Business Combinations

9 Months Ended

Sep. 30, 2021

Business Combination and Asset Acquisition [Abstract]

Business Combinations

Business Combinations

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net assets acquired.

Trade Names

A trade name is a legally-protected trade or similar mark. Acquired trade names are valued using an income method approach, generally the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of trade names and applies it to the after-tax discounted free cash flow attributed to the trade name. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.

Technology and Intellectual Property

Technology and intellectual property (“IP”) is a design, work, or invention that is the result of creativity to which one has ownership rights that may be protected through a patent, copyright, trademark, or service mark. IP is valued using the relief-from-royalty valuation method. The method uses a royalty rate based on comparable marketplace royalty agreements for similar types of IP and applies it to the after-tax discounted free cash flow attributed to the IP. The discount rate used is based on an estimated weighted average cost of capital and the anticipated risk for intangible assets.

IP is amortized following the pattern in which the expected benefits will be consumed or otherwise used up over each component’s useful life, based on our plans and expectations for the IP going forward, which is generally the underlying IP’s legal expiration dates.

Customer Relationships

Customer relationships are intangible assets that consist of historical and factual information about customers and contacts collected from repeat transactions with customers, with or without any underlying contracts. The information is generally organized as customer lists or customer databases. We have the expectation of repeat patronage from these customers based on the customers’ historical purchase activity, which creates the intrinsic value over a finite period of time and translates into the expectation of future revenue, income, and cash flow.

Customer relationships are valued using projected operating income, adjusted for estimated future existing customer growth, less estimated future customer attrition, net of charges for net tangible assets, IP charge, trade name charge, and work force. The concluded value is the after-tax discounted free cash flow.

Measurement Period

We have included a measurement period table for each acquisition, identifying the line item or line items where an adjustment was deemed necessary and have quantified its impact. We expect to finalize the valuations and complete the purchase price allocations as soon as practicable, but no later than one year from each acquisition date. In addition, we have not finalized our evaluation of allocating goodwill to reporting units.

The Formation of UpHealth Holdings

UpHealth Holdings was formed on October 26, 2020, as a Delaware corporation, when the shareholders of UpHealth Services, Inc. contributed all of the shares of UpHealth Services to UpHealth Holdings in exchange for outstanding common stock of UpHealth Holdings, resulting in UpHealth Services being a wholly-owned subsidiary of UpHealth Holdings. There was an immaterial disclosure in the Quarterly Report on Form 10-Q for the six-months ended June 30, 2021 which mistakenly described the reorganization of

UpHealth Services as a merger rather than a contribution of shares. This was accounted for as a common control transaction with assets and liabilities carried over at book value.

Acquisition of Thrasys

On November 20, 2020, UpHealth Holdings completed the 100% acquisition of Thrasys, in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $167.4 million, net of cash and restricted cash acquired of $2.5 million. The acquisition brings additional software and support synergies to our consolidated digital healthcare offerings.

Under the terms of the merger agreement, shares of common stock held by two officers of Thrasys, with a value of $10.0 million, have been restricted for 12 months from the closing date of the merger, as security for a potential indemnification claim related to a Thrasys tax matter (see Note 12, Income Taxes, for further information).

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Thrasys. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to Thrasys’ identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of November 20, 2020
Accounts receivable	$	3,491	$	—	$	3,491
Prepaid expenses and other	3,001		—		3,001
Identifiable intangible assets	27,875		—		27,875
Property and equipment	101		—		101
Other assets	19		—		19
Goodwill	145,036		(3,052)		148,088
Total assets acquired	179,523		(3,052)		182,575
Accounts payable	1,779		—		1,779
Accrued expenses and other current liabilities	5,322		—		5,322
Debt	430		(531)		961
Deferred tax liabilities	6,378		—		6,378
Deferred revenue	700		—		700
Total liabilities assumed	14,609		(531)		15,140
Net assets acquired	$	164,914	$	(2,521)	$	167,435

Thrasys applied for forgiveness of its $0.5 million PPP loan during 2020 and it was forgiven in full and the subsidiary legally released from repaying the loan by the SBA in June 2021. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended June 30, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreement, resulting in a decrease in net assets acquired and goodwill of $2.5 million during the three months ended June 30, 2021.

