabilities | | 6,918 | | | 6,918 | |
| Lease liabilities, noncurrent | | 760 | | | 869 | |
| Total liabilities held for sale | | $ | 10,653 | | | $ | 11,106 | |
4. Revenues
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Revenues by geography consisted of the following:
| | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2023 | | 2022 |
| Americas | $ | 42,145 | | | $ | 32,663 | |
| Asia | — | | | 3,309 | |
| Total revenues | $ | 42,145 | | | $ | 35,972 | |
Our revenues are entirely derived from the healthcare industry. Revenues recognized over-time were approximately 75% and 71% of the total revenues during three months ended March 31, 2023 and 2022, respectively.
Contract Assets
There were no impairments of contract assets, consisting of unbilled receivables, during the three months ended March 31, 2023 and 2022.
The change in contract assets was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (In thousands) | 2023 | | 2022 |
| Unbilled receivables, beginning of period | $ | 694 | | | $ | 784 | |
| Reclassifications to billed receivables | (694) | | | (232) | |
| Revenues recognized in excess of period billings | 668 | | | 285 | |
| Unbilled receivables, end of period | $ | 668 | | | $ | 837 | |
Contract Liabilities
The change in contract liabilities, consisting of deferred revenue, was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (In thousands) | 2023 | | 2022 |
| Deferred revenue, beginning of period | $ | 2,738 | | | $ | 2,649 | |
| Revenues recognized from balances held at the beginning of the period | (1,442) | | | (1,581) | |
| Revenues deferred from period collections on unfulfilled performance obligations | 253 | | | 664 | |
| Deferred revenue, end of period | $ | 1,549 | | | $ | 1,732 | |
Revenues recognized ratably over time are generally billed in advance and includes software-as-a-service (“SaaS”) internet hosting, subscriptions, construction of digital hospitals and dispensaries, and related consulting, implementation, services support, and advisory services.
Revenues recognized as delivered over time include professional services billed on a time and materials basis, and fixed fee professional services and training classes that are primarily billed, delivered, and recognized within the same reporting period.
Approximately 3.4% of revenues recognized during the three months ended March 31, 2023, was from the deferred revenue balance existing as of December 31, 2022. Approximately 4% of revenues recognized during the three months ended March 31, 2022, was from the deferred revenue balance existing as of December 31, 2021.
Remaining Performance Obligations
Remaining performance obligations consisted of the following as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Remaining 2023 | | 2024 | | Total |
| Subscriptions | | $ | 2,919 | | | $ | 1,104 | | | $ | 4,023 | |
| Program management and professional services | | 2,092 | | | — | | | 2,092 | |
| Total | | $ | 5,011 | | | $ | 1,104 | | | $ | 6,115 | |
5. Supplemental Financial Statement Information
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Property and equipment consisted of the following:
| | | | | | | | | | | |
| (In thousands) | March 31, 2023 | | December 31, 2022 |
| Leasehold improvements | $ | 878 | | | $ | 868 | |
| Electrical and other equipment | 21 | | | 21 | |
| Computer equipment, furniture and fixtures | 16,413 | | | 16,222 | |
| Vehicles | 305 | | | 302 | |
| Capitalized software development costs | 6,925 | | | 4,404 | |
| Capitalized software development costs in progress | 849 | | | 2,590 | |
| 25,391 | | | 24,407 | |
| Accumulated depreciation and amortization | (11,067) | | | (10,338) | |
| Total property and equipment, net | $ | 14,324 | | | $ | 14,069 | |
As discussed in Note 4, Assets and Liabilities Held for Sale, an additional $4.6 million of property and equipment are included in assets held for sale, noncurrent, in the condensed consolidated balance sheet as of both March 31, 2023 and December 31, 2022.
Depreciation expense was $1.3 million and $1.5 million for the three months ended March 31, 2023 and 2022, respectively.
Accrued expenses consisted of the following:
| | | | | | | | | | | |
| (In thousands) | March 31, 2023 | | December 31, 2022 |
| Accrued professional fees | $ | 15,768 | | | $ | 14,245 | |
| Accrued products and licenses | 17,820 | | | 17,820 | |
| Accrued interest on debt | 2,553 | | | 741 | |
| Accrued payroll and bonuses | 4,715 | | | 5,163 | |
| Other accruals | 243 | | | 794 | |
| Total accrued expenses | $ | 41,099 | | | $ | 38,763 | |
As discussed in Note 4, Assets and Liabilities Held for Sale, an additional $1.3 million and $1.5 million of accrued expenses are included in liabilities held for sale, current, in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively.
