Home Support system UPHEALTH, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

UPHEALTH, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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Unless otherwise indicated or the context otherwise requires, references in this
report (this "Quarterly Report") to "we," "our," "us," "UpHealth" or the
"Company" and other similar terms refer to UpHealth, Inc. and its consolidated
subsidiaries. The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the condensed
financial statements and the notes thereto contained elsewhere in this Quarterly
Report. Certain information contained in the discussion and analysis set forth
below includes forward-looking statements that involve risks and uncertainties.

Special note regarding forward-looking statements

This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
that are not historical facts, and involve risks and uncertainties that could
cause actual results to differ materially from those expected and projected. All
statements, other than statements of historical fact included in this Quarterly
Report including, without limitation, statements in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the company's financial position, business strategy and the plans and
objectives of management for future operations, are forward-looking statements.
Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek,"
"may," "might," "plan," "possible," "potential," "should, "would" and similar
words and expressions are intended to identify such forward-looking statements.
Such forward-looking statements relate to future events or future performance,
but reflect management's current beliefs, based on information currently
available. A number of factors could cause actual events, performance or results
to differ materially from the events, performance and results discussed in the
forward-looking statements. For information identifying important factors that
could cause actual results to differ materially from those anticipated in the
forward-looking statements, please refer to the "Risk Factors" section in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed
with the SEC on April 18, 2022 (our "Annual Report") and in any more recent
filings with the SEC. The company's securities filings can be accessed on the
EDGAR section of the SEC's website at www.sec.gov. Except as expressly required
by applicable securities law, the company disclaims any intention or obligation
to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise.

UpHealth, Inc. Company Overview

UpHealth Services, Inc. was formed on November 5, 2019, and effectively began
operations on January 1, 2020. It was formed for the purpose of effecting a
combination of various companies engaged in digital health, and commenced
negotiations with a number of companies, including those that are discussed
below as having been acquired. UpHealth Holdings, Inc. ("UpHealth Holdings")
became the sole shareholder of UpHealth Services, Inc. through a reorganization
with UpHealth Services, Inc.'s original shareholders when UpHealth Holdings was
formed on October 26, 2020 as a Delaware corporation. UpHealth Holdings then
entered into a series of transactions to develop its business across three
segments: (a) Integrated Care Management-through its subsidiary Thrasys, Inc.
("Thrasys"); (b)Virtual Care Infrastructure-through its subsidiary Glocal
Healthcare Systems Private Limited ("Glocal"); and (c) Services-through its
subsidiaries Innovations Group, Inc. ("Innovations Group"), Behavioral Health
Services, LLC ("BHS") and TTC Healthcare, Inc. ("TTC"). On June 9, 2021,
UpHealth (fka GigCapital2, Inc.) acquired UpHealth Holdings and its subsidiaries
and Cloudbreak Health, LLC and its subsidiaries ("Cloudbreak"), which added
Cloudbreak to the Virtual Care Infrastructure segment.

Integrated care management segment – Thrasys

Overview of Thrasys

Thrasys provides its customers with an advanced, comprehensive, and extensible
technology platform, marketed under the umbrella "SyntraNetTM," to manage
health, quality of care, and costs, especially for individuals with complex
medical, behavioral health, and social needs. Thrasys focuses on both the United
States and international markets. SyntraNetTM is offered as a
software-as-a-service ("SaaS") platform. Information, analytics, and
applications are delivered to care team members on desktops, tablets, and
phones, as needed. An advanced protected health information ("PHI") framework
controls access to information based on roles, rights, policies, and scope of
consent. The platform includes innovations in a number of areas: application and
information models for connected care communities (an extension of multi-tenant
architectures), integration and normalization of heterogeneous data sources,
configurable software services and open application programming interfaces
("APIs"), advanced analytics and intelligence, scalable workflows and rules,
protected health information management, and user interfaces ready for the
proliferation of device types and interaction modes.

Thrasys Key Business Indicators

Revenue

Thrasys derives revenue broadly from the sales of (a) products-with associated
license, subscription, and hosting fees and (b) services-largely to implement,
configure, and extend the technology, and train and on-board users on the use of
the platform and applications.
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Licenses and Subscriptions Revenue. License revenues are typically associated
with rights granted to customers to deploy the platform to a certain number of
care communities of a certain size, usually measured as the total population of
patients that can be included within a care community. License revenues are
recognized based on the nature of the license provided, either fully on the date
license rights are granted to the customer if there are no further performance
obligations or ratably over the license term beginning on the effective date of
each contract, the date the customer takes possession of the license rights.

Subscription fees are recurring fees charged for access to the platform and
applications. Subscription fees are typically pegged to a measure of use, such
as population size, number of providers, members enrolled in programs, or number
of members managed by applications. Subscription fees can grow as customers
subscribe to additional application features or launch additional programs.
Revenues from subscription fees are recognized ratably over the subscription
term.

Services. The majority of Thrasys' contracts to provide professional services
are priced either on a time and materials basis, whereby revenues are recognized
as the services are rendered, or as a fixed monthly retainer based on an
estimate of the number of hours of work over the contract term, whereby revenues
are recognized on a straight-line basis over the contract term. In some cases,
Thrasys enters into professional services contracts where professional services
fees are defined for specific milestones, whereby revenues are recognized upon
achievement of the milestones.

Cost of goods and services

Cost of goods and services for Thrasys include: costs related to hosting
SyntraNetTM in a HIPAA-compliant cloud environment; costs of third-party product
licenses embedded with SyntraNetTM; costs of a core professional services team,
amortization of capitalized internal-use software development costs, and an
allocation of facilities, information technology, and depreciation costs. Added
compliance requirements for security infrastructure is likely to add some
additional costs for hosting services. Thrasys also anticipates added costs for
third-party licenses that will be added as the scope and footprint of the
technology platform expands.

Hosting Infrastructure. Thrasys' technology and solutions are designed to be
agnostic to any particular cloud services provider. Currently, customer
environments are hosted through contracts with two cloud service providers.
Thrasys anticipates capabilities of cloud service providers to grow, and costs
to become increasingly competitive, and will continue to evaluate offerings in
the marketplace to determine the optimum mix of security, reliability,
scalability, and performance to meet customer needs. Hosting infrastructure
costs for Thrasys are related to the number and size of environments deployed
for customers and also on the service level agreements ("SLAs") negotiated with
customers. As the average size of customers continues to grow, hosting
infrastructure costs are expected to grow as a percentage of revenue.

Third-Party Product Licenses. SyntraNetTM embeds certain third-party technology
components to support some of its technology capabilities. There are multiple
vendors for these components, and Thrasys is not dependent on any specific
vendor.

Professional Services Team. Thrasys' professional services team works closely
with the product team and is best understood as an "A-team" created to lead
showcase implementations. The goal is to keep the professional services team
small in order to focus it on deploying reference customers and facilitating the
on-boarding and coaching of systems integration partners.

Operating Expenses
Sales and Marketing ("S&M") Expenses. S&M expenses include an internal sales and
marketing team and contracts with business development consultants to generate
and qualify leads, and an allocation of facilities, information technology, and
depreciation costs.

Research and Development ("R&D") Expenses. Thrasys continues to invest in R&D.
The core R&D team consists of a small team of very experienced software
developers. Beginning in 2019, Thrasys added considerable capacity via a
consulting group with whom it has been working for over ten years. The team,
based in Chicago, functioned much like the Thrasys internal team, until they
were brought in-house in June 2021. R&D expenses attributed to internal-use
software development are capitalized and amortized to cost of goods and
services. R&D expenses also include an allocation of facilities, information
technology, and depreciation costs.

General and Administrative ("G&A") Expenses. G&A expenses include compensation
and benefits expense, and other administrative costs, related to its executive,
finance, human resources, legal, facilities, and information technology teams,
net of allocations to cost of goods and services, S&M expenses and R&D expenses.

