UpHealth, Inc.

Good afternoon, and welcome to the Up Health second quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal marks. As a reminder, this conference is being recorded. On the call today from the company are Ramesh Balakrishnan, Chief Executive Officer, and Martin Beck, Chief Financial Officer. By now, everyone should have access to the company's second quarter earnings press release file today after market close. This is available on investor relations section of the UpHealth website at www.investors.uphealthlink.com. Before we begin, please note that all the financial information presented on today's call is unaudited, and during the course of this call, management may make forward-looking statements within the meaning of the federal and securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Throughout today's press release and on our call today, we will refer to adjusted EBITDA. This metric is not determined in accordance with general accepted accounting principles and therefore is susceptible to varying calculations. A definition, calculation, and reconciliation to the financial statements of adjusted EBITDA can be found in the tables included in our press release. We believe this non-GAAP measure of the Uphelps financial results provide useful information regarding certain financial and business trends and results of our operations. And now I would like to turn the call over to Ramesh Balakrishnan, Chief Executive Officer of Uphelps.

Ramesh Balakrishnan, Chief Executive Officer of Uphelps. Ramesh Balakrishnan, Chief Executive Officer of Uphelps. Thank you very much, Nai. Welcome and thank you all, everyone, for joining us on the call today. It's been an exciting quarter for us. As you know, our first as a public company. We completed the mergers and business combinations needed to launch our health. And now we are positioned with a unique and comprehensive suite of technology platforms, digital health infrastructure, and services to reshape how we deliver care and manage health globally for individuals and populations. And we are on track to implement our vision for this one upheld platform. Before we get into additional detail on our technologies and services and the industry needs and trends that drive our growth, I'd like to provide a high-level summary of our second quarter results. We are very pleased with our results for the second quarter of 2021. We exceeded revenue estimates. with pro forma revenues of $39.2 million, which represents 28% increase in revenues from the last quarter. And we expect continued acceleration of revenue growth in the second half of the year as we deploy additional working capital and launch the full scope of our integrated solutions. We also met our targets for profitability with $2.3 million in adjusted EBITDA. So we remain one of the few profitable public digital health companies in the market today. And we have about $100 million in cash and cash equivalents on our balance sheet. So the second quarter is a beginning in our journey to create a global digital health leader. We created UpHealth to help healthcare providers, health plans, counties and governments, our customers, and the organizations that are the heart of healthcare to help these organizations implement initiatives to digitally transform their operations. There is a general consensus that the industry cannot survive as it is. And digital transformation will radically alter healthcare as it has in many other industries. And our customers must change and adapt to survive, or they will have to give way to a new generation of organizations that are able to succeed in what is really an emerging new world. So we deliver an integrated, comprehensive suite of technology platforms, infrastructure, and services to help these customers implement initiatives and strategies, and adapt as the industry drives these new models for the kind of healthcare infrastructure we build, how and where we deliver care, and what kind of care we deliver, how we manage health, and also how we fund and pay for healthcare services. And these new models are being driven at the national, state, local, and county levels. So to come to our solutions briefly, our integrated care platform functions as the backbone for OneUp Health. And it is designed to create digitally enabled and connected care communities. There are substantial technology innovations that are embedded in this platform. We've invested over $100 million to create this platform. It's absolutely state-of-the-art, and we've only begun to exploit its full capabilities. And what this platform does is it rethinks how healthcare information systems would be designed and built if we began with different starting points and assumptions, with connected communities rather than individual enterprises. with coordinated and distributed care teams rather than individual providers, with a virtual model for encounter locations and care settings, with a whole person rather than medical view of health, and a view of patients as active participants rather than just the object of care. So what the platform provides is the ability to create these 360-degree views of individuals across a wide range of data sources and systems. The ability to apply advanced analytics and embedded intelligence to understand health status, to stratify populations, to evaluate risk, predict adverse events, and guide interventions and care protocols. And along with this, a wide range of configurable applications for local and remote clinical and community-based teams to coordinate care and implement programs to