6. Intangible Assets
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
The changes in carrying amounts of intangible assets consisted of the following as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Names | | Technology and Intellectual Property | | Customer Relationships | | Total |
| December 31, 2022 | $ | 11,995 | | | $ | 5,850 | | | $ | 13,517 | | | $ | 31,362 | |
| Amortization | (358) | | | (379) | | | (409) | | | (1,146) | |
| March 31, 2023 | $ | 11,637 | | | $ | 5,471 | | | $ | 13,108 | | | $ | 30,216 | |
No impairment charge was recognized during the three months ended March 31, 2023. An impairment charge of $0.7 million was recognized during the three months ended March 31, 2022 in our Services segment.
As discussed in Note 3, Assets and Liabilities Held for Sale, an additional $23.1 million of intangible assets (which includes trade names of $9.1 million, technology and intellectual property of $5.7 million, customer relationships of $7.8 million, and lease assets of $0.5 million) are included in assets held for sale, noncurrent, in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.
The estimated useful lives of trade names are 3-10 years, the estimated useful lives of technology and intellectual property are 5-7 years, and the estimated useful life of customer relationships is 10 years.
Amortization expense was $1.1 million and $5.1 million for the three months ended March 31, 2023 and 2022, respectively.
The estimated amortization expense related to definite-lived intangible assets for the five succeeding years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Trade Name Amortization | | Technology and Intellectual Property Amortization | | Customer Relationships Amortization | | Total |
| Remaining 2023 | $ | 1,058 | | | $ | 1,149 | | | $ | 1,212 | | | $ | 3,419 | |
| 2024 | 1,416 | | | 1,532 | | | 1,616 | | | 4,564 | |
| 2025 | 1,416 | | | 1,532 | | | 1,616 | | | 4,564 | |
| 2026 | 1,416 | | | 896 | | | 1,616 | | | 3,928 | |
| 2027 | 1,416 | | | 362 | | | 1,616 | | | 3,394 | |
| Thereafter | 4,915 | | | — | | | 5,432 | | | 10,347 | |
| $ | 11,637 | | | $ | 5,471 | | | $ | 13,108 | | | $ | 30,216 | |
7. Goodwill
As discussed in Note 3, Assets and Liabilities Held for Sale, an additional $33.1 million and $33.6 million of goodwill is included in assets held for sale, noncurrent, in the condensed consolidated balance sheets as of March 31, 2023 and December 31,
2022, respectively. In the three months ended March 31, 2023, we recorded a $0.5 million impairment charge on the remeasurement of the Innovations Group disposal group to the expected proceeds, less cost to sell, which was included in assets held for sale, noncurrent, in our condensed consolidated balance sheets. See Note 3, Assets and Liabilities Held for Sale, for further information. In the three months ended March 31, 2022, as a result of measurement period adjustments, we increased goodwill in the amount of $5.5 million, which was immediately impaired.
The carrying amount of goodwill consisted of the following:
| | | | | | | | | | | |
| (In thousands) | March 31, 2023 | | December 31, 2022 |
| Goodwill | $ | 159,675 | | | $ | 159,675 | |
8. Debt
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Debt consisted of the following:
| | | | | | | | | | | |
| (In thousands) | March 31, 2023 | | December 31, 2022 |
| 2025 Notes | $ | 67,500 | | | $ | 67,500 | |
| 2026 Notes | 115,000 | | | 115,000 | |
| Total debt | 182,500 | | | 182,500 | |
| Less: unamortized original issue and debt discount | (33,879) | | | (36,538) | |
| Total debt, net of unamortized original issue and debt discount | 148,621 | | | 145,962 | |
| Less: current portion of debt | — | | | — | |
| Noncurrent portion of debt | $ | 148,621 | | | $ | 145,962 | |
2026 Unsecured Convertible Notes and Indenture
On January 20, 2021, GigCapital2 entered into convertible note subscription agreements, each dated January 20, 2021 and amended on June 8, 2021, with certain institutional investors, pursuant to which GigCapital2 agreed to issue and sell unsecured convertible notes in a private placement to close immediately prior to the closing of the Business Combinations.