Depreciation and Amortization Expenses. Depreciation expense relates to the
depreciation of computer equipment, purchased software, furniture and fixtures,
and office equipment, net of amounts allocated to cost of goods and services.
Amortization expense relates to the amortization of intangible assets from the
acquisition of Thrasys.

Virtual Care Infrastructure Segment – ​​Glocal and Cloudbreak

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Overview

Glocal is a technology and process-based healthcare platform providing its
customer comprehensive primary care and specialty consultations for a fraction
of the cost of traditional healthcare delivery systems, through telemedicine,
digital dispensaries, and technology-based hospital centers. Glocal has been
awarded by the United Nation's ("UN") Innovation Exchange with the Public
Appreciation Award 2020 as a cutting-edge technology to meet the sustainable
development goals of the UN.

Glocal pioneered the development of a semantic algorithm and AI-based clinical
decision support system called LitmusDX, which helps deliver healthcare through
telemedicine in its HelloLyf CX digital dispensaries and HelloLyf HX digital
hospital, utilizing a telemedicine terminal called LitmusMX and an automated
medicine dispenser called LitmusRX.

LitmusMX is used for recording the vitals of the patient, consultations with a
doctor over video conferencing from miles away, and routine card-based
point-of-care tests, and also contains a fully automatic biochemistry analyzer.
The software may also suggest further investigations. If the doctor agrees, they
can order further rapid tests, such as for dengue or malaria, for which kits are
available. When the doctor selects a prescription, LitmusMX talks to the
LitmusRX automated medicine dispensing unit, which delivers the required dosages
of the medicines. Theoretically, the algorithm can be fine-tuned to arrive at a
final diagnosis and prescription on its own. In addition to these solutions is
one of the world's top end-to-end Clinical Decision Support System ("CDSS"),
named LitmusDX, along with a web interface, named HelloLyf, which integrates
practice management with diagnostic algorithms, investigation interpretation,
treatment protocols, drug safety checks, and electronic medical records.

Glocal's HelloLyf CX digital dispensary was selected by United Nations AID as a
cutting-edge technology solution to reach the UN's sustainable development
goals. Unlike other telemedicine centers seen today, Glocal's HelloLyf CX
digital dispensary is an innovative, hybrid, brick-and-mortar center, which
provides complete primary and emergency healthcare solutions, such as
consultation, confirmatory tests, and medicines, from a single point through the
use of LitmusMX and LitmusRX. During the COVID-19 pandemic, Glocal's innovative
HelloLyf CX digital dispensaries successfully used ultraviolet C light
disinfection, acrylic separation, and positive air pressure to create the first
line for defense of health workers and patients against all forms of infectious
and contagious diseases, including COVID-19.

In September 2021, Glocal delivered its first digital hospital in the Indian
state of Nagaland, providing 88 e-ICU beds with connected ventilators and
injection syringe pump. This digital hospital utilizes Glocal's HelloLyf patient
management, digital health, and decision support software to provide and
coordinate outpatient care, emergency care, radiology and imaging, intensive
care, high-dependency care, inpatient care, and dialysis.

While Glocal's customers are located in regions in India and Southeast Asia,
Glocal generates the majority of its revenue in India. Glocal's
telemedicine/HelloLyf CX digital dispensaries have been functional in India
mainly through the government and are primarily housed in government facilities,
which provide services that are free to the beneficiaries. After successful
implementation of projects in the Indian states of Rajasthan, Odisha, and West
Bengal, Glocal won a contract to set-up 550+ HelloLyf CX digital dispensaries in
the Indian State of Madhya Pradesh, resulting in a total of 750+
government-placed nodes across India.

Glocal has begun focusing on a business-to-business ("B2B") model where the
HelloLyf CX digital dispensaries are sold to B2B partners/customers, who operate
them with a revenue-share to Glocal. This results in lower revenues but higher
margins.

Glocal also owns nine hospitals, four of which it operates and five of which it has contracted with third parties to operate, with Glocal receiving a share of the revenue.

Glocal Key Business Metrics

Revenue

Services. Service revenue is derived primarily from the operation of hospitals and clinics, including pharmacy and drug sales, and telemedicine consultation transaction fees.

Some products. Product revenue mainly comes from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.

Cost of goods and services

Cost of goods and services consists primarily of costs of building and operating
hospitals, including costs for the purchase of medicines, professional/doctor
fees, the cost to build HelloLyf CX digital dispensaries and HelloLyf HX digital
hospitals, and an allocation of information technology and depreciation costs.

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Functionnary costs

Sales and Marketing Expenses. S&M expenses are comprised of compensation and
benefits related to Glocal's sales personnel, travel expenses, and expenses
related to advertising, marketing programs, and events, and an allocation of
facilities, information technology, and depreciation costs.

General and administrative expenses. General and administrative expenses include compensation and benefits expenses, as well as other administrative expenses, related to its management teams, finance, human resources, legal, facilities and information technology, net of allocations to the cost of goods and services and S&M expenses.

Depreciation and Amortization Expenses. Glocal's operations are capital
intensive. Depreciation expense relates to the depreciation of buildings,
computer equipment, purchased software, furniture and fixtures, and office
equipment, net of amounts allocated to cost of goods and services. Amortization
expense relates to the amortization of intangible assets from the acquisition of
Glocal.

Cloudbreak Overview

Cloudbreak is a leading provider of unified telemedicine solutions and digital
health tools aimed at increasing access to healthcare and resolving health
disparities across the care continuum, at each stage of healthcare acuity.
Cloudbreak powers its client's healthcare digital transformation initiatives and
provides digital health infrastructure enabling its partners to address
healthcare disparities and implement unique, private-label, telehealth
strategies customized to their specific needs and markets.

Cloudbreak's core offering, known as Martti™, is a video remote interpreting
solution that puts qualified and certified medical interpreters at the
fingertips of clinical care teams nationwide through Cloudbreak's proprietary
software platform. Having one of the largest installed bases of video endpoints
in the nation, Cloudbreak has expanded its operations to include other
telemedicine use cases as well, including tele-stroke, tele-psychiatry,
tele-urology, and tele-quarantine, among others, all over the same
infrastructure. Cloudbreak has also recently launched a home health virtual
visit platform enabling its healthcare system partners to see their patients
remotely on any device, at anytime, anywhere the patient may be, and in any
language they may speak. Cloudbreak's client base spans the entire healthcare
continuum including hospitals and health systems, Federally Qualified Healthcare
Clinics, urgent care centers, stand-alone clinics and medical practices,
employers, and schools.

Cloudbreak's Telemedicine-as-a-Service ("TaaS") business model aligns interests
between Cloudbreak and its clients, creating a partnership targeted towards
forming long-term agreements with sustainable and mutually beneficial growth
models for all stakeholders. Cloudbreak has specifically structured itself to
not have a captive medical group as it believes that creates a conflict of
interest with its client base, as local health systems do not want to suffer
patient leakage to a technology partner or be forced to use a provider network.
As a result, Cloudbreak has the freedom to match its partners with centers of
excellence on its network, who can satisfy their specific needs and strategy
without fear of competing for the patient's attention, and thereby avoid the
employment and maintenance of a medical group, which is a lower margin and a
more labor intensive activity.

Cloudbreak Key Business Metrics

Revenue

Services. Services revenue is generated primarily from the sale of
subscription-based fixed monthly minute and variable rate per unit of service
medical language interpretation services. Cloudbreak also records ancillary
revenue from the rental of Martti™ devices and from the provision of information
technology services that include connectivity and ongoing support of the Martti™
software platform. Generally, Cloudbreak's medical language interpretation and
information technology services are invoiced monthly. Fixed monthly minute
medical language interpretation subscription and information technology services
fees are invoiced in advance in the period preceding the service. Variable rate
per unit medical language interpretation and information technology services
fees (including overage fees related to minutes used by the customer in excess
of the fixed monthly minute subscription) are invoiced monthly in arrears.
Martti™ device leases are invoiced monthly in advance in the period preceding
the usage. Invoiced amounts are typically due within 30 days of the invoice
date.