The acquired intangible assets from Thrasys and their related estimated useful lives consisted of the following:

	Value		Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	6,925	10
Definite-lived intangible assets—Technology and intellectual property	10,825		10
Definite-lived intangible assets—Customer relationships	10,125		10
Total fair value of identifiable intangible assets	$	27,875

Acquisition of BHS

On November 20, 2020, UpHealth Holdings completed the 100% acquisition of BHS in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $15.8

million, net of cash acquired of $1.0 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of BHS. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to BHS’ identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of November 20, 2020
Accounts receivable	$	1,257	$	—	$	1,257
Inventories	100		—		100
Prepaid expenses and other	40		—		40
Identifiable intangible assets	225		—		225
Property and equipment	53		—		53
Other assets	4		—		4
Deferred tax assets	19		—		19
Goodwill	15,339		(767)		16,106
Total assets acquired	17,037		(767)		17,804
Accounts payable	374		—		374
Accrued expenses and other current liabilities	847		421		426
Debt	229		(1,005)		1,234
Total liabilities assumed	1,450		(584)		2,034
Net assets acquired	$	15,587	$	(183)	$	15,770

In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $0.2 million during the three months ended June 30, 2021. Additionally, during the three months ended June 30, 2021, BHS recorded an accrual in the amount of $0.4 million for amounts owing to providers as of the acquisition date, with an offsetting increase in goodwill. BHS submitted a request for forgiveness of its $1.0 million PPP loans during 2021 and it was forgiven in full and BHS was legally released from repaying the loan by the SBA in August 2021. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended September 30, 2021.

The acquired intangible assets from BHS and their related estimated useful lives consisted of the following:

	Value		Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	225	3
Total fair value of identifiable intangible assets	$	225

Acquisition of TTC

On January 25, 2021, UpHealth Holdings completed the 100% acquisition of TTC in exchange for a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $45.9 million, net of cash acquired of $2.4 million. The acquisition brings additional medical synergies to our consolidated digital healthcare offerings.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of TTC. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to TTC’s identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of January 25, 2021
Accounts receivable	$	1,773	$	—	$	1,773
Prepaid expenses and other	187		—		187
Identifiable intangible assets	1,125		—		1,125
Property and equipment	531		—		531
Other assets	281		—		281
Goodwill	57,921		347		57,574
Total assets acquired	61,818		347		61,471
Accounts payable	625		—		625
Accrued expenses and other current liabilities	602		—		602
Due to related parties	4,200		2,807		1,393
Debt	11,217		(1,283)		12,500
Deferred tax liabilities	474		—		474
Total liabilities assumed	17,118		1,524		15,594
Net assets acquired	$	44,700	$	(1,177)	$	45,877

TTC submitted a request for forgiveness of its PPP loans in 2020 and they were forgiven in full and TTC was legally released from repaying the loans in the amount of $0.9 million and $0.3 million in February and March 2021, respectively. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended March 31, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $1.2 million. Additionally, during the three months ended June 30, 2021, TTC recorded an accrual in the amount of $2.8 million for amounts owing to a related party as of the acquisition date, with an offsetting increase in goodwill.

The acquired intangible assets from TTC and their related estimated useful lives consisted of the following:

	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-life intangible assets – Trade names	$	1,125	3
Total fair value of identifiable intangible assets	$	1,125

