Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2023

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)