Some products. Product revenue consists of the sale of Martti™ appliances to its customers. Sales of Martti™ appliances are generally invoiced upon execution of the contract (50%) and upon delivery of the appliances to the customer (50%). Invoiced amounts are generally due within 30 days of the invoice date.

Cost of goods and services

Cost of goods and services primarily consists of costs related to supporting and
hosting Cloudbreak's product offerings and delivering services, and include the
cost of maintaining Cloudbreak's data centers, customer support team, and
Cloudbreak's professional services staff, in
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in addition to third-party service provider costs such as data center and networking charges, amortization of capitalized internal-use software development costs, inventory cost of purchased equipment sold to customers, and an allocation of facilities, information technology and depreciation costs.

Functionnary costs

Sales and Marketing Expenses. S&M expenses consist of costs related to
advertising, marketing programs, and events including related wages, commissions
and travel expenses, and an allocation of facilities, information technology,
and depreciation costs.

General and Administrative Expenses. G&A expenses consist of compensation and
benefits expense, and other administrative costs, related to its executive,
finance, human resources, legal, facilities, and information technology teams,
net of allocations to cost of goods and services and S&M.

Depreciation and Amortization Expenses. Depreciation expense relates to the
depreciation of computer equipment, purchased software, furniture and fixtures,
and office equipment, net of amounts allocated to cost of goods and services.
Amortization expense relates to the amortization of intangible assets from the
acquisition of Cloudbreak.

Service Segment – Innovation GroupTTC and BHS

Innovations Group Overview

Innovations Group is the parent company of the following wholly-owned operating
subsidiaries: MedQuest Pharmacy, Inc. ("MedQuest Pharmacy"), WorldLink Medical,
Inc ("WorldLink Medical"), Medical Horizons, Inc. ("Medical Horizons"), and
Pinnacle Labs, Inc. (doing business as MedQuest Testing Services ("MTS")).

MedQuest Pharmacy is a full-service retail and compounding pharmacy licensed in
50 states and the District of Columbia that has relationships with both
prescribers and patients, dispenses patient-specific medications, and ships
directly to patients. The business model is driven by cash-pay and prescription
volume-based revenue generated by physician electronic prescription order entry,
as well as traditional prescriber-patient-pharmacist interactions, mailed,
verbal, and faxed orders. It delivers both compounded and legend (also referred
to as manufactured) drugs and is capable of serving as a retail or national
fulfillment center, as a personalized medication administration partner with
prescribers, and as a lifestyle wellness direct-to-consumer offering. Its
proprietary software and operating system, eMedplus, is Electronic Prescribing
of Controlled Substances ("EPCS") certified by the U.S. Drug Enforcement
Administration ("DEA") and provides prescribers with a full-service prescription
management system. In January 2020, eMedplus became SureScripts certified
(SureScript's process is to validate that the software meets certain industry
standards related to sending and receiving electronic messages and that it is
providing open choice for medication selection and dispensing location),
allowing any user of the SureScripts platform to prescribe medications dispensed
by MedQuest Pharmacy.

MedQuest Pharmacy is accredited and recognized by the Accreditation Commission
for Health Care and its Pharmacy Compounding Accreditation Board, among other
high-quality providers and suppliers. MedQuest Pharmacy has achieved this elite
level of quality by exceeding standards set by national accreditation bodies and
quality-centered organizations.

MedQuest Pharmacy is currently working on expanding its prescriber base, through
both current prescribers and new prescribers, through the SureScripts platform
and testing services with new and existing lab companies and relationships.
Medical Horizons is also expanding their sales of supplements through the new
NutraScriptives-Direct program, which allows physicians and others to use the
NutraScriptives-Direct program to service their patients' needs and thus expand
their services and provide growth opportunities for their practices.

Also under the Innovations Group suite of services is WorldLink Medical, Medical
Horizons, and MedQuest Testing Services. WorldLink Medical is the educational
services arm of Innovations Group, providing Continuing Medical Education
("CME") educational courses accredited as a joint provider through the
Accreditation Council for Continuing Medical Education ("ACCME"). Medical
Horizons specializes in customized formulations and contract dietary supplement
and nutraceuticals manufacturing as an own label distributor with its brand
NUTRAscriptivesTM, as well as other brands. Its turnkey solutions include label
design, printing, and application; custom packaging; daily packs; a selection of
capsule sizes and colors; and convenient auto-reorder services. It features a
staff of experts that is committed to excellence and outstanding customer
service. MedQuest Testing Services focuses specifically on facilitating
diagnostic testing between lab companies, such as LabCorp and Quest Diagnostics,
patients, and providers.

Innovations Group Key Business Indicators

Revenue

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Products. Products revenue is generated primarily from the sale of prescription
medications directly to patients, as well as through the sale of supplemental
products to providers. The majority of the customer revenue is billed and
collected before the medications and products are shipped from the facility.
MedQuest Pharmacy is Innovation's largest subsidiary in terms of revenue and
generates approximately 60% of its revenue from sales of compounded medications
and approximately 40% of its revenue from sales of manufactured medications and
supplements.

Services. Service revenue is primarily derived from CME training courses provided by WorldLink Medical.

Cost of goods and services

Cost of goods and services primarily consists of costs of raw ingredients and
materials to compound various drugs and supplements, the cost of manufactured
product purchased directly from the distributors for resale, the cost of
fulfillment and shipping services, amortization of capitalized internal-use
software development costs, and an allocation of facilities, information
technology, and depreciation costs. MedQuest Pharmacy purchases these items
through a large industry distributor with many suppliers and also sources
products and supplies directly with manufacturers. MedQuest Pharmacy is also
able to leverage the size of its operations to purchase larger quantities of
certain ingredients and materials at lower prices.

Functionnary costs

Sales and Marketing Expenses. S&M expenses consist of costs related to
advertising, marketing programs, and events including related wages, commissions
and travel expenses, an allocation of facilities, information technology, and
depreciation costs.

General and administrative expenses. General and administrative expenses include compensation and benefits expenses, as well as other administrative expenses, related to its management teams, finance, human resources, legal, facilities and information technology, net of allocations to the cost of goods and services and S&M expenses.

Depreciation and Amortization Expenses. Depreciation expense relates to the
depreciation of computer equipment, lab equipment, purchased software, furniture
and fixtures, office equipment, and leasehold improvements, net of amounts
allocated to cost of goods and services. Amortization expense relates to the
amortization of intangible assets from the acquisition of Innovations Group.

Presentation of the TTC

TTC provides inpatient and outpatient mental health and substance abuse
treatment services for individuals with behavioral health issues, including
post-traumatic stress disorder and drug and alcohol addiction. TTC offers a
complete continuum of care from its detoxification services, residential care,
partial hospitalization programs, and intensive outpatient, and outpatient
programs. During the COVID-19 pandemic, outpatient programs have been virtual
for a majority of visits.

In March 2020, TTC formed Transformations Mending Fences, LLC to provide mental
health and substance abuse disorder treatment, including equine therapy, to
patients. TTC has an 80% controlling interest in the entity with the remaining
20% interest owned by an unrelated party. Operations began in December 2020,
with the admission of the first patient occurring in January 2021.

In addition to inpatient and outpatient substance abuse treatment services, TTC
performs screenings, urinalysis, and diagnostic laboratory services, and
provides physician services to clients. TTC operates three subsidiaries located
in Delray Beach, Florida and one facility in Morriston, Florida. These
facilities consist of inpatient substance abuse treatment facilities, standalone
outpatient centers, and sober living facilities focused on delivering effective
clinical care and treatment solutions.