Acquisition of Glocal

On November 20, 2020, UpHealth Holdings entered into a stock purchase agreement to acquire 43.46% of Glocal. On March 26, 2021, UpHealth Holdings completed a step acquisition of an additional 45.94% of Glocal, bringing our total ownership to 89.4%. The acquisition resulted in our ownership exceeding 50.0%, requiring consolidation of Glocal as of March 26, 2021. On May 14, 2021, June 21, 2021, and August 27 2021, UpHealth Holdings completed the acquisition of an additional 1.0%, 1.8%, and 2.61% of Glocal, respectively, bringing our total ownership to 94.81% as of September 30, 2021. Total purchase price consideration included a promissory note for future cash consideration, as defined in the merger agreements, and common stock interests in UpHealth Holdings totaling $131.5 million, net of cash acquired of $0.4 million. The acquisition brings additional medical synergies to our virtual care infrastructure offerings.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Glocal. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to Glocal's identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of March 26, 2021
Accounts receivable, net	$	4,461	$	(2,000)	$	6,461
Inventories	326		—		326
Identifiable intangible assets	38,039		—		38,039
Property, equipment, and work in progress	40,726		—		40,726
Other current assets, including short term advances	1,980		—		1,980
Other noncurrent assets, including long term advances	509		—		509
Goodwill	109,872		18,001		91,871
Total assets acquired	195,913		16,001		179,912
Accounts payable	579		—		579
Accrued expenses and other current liabilities	8,271		—		8,271
Deferred tax liability	9,890		9,890		—
Debt	34,171		11,959		22,212
Noncontrolling interest	17,389		—		17,389
Total liabilities assumed and noncontrolling interest	70,300		21,849		48,451
Net assets acquired	$	125,613	$	(5,848)	$	131,461

In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $5.8 million during the three months ended June 30, 2021. Additionally, during the three months ended June 30, 2021, Glocal recorded a deferred tax liability in the amount of $9.9 million relating to identifiable intangible assets acquired in connection with the acquisition, with an offsetting increase in goodwill. Additionally, during the three months ended September 30, 2021, Glocal recorded a reserve against its accounts receivable in the amount of $2.0 million and a liability related to redeemable preferred shares as of the acquisition date in the amount of $12.0 million with offsetting increases in goodwill.

The acquired intangible assets from Glocal and their related estimated useful lives consisted of the following:

	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Technology and intellectual property	$	38,039	8.5
Total fair value of identifiable intangible assets	$	38,039

Acquisition of Innovations

On April 27, 2021, UpHealth Holdings completed the 100% acquisition of Innovations in exchange for a promissory note for future cash consideration, as defined in the merger agreement, and common stock interests in UpHealth Holdings totaling $169.8 million, net of cash acquired of $0.6 million. The acquisition adds the services segment to our operations.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Innovations. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to Innovation’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of April 27, 2021
Accounts receivable	$	47	$	—	$	47
Inventories	2,693		—		2,693
Prepaid expenses and other	530		—		530
Identifiable intangible assets	28,325		—		28,325
Property and equipment	7,937		—		7,937
Other assets	22		—		22
Goodwill	144,264		534		143,730
Total assets acquired	183,818		534		183,284
Accounts payable	472		—		472
Accrued expenses and other current liabilities	780		—		780
Deferred revenue	302		—		302
Deferred tax liability	7,837		—		7,837
Debt	4,069		—		4,069
Noncontrolling interests	534		534		—
Total liabilities assumed and noncontrolling interest	13,994		534		13,460
Net assets acquired	$	169,824	$	—	$	169,824

During the three months ended September 30, 2021, Innovations recorded noncontrolling interests as of the acquisition date in the amount of $0.5 million, with an offsetting increase in goodwill.

The acquired intangible assets from Innovations and their related estimated useful lives consisted of the following:

	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	10,925	10
Definite-lived intangible assets—Technology and intellectual property	8,075		5 - 7
Definite-lived intangible assets—Customer relationships	9,325		17
Total fair value of identifiable intangible assets	$	28,325

Acquisition of Cloudbreak

On June 9, 2021, UpHealth (fka GigCapital2) completed the Cloudbreak Business Combination in an exchange of cash, notes, and common stock interests in UpHealth totaling $142.0 million, net of cash acquired of $0.9 million. The acquisition brings additional software and support synergies to our virtual care infrastructure offerings.

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after our acquisition of Cloudbreak. The goodwill is not deductible for tax purposes.