manage health. And the platform is also radically open, so we avoid the vendor lock-in that is built into many legacy platforms. And ultimately, we designed this platform to support an ecosystem of partners that can expand and add to its capabilities. At the end of the second quarter, we had 6.8 million lives on the platform and 132 organizations participating in these connected digitally enabled care communities. And we expect to double the lives on the platform annually over the next three years. We provide this platform to the largest publicly operated health plan in the country, LA Care. to manage health for its members across multiple lines of business. And so it's a real honor for us to have LA Care as a customer because of their very deep expertise in managing health for individuals with complex needs. And now in the second quarter, we began working with them to support two very important initiatives, the enhanced care management and in lieu of services initiatives that are part of a very ambitious program in California called CalAIM to better manage health for individuals with complex medical, behavioral health, and social needs. And this is a massive program. And CalAIM will set the trend across the country for how we manage health for now the almost 90 million Medicaid and dual eligible beneficiaries under a resort whole person model of care. And so our goal going forward is to provide the most comprehensive and compelling platform for health plans and healthcare providers that are contracted with these health plans for CalAIM and similar initiatives that are proliferating across the country. And we are extremely well positioned to do this and innovate and lead in this area. The platform also supports Alameda County's Whole Person Care and other initiatives to manage health. And here in Alameda County, we've created probably the largest social health information exchange in the country. The care community across the county that we've enabled includes hospitals, clinics, health plans, behavioral health providers, emergency transportation providers, housing and social services, public health, and also the county jail. So what we're building in California is a model to address a critical gap in how we deliver care and manage health in the United States. Essentially, these provider networks that are contracted by health plans And the provider networks that are contracted by counties and public health departments do not collaborate or coordinate. And especially for individuals that have complex medical, behavioral, and social needs, it is critical that we create integrated systems where these provider networks can share information, can coordinate services, and collaborate around shared care plans. So there's huge company, there's huge opportunities for companies that can create these integrated systems. And with our work in California, our goal is to lead innovation in this area. And it's a big area for growth as we go forward into the second half of this year and next year. The platform is also today enabling a unique model for a value-based management of pharmacy benefits. And we're implementing this model with a customer to manage pharmacy benefits for over 70 self-insured employers. And an important element of this new model is the ability to use integrated information, including pharmacogenetic data, and coordinate care teams with embedded intelligence as a system. And partnering with companies to manage pharmacy benefits for us as a first step in becoming a partner to managed care organizations and provider groups to manage outcomes, quality, and cost as they move into delegated and value-based contracts. So we're putting together the building blocks to become such a partner to managed care. Now we're also integrating and the work is well underway in the second quarter. Our telehealth platforms and digital health infrastructure, which we deploy now across the U.S. and internationally with the integrated care management platform to deliver what we believe is the most advanced and comprehensive solution in the market today to manage population health, improve access to care, and onboard provider networks and resources and make them available at the point of care to augment care teams. And I'd like to say a little bit about the digital health infrastructure with pioneering in the international market, because it really represents what a digital first healthcare infrastructure looks like. And it's quite revolutionary. There are many parts of the world where healthcare infrastructure is still underdeveloped. And these countries today spend a very low percentage of GDP comparatively on healthcare, but they're ramping up these investments. And as these countries launch national initiatives to improve access to care, they are very keen to leapfrog to new ways to build and deploy infrastructure and deliver care this is a lot like what happened with telecommunications and even financial services where old legacy gave way to a more flexible distributed and nimble infrastructure so in these countries that are building up healthcare infrastructure we deliver digital clinics that provide much more than simple virtual consultations we provide a complete diagnostic care encounter with a virtual exam room that's connected to remote devices and IoT with the ability to do automated lab tests and imaging onsite, prescribe and also dispense medications. And so we partner with organizations in these countries to staff the clinics with community workers and nurses, and we connect these clinics and these community workers and