Key TTC Trade Indicators

Revenue

Services. TTC generates revenue primarily through services provided to clients
in both inpatient and outpatient treatment settings. TTC bills third-party
payors weekly for the services provided in the prior week. Client-related
services, such as inpatient and outpatient programs, are generally recognized
over time as the performance obligation is satisfied at the estimated net
realizable value amount from clients, third-party payors, and others for
services provided. TTC receives the majority of payments from commercial payors
at out-of-network rates. Client service revenue is recorded at established
billing rates, less adjustments to estimate net realizable value. Provisions for
estimated third party payor reimbursements are provided in the period related
services are rendered and adjusted in future periods when actual reimbursements
are received. A significant or sustained decrease in reimbursement rates could
have a material adverse effect on operating results.

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Laboratory Testing. TTC provides diagnostic laboratory testing services for its
clients, which are recognized over time as the performance obligation is
satisfied at the estimated net realizable value amount from clients, third-party
payors, and others for services provided. Diagnostic laboratory service revenue
is recorded at established billing rates, less adjustments to estimate net
realizable value. Provisions for estimated third party payor reimbursements are
provided in the period related services are rendered and adjusted in future
periods when actual reimbursements are received.

Cost of goods and services

The cost of goods and services primarily includes facility operating costs, professional/physician fees and an allocation of information technology and depreciation costs.

Functionnary costs

Sales and Marketing Expenses. S&M expenses include costs related to advertising, marketing programs and events.

General and administrative expenses. General and administrative expenses include compensation and benefits expenses, as well as other administrative expenses, related to its management teams, finance, human resources, legal, facilities and information technology, net of allocations to the cost of goods and services and S&M expenses.

Depreciation and Amortization Expenses. Depreciation expense relates to the
depreciation of computer equipment, purchased software, furniture and fixtures,
office equipment, and leasehold improvements, net of amounts allocated to cost
of goods and services. Amortization expense relates to the amortization of
intangible assets from the acquisition of TTC.

BHS Overview

BHS operates through Psych Care Consultants, LLC, BHS Pharmacy, LLC, and
Reimbursement Solutions, LLC, wholly-owned subsidiaries of BHS. Psych Care
Consultants, LLC is a medical group that has four medical offices located in the
St. Louis Metropolitan area (Missouri) and provides psychiatric and mental
health services. BHS Pharmacy, LLC provides retail pharmacy services
specializing in behavioral health through services, such as medication
management, screenings, online portals, and delivery. Reimbursement Solutions,
LLC provides billing services for Psych Care Consultants, LLC (which has allowed
for more efficient payment for BHS clinicians) and third-party customers.
Services include billings, collections, verification of benefits, authorization,
and credentialing.

BHS provides its patients and providers with a reliable platform where a
provider can address their patients' needs efficiently with an infrastructure
built to support the providers and address patient needs. This infrastructure
consists of medical offices placed strategically for the convenience of
providers and patients and trained staff to assist providers and patients in the
delivery of quality health services that is timely and efficient, provide
prescription dispensing for patients that is convenient to maintain compliance,
and assist providers with billing and collection services through Reimbursement
Solutions, LLC.

BHS providers work in collaboration with multiple area hospital systems (both in
leadership and clinical positions) to provide and direct inpatient treatment.
BHS' business is generated by various referral sources developed over the years
by BHS' providers and their presence in the market for over twenty-five years.
BHS offers in-office, virtual, and in-patient treatment. Common conditions
treated by BHS practitioners include depression, bipolar disorder, attention
disorders, schizophrenia, substance use disorders, post-traumatic stress
disorder, Alzheimer's disease and related disorders, and personality disorders.

BHS Key Business Metrics

Revenue

Services. Services revenue is generated primarily by providing psychiatric and
mental health services and billing services. Although the underlying tasks will
vary by service and by patient, medical professionals perform inquiries, obtain
vital statistics, perform certain lab tests, administer therapy, and provide any
additional goods and services as necessary depending on the information
obtained.

Some products. Product revenue is generated primarily by providing retail pharmacy services through BHS Pharmacy, LLC.

Cost of goods and services

Cost of goods and services consists primarily of provider compensation expenses,
the cost of pharmaceutical medications sold to patients, and an allocation of
facilities, information technology, and depreciation costs. Provider
compensation expenses include consulting payments to BHS' healthcare providers,
including medical doctors in psychiatry, psychologists, nurse practitioners, and
clinical social workers. BHS has adopted an incentive-based compensation plan
with provider agreements that compensate the providers based upon a percentage
of
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revenue generated and ultimately collected for services provided. BHS primarily
purchases pharmaceutical medications through a large industry distributor with
many suppliers, but also purchases some directly from other suppliers.

Functionnary costs

General and administrative expenses. General and administrative expenses include compensation and benefits expenses, as well as other administrative expenses, related to its management teams, finance, human resources, legal, facilities and information technology, net of allocations to the cost of goods and services.

Depreciation Expense. Depreciation expense relates to the depreciation of
computer equipment, purchased software, furniture and fixtures, and office
equipment, net of amounts allocated to cost of goods and services. Amortization
expense relates to the amortization of intangible assets from the acquisition of
BHS.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and income and expenses
during the periods reported. These estimates and assumptions are based on
current facts, historical experience, and various other factors that we believe
are reasonable under the circumstances to determine reported amounts of assets,
liabilities, revenue and expenses that are not readily apparent from other
sources. To the extent there are material differences between our estimates and
the actual results, our future consolidated results of comprehensive income
(loss) may be affected.

Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies, in the Notes to the Condensed Consolidated Financial Statements of this Quarterly Report, the following specific accounting policies and estimates involve a greater degree of judgment and complexity :

•Business combinations;

•Goodwill and intangible fixed assets;

•Revenue recognition; and

•Income taxes.

There have been no changes to our significant accounting policies and estimates described in our annual report that have materially affected our condensed consolidated financial statements and accompanying notes.

UpHealth, Inc. Consolidated operating results

Operating results

As of June 30, 2022 and for the three and six months then ended, UpHealth's
operating results consist of the results of operations for UpHealth and its
subsidiaries Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak. As of
June 30, 2021 and for the three and six months then ended, UpHealth's operating
results consist of (1) the results of operations for UpHealth Holdings and its
subsidiaries Thrasys, BHS, TTC and Glocal and (2) the results of operations for
its subsidiaries Innovations Group and Cloudbreak subsequent to their
acquisitions on April 27, 2021 and June 9, 2021, respectively.
                                       35
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The following table sets forth the consolidated results of operations of
UpHealth:


(Unaudited, in thousands)            Three Months Ended June 30,                                                         Six Months Ended June 30,
                                       2022                  2021            $ Change            % Change                 2022                  2021            $ Change            % Change
Revenue:
Services                         $       28,096          $  15,448          $ 12,648                    82  %       $       53,782          $  23,586          $ 30,196                  128  %
Licenses and subscriptions                6,812              9,145            (2,333)                  (26) %                8,593             12,803            (4,210)                 (33) %
Products                                  8,760              7,289             1,471                    20  %               17,265              8,309             8,956                  108  %
Total revenue                            43,668             31,882            11,786                    37  %               79,640             44,698            34,942                   78  %
Cost of goods and services:
Services                                 14,762              9,590             5,172                    54  %               29,207             14,063            15,144                  108  %
License and subscriptions                   217              6,173            (5,956)                  (96) %                  450              6,670            (6,220)                 (93) %
Products                                  6,296              4,727             1,569                    33  %               12,286              5,643             6,643                  118  %
Total cost of goods and services         21,275             20,490               785                     4  %               41,943             26,376            15,567                   59  %
Gross margin                             22,393             11,392            11,001                    97  %               37,697             18,322            19,375                  106  %
Operating expenses:
Sales and marketing                       3,486              1,695             1,791                   106  %                6,212              2,580             3,632                  141  %
Research and development                  1,782              2,273              (491)                  (22) %                3,369              3,843              (474)                 (12) %
General and administrative               14,632              7,306             7,326                   100  %               28,291             11,029            17,262                  157  %
Depreciation and amortization             4,700              2,966             1,734                    58  %                9,936              3,870             6,066                  157  %
Stock-based compensation                  1,088                  -             1,088                     -  %                2,462                  -             2,462                    -  %
Lease abandonment expenses                    -                  -                 -                     -  %                   75                  -                75                    -  %
Goodwill and intangible asset
impairment                                    -                  -                 -                     -  %                6,174                  -             6,174                    -  %
Acquisition, integration, and
transformation costs                      6,749             32,653           (25,904)                  (79) %                9,133             35,339           (26,206)                 (74) %
Total operating expenses                 32,437             46,893           (14,456)                  (31) %               65,652             56,661             8,991                   16  %
Loss from operations                    (10,044)           (35,501)           25,457                   (72) %              (27,955)           (38,339)           10,384                  (27) %
Other income (expense):
Interest expense                         (6,603)            (4,904)           (1,699)                   35  %              (13,598)            (5,615)           (7,983)                 142  %
Gain on consolidation of equity
method investment                             -                  -                 -                     -  %                    -                640              (640)                (100) %
Gain on fair value of derivative
liability                                 1,841                  -             1,841                     -  %                6,670                  -             6,670                    -  %
Gain on fair value of warrant
liabilities                                  95              1,075              (980)                  (91) %                  190              1,075              (885)                 (82) %
Gain on extinguishment of debt                -                151              (151)                 (100) %                    -                151              (151)                (100) %
Other income (expense), net,
including interest income                    14               (256)              270                  (105) %                   (2)              (219)              217                  (99) %
Total other expense                      (4,653)            (3,934)             (719)                   18  %               (6,740)            (3,968)           (2,772)                  70  %
Loss before income tax benefit          (14,697)           (39,435)           24,738                   (63) %              (34,695)           (42,307)            7,612                  (18) %
Income tax benefit                        2,232              6,646            (4,414)                  (66) %                4,525              7,052            (2,527)                 (36) %
Net loss before loss from equity
method investment                       (12,465)           (32,789)           20,324                   (62) %              (30,170)           (35,255)            5,085                  (14) %
Loss from equity method
investment                                    -                  -                 -                     -  %                    -               (561)              561                 (100) %
Net loss                                (12,465)           (32,789)           20,324                   (62) %              (30,170)           (35,816)            5,646                  (16) %
Less: net loss attributable to
noncontrolling interests                    (27)                (6)              (21)                  350  %                 (287)               (84)             (203)                 242  %
Net loss attributable to
UpHealth, Inc.                   $      (12,438)         $ (32,783)         $ 20,345                   (62) %       $      (29,883)         $ (35,732)         $  5,849                  (16) %





                                       36
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The following table presents the consolidated operating results of
UpHealth as a percentage of total turnover:

                                                         Three Months Ended June 30,                 Six Months Ended June 30,
                                                          2022                 2021                  2022                 2021
Revenue:
Services                                                      64  %                 48  %                68  %                53  %
Licenses and subscriptions                                    16  %                 29  %                11  %                29  %
Products                                                      20  %                 23  %                22  %                19  %
Total revenue                                                100  %                100  %               100  %               100  %
Cost of goods and services:
Services                                                      34  %                 30  %                37  %                31  %
License and subscriptions                                      -  %                 19  %                 1  %                15  %
Products                                                      15  %                 15  %                15  %                13  %
Total cost of goods and services                              49  %                 64  %                53  %                59  %
Gross margin                                                  51  %                 36  %                47  %                41  %
Operating expenses:
Sales and marketing                                            8  %                  5  %                 8  %                 6  %
Research and development                                       4  %                  7  %                 4  %                 9  %
General and administrative                                    34  %                 23  %                36  %                25  %
Depreciation and amortization                                 11  %                  9  %                12  %                 9  %
Stock-based compensation                                       2  %                  -  %                 3  %                 -  %
Lease abandonment expenses                                     -  %                  -  %                 -  %                 -  %
Goodwill and intangible asset impairment                       -  %                  -  %                 8  %                 -  %
Acquisition, integration, and transformation costs            15  %                102  %                11  %                79  %
Total operating expenses                                      74  %                147  %                82  %               127  %
Loss from operations                                         (23) %               (111) %               (35) %               (86) %
Other income (expense):
Interest expense                                             (15) %                (15) %               (17) %               (13) %
Gain on consolidation of equity method investment              -  %                  -  %                 -  %                 1  %
Gain on fair value of derivative liability                     4  %                  -  %                 8  %                 -  %
Gain on fair value of warrant liabilities                      -  %                  3  %                 -  %                 2  %
Gain on extinguishment of debt                                 -  %                  -  %                 -  %                 -  %
Other income (expense), net, including interest
income                                                         -  %                 (1) %                 -  %                 -  %
Total other expense                                          (11) %                (12) %                (8) %                (9) %
Loss before income tax benefit                               (34) %               (124) %               (44) %               (95) %
Income tax benefit                                             5  %                 21  %                 6  %                16  %
Net loss before loss from equity method investment           (29) %               (103) %               (38) %               (79) %
Loss from equity method investment                             -  %                  -  %                 -  %                (1) %
Net loss                                                     (29) %               (103) %               (38) %               (80) %
Less: net loss attributable to noncontrolling
interests                                                      -  %                  -  %                 -  %                 -  %
Net loss attributable to UpHealth, Inc.                      (28) %               (103) %               (38) %               (80) %


Due to the timing of UpHealth's acquisitions of TTC, Glocal, Innovations Group,
and Cloudbreak, the numbers presented above are not directly comparable between
periods.

Three months completed June 30, 2022 and 2021

Revenue

In the three months ended June 30, 2022, revenue was $43.7 million, an increase
of $11.8 million, or 37%, compared to $31.9 million in the three months ended
June 30, 2021. Services revenue increased $12.6 million, primarily due to a
$10.6 million increase in the Virtual Care Infrastructure segment resulting from
a full period of operations in the three months ended June 30, 2022 at
Cloudbreak, which was acquired in the second quarter of 2021. Products revenue
increased $1.5 million, primarily due to an increase in the Services segment
resulting from to a full period of operations in the three months ended June 30,
2022 for Innovations Group, which was also acquired in the second quarter of
2021. Licenses and subscriptions revenue declined $2.3 million, primarily due to
Thrasys' loss of a contract with a European customer, net of increased revenue
from an amended contract with an existing customer.
                                       37
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We expect revenue to increase in fiscal 2022 as compared to fiscal 2021 due to a
full year of operations for TTC, Glocal, Innovations Group and Cloudbreak, which
were acquired in the first half of 2021. In addition, we expect revenue to
increase for the foreseeable future as we invest in advertising and marketing,
as well as in the integration and development of our technology platforms across
each of our segments.

Cost of Goods and Services

In the three months ended June 30, 2022, cost of goods and services was $21.3
million, an increase of $0.8 million, or 4%, compared to $20.5 million in the
three months ended June 30, 2021. Cost of services increased $5.2 million,
primarily due to a $4.5 million increase in the Virtual Care Infrastructure
segment resulting from a full period of operations in the three months ended
June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021.
Cost of products increased $1.6 million, primarily due to an increase in the
Services segment resulting from a full period of operations in the three months
ended June 30, 2022 for Innovations Group, which was also acquired in the second
quarter of 2021. Cost of licenses and subscriptions declined $6.0 million,
primarily due to Thrasys' loss of a contract with a European customer.

We expect cost of goods and services to increase in fiscal 2022 as compared to
fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group,
and Cloudbreak, which were acquired in the first half of 2021. In addition, we
expect cost of goods and services to increase for the foreseeable future,
commensurate with the growth in our revenue. Our cost of goods and services may
fluctuate as a percentage of our total revenue (gross margin %) from period to
period due to the changes in the percentage of revenue contributed by each of
our segments.

Operating Expenses

Sales and Marketing. In the three months ended June 30, 2022, S&M expenses,
which primarily consisted of advertising, marketing programs, and events,
including related wages, commissions and travel expenses, were $3.5 million,
compared to $1.7 million in the three months ended June 30, 2021. The increase
in S&M expenses was largely due to a $1.6 million increase in S&M expenses at
Innovations Group and Cloudbreak, which were acquired in the second quarter of
2021, as well as corporate S&M expenses related to additional headcount.