On June 15, 2021, in connection with the closing of the Business Combinations, we entered into an indenture (the “2026 Indenture”) with Wilmington Trust, National Association, a national banking association, (the “Indenture Trustee”) in its capacity as trustee thereunder, in respect of the $160.0 million in aggregate principal amount of unsecured convertible notes due in 2026 (the “2026 Notes”) that were issued to certain institutional investors. The 2026 Notes bear interest at a rate of 6.25% per annum, payable semi-annually, and were convertible following the reverse split of our shares into approximately 1,502,347 shares of common stock at a conversion price of $106.50 in accordance with the terms of the 2026 Indenture, and will mature on June 15, 2026. The total proceeds received from the 2026 Notes were $151.9 million, net of debt issuance costs of $8.1 million. In accounting for the 2026 Notes, we bifurcated and accounted for the conversion option as a derivative measured at fair value on the issuance date in accordance with ASC 815, Derivatives and Hedging. The difference between the proceeds allocated to the 2026 Notes at issuance and the fair value of the conversion option was allocated to the host debt contract. As of March 31, 2023 and December 31, 2022, the fair value of the derivative was $30 thousand and $0.1 million, respectively, all of which was included in derivative liability, noncurrent, in our unaudited condensed consolidated balance sheets.
Total interest expense for the three months ended March 31, 2023 was $4.3 million, of which $1.8 million related to contractual interest expense, $2.2 million related to derivative accretion, and $0.3 million related to debt issuance costs amortization. Total interest expense for the three months ended March 31, 2022 was $6.0 million, of which $2.5 million related to contractual interest expense, $3.1 million related to derivative accretion, and $0.4 million related to debt issuance costs amortization. Total other income for the three months ended March 31, 2023 and 2022 included a $26 thousand gain and a $4.8 million gain on the fair value of the derivative liability, respectively.
On August 12, 2022, concurrently and in connection with the issuance of our 2025 senior secured convertible notes and indenture (see below), Oppenheimer & Co. Inc. (“OpCo”) commenced a private offer to repurchase approximately $45.0 million in aggregate principal amount of our 2026 Notes (the “2026 Notes Repurchase”). In connection with the 2026 Notes Repurchase, OpCo entered into a note purchase agreement with each institutional investor pursuant to which OpCo agreed to purchase 2026 Notes from
each investor, concurrently with each investor’s purchase of 2025 Notes in the 2025 Notes Offering (see below). At the closing, each investor had the ability to sell $2.0 million in principal amount of 2026 Notes at 100% of par value for each $3.0 million in principal amount of 2025 Notes purchased in the 2025 Notes Offering. Concurrently and in connection with the closing on August 18, 2022, OpCo purchased from each investor the principal amount of the 2026 Notes set forth in each investor’s note purchase agreement, pursuant to and in accordance with the terms thereof. Following the reverse split of shares, the remaining 2026 Notes are convertible into approximately 1,079,812 shares of common stock at a conversion price of $106.50 in accordance with the terms of the Indenture.
2025 Senior Secured Convertible Notes and Indenture
On August 12, 2022, we entered into an indenture (the “2025 Indenture”) with the Indenture Trustee in its capacity as trustee thereunder, in respect of the $67.5 million in aggregate principal amount of a new series of variable rate convertible senior secured notes due December 15, 2025 (the “2025 Notes”) issued to holders of our 2026 Notes in a private placement transaction (“2025 Notes Offering”), raising approximately $22.5 million in gross cash proceeds, net of debt issuance costs of $2.2 million, after paying for a repurchase of $45.0 million of the 2026 Notes, which net proceeds were used in part to fully repay the Seller Notes (see below). The debt issuance costs consisted of cash paid in the amount of $1.5 million and the issuance of 115,000 shares of common stock, following the reverse stock split, with a value of $0.7 million. The 2025 Notes are convertible following the reverse split of our shares into 3,857,142 shares of our common stock at a conversion price, subject to the occurrence of certain corporate events, of $17.50 per share. The 2025 Notes are senior secured obligations of UpHealth, secured by substantially all of our assets and those of our domestic subsidiaries, and accrue interest at a rate equal to the daily secured overnight financing rate (“SOFR”) plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears, for a quarterly rate of 12.21% for our December 15, 2022 interest payment date. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require us to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that we sell assets with net proceeds in excess of $15.0 million, then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any. We may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. We will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.
Total interest expense for the three months ended March 31, 2023 was $2.5 million, of which $2.3 million related to contractual interest expense and $0.2 million related to debt issuance costs amortization.
In March 2023, the Indenture Trustee, in its capacity as calculation agent, notified us of the quarterly rate reset of 14.03% for our June 15, 2023 interest payment date.