nurses remotely to networks of primary care physicians and specialists. And this is really bringing in, with these digital clinics, a new model for how we can rapidly build healthcare infrastructure and serve communities that otherwise have very little access to care. And demand for these digital clinics is nothing less than explosive. And our potential for growth is limited only by the amount of working capital we can deploy. At the end of the second quarter of 2020 last year, the population we served with these digital clinics was about 4.5 million. By the end of this year, we expect these clinics will be serving a population nearing 20 million, a substantial growth in the population we serve. Now, in the United States, we've been deploying the telehealth platforms, which are now being integrated with the integrated care platform, to bring specialized resources, language interpreters, physicians, specialists, remotely to the point of care. And this is a very different model for telehealth than companies that are in the market that function more or less as a technology-enabled medical group. And so a first driver for our telehealth platform was a need for medically certified language interpreters to support patients in various facility settings. A sort of somewhat less known fact is that more than 20% of individuals admitted to hospitals nationwide do not speak English and suffer very poor outcomes as a result. And this percentage increases dramatically in communities that are more diverse And what we do with the telehealth platform is we provide very robust capabilities to onboard resources of various skills and make them available remotely at the point of care where they can collaborate with and augment the care teams that are there with the patient. So we initially just support this need for language interpretation. We onboarded a worldwide network of language interpreters. But we have expanded the kinds of resources we can bring to the point of care and the kinds of virtual care use cases we support. But combining this with the digital health infrastructure we're deploying in the international market, we have the most robust platform in the market today. to deliver high levels of care in these virtual care models and support initiatives like the CMS Hospital at Home program and other initiatives that really deliver very high levels of care in home and community-based settings. The utilization of our telehealth platform in the U.S. increased from 8 million minutes in the first half of 2020 to 11.4 million in the first half of this year, which represents a growth of over 42%. And the platform is now deployed in over 2,000 healthcare venues in the United States, performing over 2 million minutes of consultation a month. We actually have the largest footprint uh largest installed base at healthcare providers of any telehealth platform so if you look at what we have with the integrated care platform the digital health infrastructure and the telehealth platform we provide a comprehensive solution to transition to these new models to how we deliver care and manage health and essentially power the digital transformation of healthcare and our goal is to support our customers to deliver these higher levels of care in home and community-based settings, and to implement various programs where you can manage health with distributed and coordinated care teams. So in the second quarter, we continue to execute on our roadmap to unify the integrated care infrastructure and telehealth platform into this one upheld platform. we are bringing the full capabilities of OneUp Health now to our customers and educating them on the full scope of what we can provide. Now, early on, we also recognized another area of critical need, and that is a better way to manage medications, especially medications that require personalization. We have a pharmacy licensed in all 50 states And with our compounding pharmacy, we have the ability to deliver generic and customized medications anywhere in the country. What we are not doing is trying to compete in the commodity delivery of generic medications directly to the consumer. What we're doing with our pharmacy services is partnering with physician groups to better manage medications for their patients, especially compounded medications. And so we currently have over 14,000 physicians that are part of a network. We're continuing to grow this network. And our pharmacy teams collaborate physicians to better manage medications and support these physician practices. We're onboarding physicians, and these onboarded physicians also are available as resources that can be made available at any of these points of care where we present. So as we go forward, our strategic direction with the pharmacy services is to use our capabilities with technology and the pharmacy teams to help employers, health plans, and like one of our customers, a new generation of pharmacy benefit managers to better manage the efficacy and cost of medications. and better manage programs for improving adherence. And finally, what I wanted to say is that in addition to working with our pharmacy teams to manage medication, we also have capabilities to manage behavioral health. And as everybody knows, mental health is emerging as a national priority. The pandemic has obviously exposed a great need to improve access to behavioral health services. and better coordinate these services of medical care. And what we have with our core team of psychiatrists, nurse practitioners, and counselors is the ability to manage a wide range of behavioral health