The following table sets forth the preliminary allocation of the purchase price to Cloudbreak's identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is subject to reevaluation during the measurement period.

(In thousands)	As of September 30, 2021		Measurement Period Adjustments		As of June 9, 2021
Accounts receivable	$	4,810	$	—	$	4,810
Prepaid expenses and other	921		—		921
Identifiable intangible assets	32,475		—		32,475
Property and equipment	6,882		—		6,882
Other assets	1,042		—		1,042
Goodwill	111,363		395		110,968
Total assets acquired	157,493		395		157,098
Accounts payable	2,518		—		2,518
Accrued expenses and other current liabilities	987		82		905
Deferred revenue	15		—		15
Deferred tax liability	7,906		—		7,906
Other long-term liabilities	300		300		—
Debt	3,752		—		3,752
Total liabilities assumed	15,478		382		15,096
Net assets acquired	$	142,015	$	13	$	142,002

During the three months ended September 30, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net increase in net assets acquired and goodwill of $13 thousand. In addition, during the three months ended September 30, 2021, Cloudbreak recorded a deferred rent liability related to its operating leases as of the acquisition date in the amount of $0.4 million, with an offsetting increase in goodwill.

The acquired intangible assets from Cloudbreak and their related estimated useful lives consisted of the following:

	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-lived intangible assets—Trade names	$	12,975	15
Definite-lived intangible assets—Technology and intellectual property	5,825		5
Definite-lived intangible assets—Customer relationships	13,675		10
Total fair value of identifiable intangible assets	$	32,475

Acquisition of UpHealth Holdings

On June 9, 2021, GigCapital2 completed the UpHealth Business Combination as disclosed above, in an exchange of cash, notes, and common stock interests in UpHealth for all the shares of UpHealth Holdings' capital stock issued and outstanding immediately prior to the effective date 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 GigCapital2, accompanied by a recapitalization, with UpHealth Holdings treated as the accounting acquiror. The determination of UpHealth Holdings as the accounting acquiror was primarily based on the fact that subsequent to the acquisition, UpHealth Holdings owns a majority of the voting power of the combined company, UpHealth Holdings comprises 75% of the ongoing operations of the combined entity, UpHealth Holdings controls a majority of the governing body of the combined company, and UpHealth Holdings' senior management comprises most of the senior management of the combined company. The net assets of GigCapital2 were stated at historical cost with no goodwill or other intangible assets recorded. Reported results from operations included herein prior to the acquisition are those of UpHealth Holdings. The shares and corresponding capital amounts and loss per share related to UpHealth Holdings' outstanding common stock prior to the acquisition have been retroactively restated to reflect the exchange ratio (1.0 UpHealth Holdings share to 10.28 GigCapital2 shares) established in the business combination agreement.

Acquisition-Related Costs

For the three and nine months ended September 30, 2021, we have incurred $1.2 million and $36.6 million, respectively, of acquisition-related charges for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations), and Cloudbreak, which are included in acquisition-related expenses in the condensed consolidated statements of operations.

Combined Pro Forma Results for the Three and Nine Months Ended September 30, 2021 and 2020

The results of operations of UpHealth Holdings and its subsidiaries (BHS, Thrasys, TTC, Glocal, and Innovations), and Cloudbreak have been included in the financial statements subsequent to their acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the acquisition of UpHealth Holdings (including all subsidiaries) and Cloudbreak had occurred on January 1, 2020, after giving effect to certain purchase accounting adjustments. These purchase accounting adjustments mainly include incremental depreciation expense related to the fair value adjustment of property and equipment, amortization expense related to identifiable intangible assets, and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020
Pro Forma
Revenues	$	49,070	$	26,582	$	118,848	$	86,050
Net income (loss)	$	32,592	$	(3,215)	$	(7,459)	$	(12,269)
Basic earnings per share	$	0.28	$	(0.06)	$	(0.08)	$	(0.25)
Diluted earnings per share	$	0.28	$	(0.06)	$	(0.08)	$	(0.25)