We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due
to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak,
which were acquired in the first half of 2021. In addition, we expect our S&M
expenses to increase for the foreseeable future as we invest in advertising and
marketing. Our S&M expenses may fluctuate as a percentage of our total revenue
from period to period due to the timing and extent we promote our brands through
a variety of marketing and public relations activities.

Research and Development. In the three months ended June 30, 2022, R&D expenses,
which primarily consisted of compensation and benefits expense and other
administrative costs related to the Thrasys' software development teams, were
$1.8 million compared to $2.3 million in the three months ended June 30, 2021.
The decrease in R&D expenses was largely due to an increase in the
capitalization of internal-use software development costs.

We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021,
and for the foreseeable future, as we continue to invest in the development and
integration of our technology platforms across each of our segments. Our R&D
expenses may fluctuate as a percentage of our total revenue from period to
period due to the timing and extent of our technology and development expenses,
including the ability to capitalize software development costs. Historically,
the majority of our technology and development costs have been expensed, except
those costs that have been capitalized as software development costs.

General and Administrative. In the three months ended June 30, 2022, G&A
expenses, which primarily consisted of compensation and benefits expense and
other administrative costs related to the executive, finance, human resources,
legal, facilities, and information technology teams, net of allocations to cost
of goods and services and S&M and R&D expenses, were $14.6 million, compared to
$7.3 million in the three months ended June 30, 2021. The increase in G&A
expenses of $7.3 million was largely due an increase of approximately $5.8
million in corporate expenses, primarily related to increased professional and
legal fees and increased compensation and benefits due to increased headcount,
and to a lesser extent, due to a full period of operations for Innovations Group
and Cloudbreak, which were acquired in the second quarter of 2021.

We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due
to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak,
which were acquired in the first half of 2021, and an increase in expenses at
corporate as we build out our executive, finance, human resources, legal,
facilities, and information technology teams, net of savings we expect to
realize as we continue to integrate and centralize G&A functions across our
segments. In addition, we expect our G&A expenses to increase for the
foreseeable future as we continue to grow our business. Our G&A expenses may
fluctuate as a percentage of our total revenue from period to period due to the
timing and extent of our G&A expenses.

Depreciation and Amortization. In the three months ended June 30, 2022,
depreciation and amortization expenses were $4.7 million, primarily consisting
of $4.2 million of amortization of intangible assets and $0.7 million of
depreciation related to property, plant and equipment, net of allocations to
cost of goods and services. In the three months ended June 30, 2021 depreciation
and amortization expenses
                                       38
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were $3.0 million, primarily consisting of $2.7 million of amortization of
intangible assets and $0.3 million of depreciation related to property, plant
and equipment, net of allocations to cost of goods and services. The increase in
depreciation and amortization expenses was largely due to a full period of
operations for Innovations Group and Cloudbreak, which were acquired in the
second quarter of 2021.

We expect depreciation and amortization expenses to increase in fiscal 2022 due
to a full year of amortization of intangibles assets and depreciation of
property, plant, and equipment related to TTC, Glocal, Innovations Group, and
Cloudbreak, which were acquired in the first half of 2021.

Stock-Based Compensation. In the three months ended June 30, 2022, stock-based
compensation expenses were $1.1 million, related to grants under equity
incentive plans. There were no stock-based compensation expenses in the three
months ended June 30, 2021. We expect stock-based compensation expenses to
increase in fiscal 2022 as we continue to make grants under our equity incentive
plan to new and existing employees.

Acquisition, Integration and Transformation Costs. In the three months ended
June 30, 2022, acquisition, integration and transformation costs were $6.7
million, primarily consisting of consulting, legal, and severance costs incurred
to integrate and transform the businesses. In the three months ended June 30,
2021, acquisition, integration and transformation costs were $32.7 million,
primarily consisting of one-time transaction expenses related to the
acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and
UpHealth Holdings' merger with UpHealth. While we do not expect to incur
additional acquisition costs in fiscal 2022, we will incur additional
integration and transformation costs in fiscal 2022, and for the foreseeable
future.

Other Expense

In the three months ended June 30, 2022, other expense was $4.7 million,
primarily consisting of $6.6 million of interest expense, partially offset by a
$1.8 million of gain on fair value of derivative liability and a $0.1 million
gain on fair value of warrant liabilities. In the three months ended June 30,
2021, other expense was $3.9 million, primarily consisting of $4.9 million of
interest expense and $0.3 million of other expense, net, partially offset by a
$1.1 million gain on fair value of warrants and a $0.2 million gain on
extinguishment of debt.

Tax benefit

Within three months June 30, 2022the tax benefit was $2.2 million. Within three months June 30, 2021the tax benefit was
$6.6 million.

Income tax benefit reflects management's best assessment of estimated current
and future taxes to be paid. The objectives for accounting for income taxes, as
prescribed by the relevant accounting guidance, are to recognize the amount of
taxes payable or refundable for the current year and deferred tax assets and
liabilities for future tax consequences of events that have been recognized in
the financial statements.

Six months ended June 30, 2022 and 2021

Revenue

In the six months ended June 30, 2022, revenue was $79.6 million, an increase of
$34.9 million, or 78%, compared to $44.7 million in the six months ended June
30, 2022. Services revenue increased $30.2 million, primarily due to an increase
of $25.4 million in the Virtual Care Infrastructure segment resulting from a
full period of operations in the six months ended June 30, 2022 at Cloudbreak
and Glocal, and due to an increase of $7.7 million in the Services segment
resulting from a period of operations in the six months ended June 30, 2022 at
Innovations Group and TTC, all of which were acquired in the first half of 2021.
Products revenue increased $9.0 million, primarily due to a full period of
operations in the six months ended June 30, 2022 at Innovations Group and TTC,
which were acquired in the first half of 2021. Licenses and subscriptions
revenue declined $4.2 million, primarily due to Thrasys' loss of a contract with
a European customer, net of increased revenue from an amended contract with an
existing customer.

We expect revenue to continue to increase in fiscal 2022 as compared to fiscal
2021 due to a full year of operations for TTC, Glocal, Innovations Group, and
Cloudbreak, which were acquired in the first half of 2021. In addition, we
expect revenue to increase for the foreseeable future as we invest in
advertising and marketing, as well as in the integration and development of our
technology platforms across each of our segments.

Cost of goods and services

In the six months ended June 30, 2022, cost of goods and services was $41.9
million, an increase of $15.6 million, or 59%, compared to $26.4 million in the
six months ended June 30, 2021. Cost of services increased $15.1 million,
primarily due to an increase of $12.3 million in the Virtual Care Infrastructure
segment resulting from a full period of operations in the six months ended June
30, 2022 at Cloudbreak and Glocal, and due to an increase of $2.6 million in the
Services segment resulting from a full period of operations in the six months
ended June 30,
                                       39
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2022 at Innovations Group and TTC, all of which were acquired in the first half
of 2021. Cost of products increased $6.6 million, primarily due to a full period
of operations in the six months ended June 30, 2022 at Innovations Group and
TTC, which were acquired in the first half of 2021. Cost of licenses and
subscriptions revenue declined $6.2 million, primarily due to Thrasys' loss of a
contract with a European customer.

We expect cost of goods and services to increase in fiscal 2022 as compared to
fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group,
and Cloudbreak, which were acquired in the first half of 2021. In addition, we
expect cost of goods and services to increase for the foreseeable future,
commensurate with the growth in our revenue. Our cost of goods and services may
fluctuate as a percentage of our total revenue (gross margin %) from period to
period due to the changes in the percentage of revenue contributed by each of
our segments.