Related Party Debt
One of our subsidiaries has notes payable to related parties totaling $0.2 million and $0.3 million as of March 31, 2023 and December 31, 2022. The notes bear interest at rates of 3.50% per annum. The notes are payable in eight quarterly installments starting from October 1, 2022, or upon a liquidity event, as defined in the note agreement. The accrued interest payable was zero as of both March 31, 2023 and December 31, 2022. Interest expense was $3 thousand and $10 thousand for the three months ended March 31, 2023 and 2022, respectively.
Seller Notes
As part of the purchase price consideration for several of UpHealth Holdings’ merger entities, we entered into seller notes payable to their former shareholders, which accrue interest at specific rates, per the respective merger agreements. On June 9, 2021, in connection with the closing of the Business Combination, we paid $88.1 million of the seller notes. In August 2021, we paid an additional $11.1 million of the seller notes and deferred the maturity date to September 2022. In August 2022, we paid the remaining $18.7 million of seller notes plus accrued interest of $1.9 million. As of both March 31, 2023 and December 31, 2022, the seller notes totaled zero.
Accrued interest payable was zero as of both March 31, 2023 and December 31, 2022. Interest expense was zero and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.
9. Fair Value of Financial Instruments
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of March 31, 2023 and December 31, 2022, the fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying values due to the short-term nature of these instruments. Additionally, the fair values of short-term and long-term debt instruments approximate their carrying values.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
•Quoted prices for similar assets/liabilities in active markets;
•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
The following tables present information about our financial assets and liabilities measured at fair value on are recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Cash equivalents - money market funds | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| Liabilities: | | | | | | | |
| Derivative liability | $ | — | | | $ | — | | | $ | 30 | | | $ | 30 | |
| Warrant liability | — | | | 17 | | | — | | | 17 | |
| $ | — | | | $ | 17 | | | $ | 30 | | | $ | 47 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Cash equivalents - money market funds | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| Liabilities: | | | | | | | |
| Derivative liability | $ | — | | | $ | — | | | $ | 56 | | | $ | 56 | |
| Warrant liability | — | | | 9 | | | — | | | 9 | |
| $ | — | | | $ | 9 | | | $ | 56 | | | $ | 65 | |
Money Market Funds
As of March 31, 2023 and December 31, 2022, our cash equivalents consisted of money market funds which were classified as Level 1. We used observable prices in active markets in determining the classification of our money market funds as Level 1. There were no transfers between the hierarchy levels during the three months ended March 31, 2023 and the year ended December 31, 2022.
Cash equivalents as of March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| (In thousands) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| Total cash equivalents | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (In thousands) | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
| Total cash equivalents | $ | 1,681 | | | $ | — | | | $ | — | | | $ | 1,681 | |
Derivative Liability
As of March 31, 2023 and December 31, 2022, the fair value of the derivative was $30 thousand and $0.1 million, respectively, which was included in derivative liability, noncurrent in our unaudited condensed consolidated balance sheets. Total other income for the three months ended March 31, 2023 and 2022 included a gain of $26 thousand and $4.8 million, respectively, on the fair value of the derivative liability.
The fair value of the derivative liability is considered a Level 3 valuation and is determined using a Binomial Lattice Option Pricing Model. The significant assumptions used in the model were:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Stock price | $1.49 | | $1.63 |
| Volatility | 95.0% | | 95.0% |
| Risk free rate | 3.79% | | 4.17% |
| Exercise price | $106.50 | | $106.50 |
| Expected life (in years) | 3.19 | | 3.44 |
| Conversion periods | 2-4 years | | 2-4 years |
| Future share price | $0.10-$303.10 | | $0.10-$405.60 |
2021 Private Placement Warrants and 2021 PIPE Warrants
As of March 31, 2023, the fair value of the 2021 Private Placement Warrants (the “2021 Private Placement Warrants”) and the 2021 PIPE Warrants (the “2021 PIPE Warrants”) was determined to be $0.02 per warrant, totaling $11 thousand and $6 thousand respectively, and are included in warrant liabilities in our unaudited condensed consolidated balance sheets. As of December 31, 2022, the fair value of the 2021 Private Placement Warrants and the 2021 PIPE Warrants was determined to be $0.01 per warrant, totaling $6 thousand and $3 thousand respectively, and are included in warrant liabilities in our unaudited condensed consolidated balance sheets. During the three months ended March 31, 2023, we recorded a $5 thousand gain due to the fair value changes in the 2021 Private Placement Warrants and a $3 thousand due to fair value changes in the 2021 PIPE Warrants, both of which are included in gain in fair value of warrant liabilities in our unaudited condensed consolidated statements of operations. During the three months ended March 31, 2022, we recorded a $0.1 million gain due to the fair value changes in the 2021 Private Placement Warrants and a $33 thousand gain due to fair value changes in the 2021 PIPE Warrants, both of which are included in gain in fair value of warrant liabilities in our unaudited condensed consolidated statements of operations.
There were no transfers between fair value levels during the three months ended March 31, 2023 and year ended December 31, 2022.
10. Capital Structure
2023 Private Placement
On March 9, 2023, we entered into a Securities Purchase Agreement, with a single institutional investor, pursuant to which, in a private placement (the “2023 Private Placement”), we agreed to issue and sell (i) 1,650,000 shares of our common stock, par value $0.0001 per share; (ii) warrants that are exercisable six months from the date of issuance and will have a term of five years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series A Warrants”); (iii) warrants that are exercisable six months from the date of issuance and will have a term of two years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series B Warrants” and, collectively with Series A Warrants, the “Common Stock Purchase Warrants”); and (iv) pre-funded warrants (the “Pre-Funded Warrants,” and together with the Common Stock Purchase Warrants, the “Private Placement Warrants”) to purchase an additional 1,350,000 shares of our common stock (all of such shares issuable upon exercise of the Warrants, the “Warrant Shares”). On March 13, 2023, we announced that we completed the closing of the 2023 Private Placement. The purchase price of each share of common stock sold in the 2023 Private Placement was $1.50, the exercise price of each Common Stock Purchase Warrants (as defined above) is $2.04, and the exercise price of each Pre-
Funded Warrant is $0.0001 and the purchase price of each Pre-Funded Warrant was $1.4999. The aggregate gross proceeds to us from the 2023 Private Placement were approximately $4.5 million, before deducting $0.3 million of placement agent fees and other offering expenses. We intend to use the net proceeds from the offering for general corporate purposes, including working capital.
Common Stock Reserved for Future Issuance
The following table summarizes shares of common stock reserved for future issuance as of March 31, 2023 (recorded on a post-reverse split basis):
| | | | | |
| (In thousands) | Number of Shares |
| Restricted stock units outstanding | 1,342 | |
| Stock options outstanding | 138 | |
| Shares issuable upon conversion of 2025 Notes | 3,857 | |
| Shares issuable upon conversion of 2026 Notes | 1,080 | |
| Shares issuable upon conversion of 2021 Public Warrants | 1,725 | |
| Shares issuable upon conversion of 2021 Private Warrants | 57 | |
| Shares issuable upon conversion of 2021 PIPE Warrants | 29 | |
| Shares issuable upon conversion of the 2023 Private Placement Series A Warrants | 3,000 | |
| Shares issuable upon conversion of the 2023 Private Placement Series B Warrants | 3,000 | |
| Shares issuable upon conversion of the 2023 Private Placement Pre-Funded Warrants | 1,350 | |
| Shares available for future grant under 2021 EIP | 1,032 | |
| 16,610 | |
2015 Cloudbreak Incentive Plan
The following table summarizes stock option activity under the Cloudbreak Plan (recorded on a post-reverse split basis):
| | | | | | | | |
| Number of Shares | Weighted Average Exercise Price Per Share |
| Outstanding as of December 31, 2022 | 138 | | $ | 50.76 | |
| Options exercised | — | | $ | — | |
| Outstanding as of March 31, 2023 | 138 | | $ | 50.76 | |
2021 Equity Incentive Plan
The following table summarizes our RSU activity under the 2021 EIP (recorded on a post-reverse split basis):
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value Per Share |
| Outstanding as of December 31, 2022 | 878 | | $ | 6.61 | |
RSUs granted | 663 | | $ | 2.03 | |
RSUs vested and released | (82) | | $ | 16.09 | |
RSUs forfeited | (117) | | $ | 7.11 | |
Outstanding as of March 31, 2023 | 1,342 | | $ | 3.73 | |
11. Income Taxes
As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Consistent with our conclusion as of December 31, 2022, we continue to believe that it is not more likely than not that the deferred tax assets will be realized and we therefore maintained a full valuation allowance against the deferred tax assets as of March 31, 2023. As a result, the estimated annual effective tax rate for 2023 is expected to be 0% because our forecasted losses are expected to generate no income tax benefit. Furthermore, there were no discrete tax items for the quarter ended March 31, 2023.