Operating Expenses

Sales and Marketing. In the six months ended June 30, 2022, S&M expenses, which
primarily consisted of advertising, marketing programs, and events, including
related wages, commissions and travel expenses, were $6.2 million, compared to
$2.6 million in the six months ended June 30, 2021. The increase in S&M expenses
was largely due to a full period of operations in the six months ended June 30,
2022 for Innovations Group and Cloudbreak, which were acquired in the second
quarter of 2021, as well as TTC and Glocal, which were acquired in the first
quarter of 2021.

We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due
to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak,
which were acquired in the first half of 2021. In addition, we expect our S&M
expenses to increase for the foreseeable future as we invest in advertising and
marketing. Our S&M expenses may fluctuate as a percentage of our total revenue
from period to period due to the timing and extent we promote our brands through
a variety of marketing and public relations activities.

Research and Development. In the six months ended June 30, 2022, R&D expenses,
which primarily consisted of compensation and benefits expense and other
administrative costs related to the Thrasys' software development teams, were
$3.4 million compared to $3.8 million in the six months ended June 30, 2021. The
decrease in R&D expenses was largely due to an increase in the capitalization of
internal-use software development costs.

We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021,
and for the foreseeable future, as we continue to invest in the development and
integration of our technology platforms across each of our segments. Our R&D
expenses may fluctuate as a percentage of our total revenue from period to
period due to the timing and extent of our technology and development expenses,
including the ability to capitalize software development costs. Historically,
the majority of our technology and development costs have been expensed, except
those costs that have been capitalized as software development costs.

General and Administrative. In the six months ended June 30, 2022, G&A expenses,
which primarily consisted of compensation and benefits expense and other
administrative costs related to the executive, finance, human resources, legal,
facilities, and information technology teams, net of allocations to cost of
goods and services and S&M and R&D expenses, were $28.3 million, compared to
$11.0 million in the six months ended June 30, 2021. The increase in G&A
expenses of $17.3 million was largely due an increase of approximately $12
million in corporate expenses, primarily related to increased professional and
legal fees and increased compensation and benefits due to increased headcount,
and to a lesser extent, a full period of operations in the six months ended June
30, 2022 for Innovations Group and Cloudbreak, which were acquired in Q2 2021,
as well as TTC and Glocal, which were acquired in the first quarter of 2021.

We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due
to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak,
which were acquired in the first half of 2021, and an increase in expenses at
corporate as we build out our executive, finance, human resources, legal,
facilities, and information technology teams, net of savings we expect to
realize as we continue to integrate and centralize G&A functions across our
segments. In addition, we expect our G&A expenses to increase for the
foreseeable future as we continue to grow our business. Our G&A expenses may
fluctuate as a percentage of our total revenue from period to period due to the
timing and extent of our G&A expenses.

Depreciation and Amortization. In the six months ended June 30, 2022,
depreciation and amortization expenses were $9.9 million, primarily consisting
of $9.3 million of amortization of intangible assets and $0.4 million of
depreciation related to property, plant and equipment, net of allocations to
cost of goods and services. In the six months ended June 30, 2021 depreciation
and amortization expenses were $3.9 million, primarily consisting of $3.5
million of amortization of intangible assets and $0.4 million of depreciation
related to property, plant and equipment, net of allocations to cost of goods
and services. The increase in depreciation and amortization expenses was largely
due to a full period of operations in the six months ended June 30, 2022 for
Innovations Group and Cloudbreak, which were acquired in the second quarter of
2021, as well as TTC and Glocal, which were acquired in the first quarter of
2021.

We expect depreciation and amortization expenses to increase in fiscal 2022 due
to a full year of amortization of intangibles assets and depreciation of
property, plant, and equipment related to TTC, Glocal, Innovations Group, and
Cloudbreak, which were acquired in the first half of 2021.
                                       40
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Stock-Based Compensation. In the six months ended June 30, 2022, stock-based
compensation expenses were $2.5 million, related to grants under equity
incentive plans. There were no stock-based compensation expenses in the six
months ended June 30, 2021. We expect stock-based compensation expenses to
increase in fiscal 2022 as we continue to make grants under our equity incentive
plan to new and existing employees.

Lease Abandonment Expenses. In the six months ended June 30, 2022, we recorded a
lease abandonment accrual in the amount of $0.1 million related to office spaces
we vacated during the period. There were no lease abandonment expenses in the
six months ended June 30, 2021.

Goodwill and Intangible Asset Impairment. In the six months ended June 30, 2022,
we recorded a goodwill and intangible asset impairment of $6.2 million,
primarily consisting of a $5.5 million measurement period adjustment at Glocal
that was immediately impaired, and a $0.7 million trade name intangible asset
impairment at TTC. No impairment charge was recognized in the six months ended
June 30, 2021.

Acquisition, Integration and Transformation Costs. In the six months ended June
30, 2022, acquisition, integration and transformation costs were $9.1 million,
primarily consisting of consulting, legal, and severance costs incurred to
integrate and transform the businesses. In the six months ended June 30, 2021,
acquisition, integration and transformation costs were $35.3 million, primarily
consisting of one-time transaction expenses related to the acquisitions of
Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth
Holdings' merger with UpHealth. While we do not expect to incur additional
acquisition costs in fiscal 2022, we will incur additional integration and
transformation costs in fiscal 2022, and for the foreseeable future.

Other expenses

In the six months ended June 30, 2022, other expense was $6.7 million, primarily
consisting of $13.6 million of interest expense, partially offset by a $6.7
million of gain on fair value of derivative liability and a $0.2 million gain on
fair value of warrant liabilities. In the six months ended June 30, 2021, other
expense was $4.0 million, primarily consisting of $5.6 million of interest
expense, partially offset by a $1.1 million gain on fair value of warrant
liabilities and a $0.6 million gain on consolidation of equity method
investment.

Tax benefit

In the six months ended June 30, 2022the tax benefit was $4.5 million. In the six months ended June 30, 2021the tax benefit was $7.1 million.

Income tax benefit reflects management's best assessment of estimated current
and future taxes to be paid. The objectives for accounting for income taxes, as
prescribed by the relevant accounting guidance, are to recognize the amount of
taxes payable or refundable for the current year and deferred tax assets and
liabilities for future tax consequences of events that have been recognized in
the financial statements.

Segment Information

We evaluate performance based on several factors, of which revenue and gross margin by operating segment are the primary financial measures.

Revenue

Revenue by segment consisted of the following:

                                                      Three Months Ended June 30,               Six Months Ended June 30,
In thousands                                            2022                 2021                 2022                2021
Integrated Care Management                        $        7,823          $ 11,280          $      10,435          $ 17,569
Virtual Care Infrastructure                               16,815             6,964                 32,445             7,554
Services                                                  19,030            13,638                 36,760            19,575
Total revenue                                     $       43,668          $ 31,882          $      79,640          $ 44,698


Three Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care
Infrastructure segment increased $9.9 million, primarily due to a full period of
operations in the three months ended June 30, 2022 at Cloudbreak, which was
acquired in the second quarter of 2021. Revenue from the Services segment
increased $5.4 million, primarily due to a full period of operations in the
three months ended June 30, 2022 at Innovations Group, which was acquired in the
second quarter of 2021. Revenue from the Integrated Care Management segment
decreased $3.5 million, primarily due to Thrasys' loss of a contract with a
European customer, net of increased revenue from an amended contract with an
existing customer.
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Six Months Ended June 30, 2022 and 2021. Revenue from the Virtual Care
Infrastructure segment increased $24.9 million, primarily due to a full period
of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal,
which were acquired in the first half of 2021. Revenue from the Services segment
increased $17.2 million, primarily due to a full year of operations at
Innovations Group and TTC, which were acquired in the first half of 2021.
Revenue from the Integrated Care Management segment decreased $7.1 million,
primarily due to Thrasys' loss of a contract with a European customer, net of
increased revenue from an amended contract with an existing customer.