The income tax benefit was zero and $2.3 million for the three months ended March 31, 2023 and 2022, respectively.
The Internal Revenue Service (“IRS”) audited Thrasys’ 2008 and 2009 tax returns for the proper year of inclusion of approximately $15.0 million long-term capital gain on the sale of certain intellectual property rights. Thrasys originally reported the gain on its 2010 S Corporation tax return, matching the year of inclusion for financial accounting purposes. The corporate level tax was paid to California and Thrasys passed the gain through to its shareholders. The IRS has asserted that Thrasys owes C Corporation tax of approximately $5.0 million for 2008, or in the alternative, Thrasys owes C Corporation tax of approximately $5.0 million for 2009 as a built-in gain. In addition, Thrasys could be assessed additional California franchise tax of approximately $1.3 million. Additionally, if additional income taxes are imposed, interest will be charged at approximately 4% per year, compounded annually, resulting in potential interest of approximately $3.0 million. The IRS has not asked that penalties be imposed.
The matter is currently pending before the U.S. Tax Court, Docket 11565-15. There are related tax cases for some of the shareholders for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment in Thrasys, Inc. v. Commissioner (T.C. Memo 2018-199); however, Thrasys prevailed, and the motion was denied. In January 2020, Thrasys filed a motion for summary judgment arguing that either the gain was properly reported in 2010 and all taxes have been paid or in the alternative it should have been taxable in 2009 with no built-in gains tax. In both cases, there would be no additional income tax due for 2008 or 2009. The IRS filed an objection to Thrasys’ motion. On March 3, 2021, the U.S. Tax Court, without consideration of the merits of the case, issued a very brief court order dismissing Thrasys’ motion. Had the motion been granted, the need for a trial would have been obviated. Thrasys intends to vigorously defend its position in the case and believes it will prevail if the case is taken to trial. We have accrued $0.2 million representing probable additional taxes and interest imposed, in other liabilities, current in the unaudited condensed consolidated balance sheets.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share assumes the conversion of any convertible securities using the treasury stock method or the if-converted method.
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| (In thousands, except per share data) | 2023 | | 2022 |
| Numerator: | | | |
| Net income (loss) attributable to UpHealth, Inc. | $ | (8,083) | | | $ | (17,445) | |
| Denominator: | | | |
Weighted average shares outstanding(1) | 15,730 | | | 14,454 | |
| Diluted effect of stock options | — | | | — | |
Diluted effect of RSUs | — | | | — | |
| Weighted average shares outstanding assuming dilution | 15,730 | | | 14,454 | |
| Net income (loss) per share attributable to UpHealth, Inc.: | | | |
| Basic | $ | (0.51) | | | $ | (1.21) | |
| Diluted | $ | (0.51) | | | $ | (1.21) | |
(1) The shares and earnings per share as of March 31, 2022 differ from those published in our prior condensed consolidated financial statements as they were retrospectively adjusted as a result of the Reverse Stock Split (as described in Note 1, Organization and Business).
For the three months ended March 31, 2023, the calculation of basic and dilutive earnings per share included the 1.35 million pre-funded warrants with an exercise price of $0.0001, as the shares are issuable for little consideration, and excluded outstanding warrants to purchase 1.8 million shares of common stock at $115.00 per share; 6.0 million Common Stock Purchase Warrants at $2.04 per share; 0.1 million of stock options; 1.3 million of RSUs; 2025 Notes convertible into 3.9 million shares of common stock at a conversion price, subject to the occurrence of certain corporate events, of $17.50 per share; and 2026 Notes, convertible into 1.1 million shares of common stock at $106.50 per share, because the effect would be anti-dilutive. For the three months ended March 31, 2022, the calculation of dilutive earnings per share excluded outstanding warrants to purchase 1.8 million shares of common stock at $115.00 per share; 23 thousand of stock options; 2026 Notes convertible into 1.5 million shares of common stock at $106.50 per
share; and 0.2 million shares of common stock under the terms of the forward share purchase agreement, because the effect would be anti-dilutive.
13. Related Party Transactions
See Note 8, Debt, for related party debt.
See Note 16, Commitments and Contingencies, for leases with related parties.
We make guaranteed payments to related parties. Guaranteed payments aggregated $0.4 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively. These amounts are presented in cost of revenues in our unaudited condensed consolidated statements of operations. We had unpaid guaranteed payments of $0.2 million and $0.5 million as of March 31, 2023 and December 31, 2022, respectively, which is included in accrued liabilities in our unaudited condensed consolidated balance sheets.
14. Segment Reporting
Our business is organized into three operating business segments and one non-operating business segment:
•Integrated Care Management—through our Thrasys subsidiary;
•Virtual Care Infrastructure—through our Cloudbreak and Glocal subsidiaries(1);
•Services—through our Innovations Group, BHS, and TTC subsidiaries; and
•Corporate—through UpHealth and our UpHealth Holdings subsidiary.
(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
We evaluate performance based on several factors, of which Revenues, Gross Profit, and Total Assets are the primary financial measures:
Revenues by segment consisted of the following:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| In thousands | 2023 | | 2022 |
| Integrated Care Management | $ | 3,873 | | | $ | 2,612 | |
Virtual Care Infrastructure(1) | 17,458 | | | 15,630 | |
| Services | 20,814 | | | 17,730 | |
| Total revenues | $ | 42,145 | | | $ | 35,972 | |
(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Gross profit by segment consisted of the following:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| In thousands | 2023 | | 2022 |
| Integrated Care Management | $ | 2,580 | | | $ | 1,638 | |
Virtual Care Infrastructure(1) | 10,185 | | | 6,501 | |
| Services | 9,911 | | | 5,852 | |
| Total gross profit | $ | 22,676 | | | $ | 13,991 | |
(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited
condensed consolidated financial statements, and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Total assets by segment consisted of the following:
| | | | | | | | | | | |
| In thousands | March 31, 2023 | | December 31, 2022 |
| Integrated Care Management | $ | 45,132 | | | 44,776 | |
Virtual Care Infrastructure(1) | 140,311 | | | 140,776 | |
| Services | 126,142 | | | 124,980 | |
| Corporate | 27,212 | | | 29,272 | |
| Total assets | $ | 338,797 | | | $ | 339,804 | |
(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial position of Glocal as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
Total assets by geography consisted of the following:
| | | | | | | | | | | |
| In thousands | March 31, 2023 | | December 31, 2022 |
| Americas | $ | 317,597 | | | 339,804 | |
Asia(1) | 21,200 | | | — | |
| Total assets | $ | 338,797 | | | $ | 339,804 | |
(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial position of Glocal as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.
15. Leases
The components of lease expense consisted of the following for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| In thousands | Third Party | | Related Party | | Total |
| Finance lease costs: | | | | | |
| Amortization of right-of-use assets | $ | 885 | | | $ | — | | | $ | 885 | |
| Interest on lease liabilities | 88 | | | — | | | 88 | |
| Operating lease costs | 716 | | | 98 | | | 814 | |
| Short-term lease costs | 27 | | | 67 | | | 94 | |
| Variable lease costs | 144 | | | — | | | 144 | |
| Sublease income | (129) | | | — | | | (129) | |
| Total lease costs | $ | 1,731 | | | $ | 165 | | | $ | 1,896 | |
Lease-related assets and liabilities recorded on the consolidated balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| In thousands | Third Party | | Related Party | | Total | | Third Party | | Related Party | | Total |
| Assets | | | | | | | | | | | |
| Finance lease right-of-use assets (included in property and equipment, net) | $ | 5,546 | | | $ | — | | | $ | 5,546 | | | $ | 5,916 | | | $ | — | | | $ | 5,916 | |
| Operating lease right-of-use assets | 5,331 | | | 1,313 | | | 6,644 | | | 5,819 | | | 1,394 | | | 7,213 | |
| Total leased assets | $ | 10,877 | | | $ | 1,313 | | | $ | 12,190 | | | $ | 11,735 | | | $ | 1,394 | | | $ | 13,129 | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
| Lease liabilities, current: | | | | | | | | | | | |
| Finance lease liabilities | $ | 2,936 | | | $ | — | | | $ | 2,936 | | | $ | 3,023 | | | $ | — | | | $ | 3,023 | |
| Operating lease liabilities | 2,045 | | | 336 | | | 2,381 | | | 2,130 | | | 322 | | | 2,452 | |
| Lease liabilities, current | 4,981 | | | 336 | | | 5,317 | | | 5,153 | | | 322 | | | 5,475 | |
| | | | | | | | | | | |
| Lease liabilities, noncurrent: | | | | | | | | | | | |
| Finance lease liabilities | 2,813 | | | — | | | 2,813 | | | 2,976 | | | — | | | 2,976 | |
| Operating lease liabilities | 4,235 | | | 1,002 | | | 5,237 | | | 4,672 | | | 1,093 | | | 5,765 | |
| Lease liabilities, noncurrent | 7,048 | | | 1,002 | | | 8,050 | | | 7,648 | | | 1,093 | | | 8,741 | |
| Total leased liabilities | $ | 12,029 | | | $ | 1,338 | | | $ | 13,367 | | | $ | 12,801 | | | $ | 1,415 | | | $ | 14,216 | |
Accumulated amortization related to the finance lease assets was $4.8 million and $3.9 million as of March 31, 2023 and December 31, 2022, respectively.