Gross margin

Gross margin by segment consisted of the following:

                                                      Three Months Ended June 30,               Six Months Ended June 30,
In thousands                                            2022                 2021                 2022                2021
Integrated Care Management                        $        6,894          $  4,504          $       8,531          $  9,723
Virtual Care Infrastructure                                8,179             2,634                 15,588             2,933
Services                                                   7,320             4,254                 13,578             5,666
Total gross margin                                $       22,393          $ 11,392          $      37,697          $ 18,322


Three Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care
Infrastructure segment increased $5.5 million, primarily due to a full period of
operations in the three months ended June 30, 2022 at Cloudbreak, which was
acquired in the second quarter of 2021. Gross margin from the Services segment
increased $3.1 million, primarily due to a full period of operations in the
three months ended June 30, 2022 at Innovations Group, which was acquired in the
second quarter of 2021. Gross margin from the Integrated Care Management segment
increased $2.4 million, primarily due to Thrasys' increased revenue with minimal
cost from an amended contract with an existing customer, net of the loss of a
contract with a European customer.

Six Months Ended June 30, 2022 and 2021. Gross margin from the Virtual Care
Infrastructure segment increased $12.7 million, primarily due to a full period
of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal,
which was acquired in the first half of 2021. Gross margin from the Services
segment increased $7.9 million, primarily due to a full period of operations in
the six months ended June 30, 2022 at Innovations Group and TTC, which were
acquired in the first half of 2021. Gross margin from the Integrated Care
Management segment decreased $1.2 million, primarily due to Thrasys' loss of a
contract with a European customer, net of increased revenue with minimal cost
from an amended contract with an existing customer.

Cash and capital resources

As of June 30, 2022 and December 31, 2021, we had free cash on hand of $40.6
million and $58.2 million, respectively. As of June 30, 2022, we had restricted
cash of $0.5 million, representing funds held at our Glocal business. As of
December 31, 2021, we had restricted cash of $18.6 million, representing
$18.1 million of funds held in an escrow account as agreed in a forward share
purchase agreement (see Note 10, Capital Structure, for further information) and
$0.5 million of funds held at our Glocal business.

We believe our current cash, restricted cash, and expected cash collections will
be sufficient to fund our operations for at least twelve months after the filing
date of this Quarterly Report on Form 10-Q.

Cash flow

The following tables summarize cash flows for the six months ended June 30, 2022
and 2021 (unaudited):

                                                                        Six Months Ended June 30,
(In thousands)                                                         2022                   2021
Net cash used in operating activities                            $       (7,841)         $    (37,228)
Net cash (used in) provided by investing activities                      (3,783)                3,859
Net cash (used in) provided by financing activities                     (23,580)              129,801

Effect of changes in exchange rates on cash, cash equivalents and restricted cash

                                                            (460)                  (99)

Net increase (decrease) in cash, cash equivalents and restricted cash

                                                  $      (35,664)               96,333


As UpHealth Holdings actually started operations on January 1, 2020 and the operations of UpHealth’s subsidiaries are included from their acquisition dates, as described above, the figures presented above are not directly comparable between periods.

In the six months ended June 30, 2022, cash used in operating activities was
$7.8 million, primarily attributed to the net loss of $30.2 million and gain on
fair value of derivative liability, gain on fair value of warrant liabilities,
partially offset by $16.1 million of non-cash items
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(impairments, depreciation, intangible amortization, debt issuance cost
amortization, and stock-based compensation) and the changes in operating assets
and liabilities, net of effects of acquisitions, of $6.2 million. The changes in
operating assets and liabilities, net of effects of acquisitions, was primarily
due to a decrease in accounts receivable of $6.2 million due to net collections
of receivables and an increase in accounts payable and accrued expenses of $7.9
million due to delayed payments to vendors. In the six months ended June 30,
2021, cash used in operating activities was $37.2 million, primarily attributed
to the net loss of $35.8 million and the changes in operating assets and
liabilities, net of effects of acquisitions, of $1.1 million, partially offset
by $2.5 million of non-cash items (depreciation, deferred tax adjustments, gain
on extinguishment of debt, loss on fair value of warrant liabilities, and debt
issuance cost amortization). The changes in operating assets and liabilities,
net of effects of acquisitions, was primarily due to an increase in accounts
receivable of $21.0 million due to billed and unbilled receivables from two
customers during the quarter that were not collected as of June 30, 2021,
partially offset by an increase in accounts payable and accrued expenses of
$15.6 million due to delayed payments to vendors, and proceeds from Provider
Relief Funds of $0.5 million.

In the six months ended June 30, 2022, cash used in investing activities was
$3.8 million, primarily consisting of purchases of property and equipment. In
the six months ended June 30, 2021, cash provided by investing activities was
$3.9 million, primarily consisting of net cash acquired in acquisition of
businesses.

In the six months ended June 30, 2022, cash used in financing activities was
$23.6 million, primarily consisting of the repayment of the forward share
purchase of $18.5 million, payments of capital lease obligations of $1.6 million
and repayments of debt obligations of $3.2 million. In the six months ended
June 30, 2021, cash provided by financing activities was $129.8 million,
primarily consisting of proceeds from convertible debt of $164.5 million and
proceeds from merger and recapitalization transaction of $83.4 million,
partially offset by repayments of seller notes of $88.1 million, repayments of
debt of $17.3 million and payments of amounts due to members of $4.3 million.

long-term debt

See Note 8, Debt, in the Notes to the Summary Consolidated Financial Statements of this Quarterly Report for our long-term debt.

On August 12, 2022, we entered into senior secured convertible note subscription
agreements with certain institutional investors, pursuant to which we agreed to
issue and sell $67.5 million in aggregate principal amount of a new series of
variable rate convertible senior secured notes due December 15, 2025 (the "2025
Notes") to holders of our 6.25% convertible senior notes due June 15, 2026 (see
Note 8, Debt) in a private placement transaction, raising approximately
$22.5 million in gross cash proceeds, after paying for a repurchase of $45.0
million of the 2026 Notes, which proceeds will be used in part to fully repay
the seller notes. The 2025 Notes are convertible into shares of UpHealth common
stock at a conversion price, subject to the occurrence of certain corporate
events, of $1.75 per share. The 2025 Notes will be senior secured obligations of
UpHealth, secured by substantially all of our assets and those of our domestic
subsidiaries, and will accrue interest at a rate equal to the daily secured
overnight financing rate ("SOFR") plus 9.0% per annum, with a minimum rate of
10.5% per annum, payable quarterly in arrears. The 2025 Notes will mature on
December 15, 2025, unless earlier repurchased, redeemed or converted. Holders
will have the right to convert their 2025 Notes at any time. Upon the occurrence
of certain corporate events, holders of the 2025 Notes can require UpHealth to
repurchase for cash all or part of their 2025 Notes in principal amounts of
$1,000 or an integral multiple thereof at a repurchase price that will be equal
to 105% of the principal amount of the 2025 Notes to be repurchased, plus
accrued and unpaid interest thereon, if any. In the event that UpHealth sells
assets with net proceeds in excess of $15.0 million, then it will make an offer
to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate
amount of cash equal to 20.0% of the net proceeds of such asset sale, at a
repurchase price per 2025 Note equal to 100.0% of the principal amount thereof,
plus accrued and unpaid interest, if any. UpHealth may not otherwise seek to
redeem the 2025 Notes prior to June 16, 2024. UpHealth will settle conversions
solely in shares of its common stock, except for payments of cash in lieu of
fractional shares.

Contractual obligations and commitments

See Note 11, Commitments and Contingencies, in the Notes to Condensed
Consolidated Financial Statements of this Quarterly Report for information about
our operating lease obligations and our non-cancellable contractual service and
licensing obligations.

Off-balance sheet arrangements

As of June 30, 2022, we have not entered into any off-balance sheet financing
arrangements, established any additional special purpose entities, guaranteed
any debt or commitments of other entities, or purchased any non-financial
assets.

Recent accounting pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to the Summary Consolidated Financial Statements of this Quarterly Report for recently issued accounting standards that may affect us.

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