The following table summarizes our lease term and discount rate assumptions as of March 31, 2023:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Third Party | | Related Party | | Total |
| Weighted-average remaining lease term (years): | | | | | |
| Finance leases | 1.94 | | — | | 1.94 |
| Operating leases | 3.47 | | 3.67 | | 3.50 |
| | | | | |
| Weighted-average discount rate: | | | | | |
| Finance leases | 6.3% | | — | | 6.3% |
| Operating leases | 6.8% | | 5.3% | | 6.5% |
Undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year, as of March 31, 2023, have been reconciled to the total operating and finance lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2023 as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Finance Leases | | Operating Leases |
| In thousands | Third Party | | Related Party | | Total | | Third Party | | Related Party | | Total |
| Remaining 2023 | $ | 2,495 | | | $ | — | | | $ | 2,495 | | | $ | 1,922 | | | $ | 291 | | | $ | 2,213 | |
| 2024 | 2,526 | | | — | | | 2,526 | | | 1,930 | | | 421 | | | 2,351 | |
| 2025 | 1,060 | | | — | | | 1,060 | | | 1,535 | | | 427 | | | 1,962 | |
| 2026 | — | | | — | | | — | | | 1,029 | | | 323 | | | 1,352 | |
| 2027 | — | | | — | | | — | | | 457 | | | — | | | 457 | |
| Thereafter | — | | | — | | | — | | | 380 | | | — | | | 380 | |
| Total lease payments | 6,081 | | | — | | | 6,081 | | | 7,253 | | | 1,462 | | | 8,715 | |
| Less: Interest | 332 | | | — | | | 332 | | | 973 | | | 124 | | | 1,097 | |
| Present value of lease liabilities | $ | 5,749 | | | $ | — | | | $ | 5,749 | | | $ | 6,280 | | | $ | 1,338 | | | $ | 7,618 | |
Prior to the adoption of ASC 2016-02, Leases, the following was disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022:
Total rent expense under related party and third-party agreements was approximately $0.2 million and $1.2 million, respectively, for the three months ended March 31, 2022.
Total sublease revenue under third-party agreements was approximately $0.2 million for the three months ended March 31, 2022.
During the three months ended March 31, 2022, we recorded additional lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office lease.
16. Commitments and Contingencies
Commitments
Operating leases
See Note 15, Leases, for commitments related to our operating leases.
Contingencies
From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business, including the previously disclosed tax matter (see Note 11, Income Taxes, for further information) and matters described below. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies. Except as set forth below, in the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our condensed consolidated results of operations, financial position or cash flows.
Advisory Services Agreement Dispute
We are in a services agreement dispute with a third-party advisory firm for fees due under the services agreement. The advisory firm claims $31.0 million, plus interest, is owed in fees. Based on consultation with legal counsel, we previously proposed a settlement in the amount of $8.0 million, which has been accrued for as of March 31, 2023 and December 31, 2022, and is included in accrued expenses in our unaudited condensed consolidated balance sheets. The amount of the ultimate loss may range from $8.0 million to $26.3 million.
Indemnification
Certain of our agreements require us to indemnify our customers from any claim or finding of intellectual property infringements, as well as from any losses incurred relating to breach of representations, failure to perform, or specific events as outlined within the particular contract. We have not received any claims or estimated the maximum potential amount of indemnification liability under these agreements and have recorded no liabilities for these agreements.
17. Subsequent Events
Management has determined that no material events or transactions have occurred subsequent to the balance sheet date, other than those events noted below, that require disclosure in our unaudited condensed consolidated financial statements.
Sale of Innovations Group
On February 26, 2023, we agreed to sell 100% of the outstanding capital stock of our wholly owned subsidiary, Innovations Group, Inc. (“Innovations Group”), to Belmar MidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and other adjustments. See Note 3, Assets and Liabilities Held for Sale, for further information.