needs with virtual in-person visits and outpatient and residence programs. And in the second quarter, what we have started is a process to onboard these behavioral health providers to the integrated care platform and begun conversations with behavioral and mental health plans to partner with them to augment and manage their behavioral health efforts. There's some very large initiatives underway today around better coordinating behavioral health across mild to moderate and serious mental illness, and also better integrate behavioral health with medical care. And we are, you know, the combination of our platform and our behavioral health network, we are positioning to help in addressing this very critical need. So we're combining technology platform, the behavioral health network, to become a partner with these mental health plans and behavioral health provider network to improve access quality outcomes for individuals who have behavioral health comorbidities. This is a different model from a simple behavioral health consult, and we're managing a much higher acuity of care. So there are many innovations going forward that we will complete to improve, reshape how we deliver care and manage health. connecting and sharing information, powerful tools to digest and organize this information. We will also continue to evolve our analytics to get deeper insights into data and information, our predictive models to be able to stratify populations, identify risks early, and intervene proactively. And we will be on the forefront of applications and information interoperability and the ability to support distributed cross-sector teams to collaborate and coordinate so we can really prevent patients from falling through the cracks. We are actively involved and will continue to be in conversations on policy initiatives at the national and global level. These are conversations that recognize the vital importance of healthcare infrastructure on economic prosperity and even national security. And of course, the urgency to reduce disparities to these critical healthcare resources, you know, resources that are, in our view, as important as air and water. So in summary, we are pleased with our performance in the second quarter and how far we have come. We will continue to accelerate growth in the second half of the year. We're on track to meet our 2021 pro forma projections. Of course, what animates us is this desire to reshape healthcare in a better direction. We're very well positioned to do this with a comprehensive set of platforms, infrastructure, and services. And we are on our way to creating a leading, valuable digital health company that is committed to improving the experience of healthcare globally. So with that, I'd like to ask Martin Beck, our Chief Financial Officer, to give us more detail on our financial performance.

Martin. Thanks very much. We appreciate everybody joining us this afternoon. Before I begin my review of our second quarter results, I want to first comment on the presentation as it pertains to the absence of results in comparison periods. Recall that we completed the merger with Gig Capital II on June 9th. And so it was only from that day forward that we have consolidated results that we can report on a GAAP basis. In addition, due to timing factors related to the various business combination transactions encompassing multiple entities, as well as the global scope of our operations, it was not possible to provide consolidated results on a GAAP or pro forma basis that was sufficiently complete for the year-earlier periods. Accordingly, we are only able to share results for the three and six months periods ending June 30th, 2021 with you today. However, I will provide some additional context where possible to help you better understand the company's overall performance. I'll start with a review of our results on a GAAP basis. Revenues for the second quarter of 2021 was $31.9 million. This includes the integrated care management segment and behavioral health segments the entire three-month period. However, results from our global telehealth segment and digital pharmacy segment were only for a portion of the quarter, depending on when the related business combinations closed. Looking at the breakdown by segment on a gap basis, integrated care management was the largest contributor with $11.3 million of revenue, or 35% of total revenues. Behavioral health was next at $8.3 million of revenue, or 26% of the total. Global telehealth had gap revenue of $7 million, or 22% of the total, and digital pharmacy revenue of $5.3 million represented 17% of total gap revenue in the second quarter. On a geographic basis, 63% of second quarter revenues came from the United States, 24% from Europe, and 12% from Asia. Gross margin on a gap basis was 36.4%, and margins by segment were as follows. Integrated care management, 40.9%. Behavioral health, 28.4%. Global telehealth, 37.8%, and digital pharmacy, 37.4%. Second quarter net loss on a GAAP basis was $32.8 million, including $32.6 million of acquisition-related expenses, and adjusted EBITDA was $2.1 million. As a reminder, adjusted EBITDA is a non-GAAP measure, and we have included a reconciliation of GAAP net earnings to adjusted EBITDA in the press release. Now I'll review our second quarter results on a pro forma basis. which assumes all operating entities had been acquired prior to the beginning of the period. Consolidated pro forma revenue for the second quarter was $39.2 million, which was in line with our expectation, and up 28% sequentially from the first quarter. Global telehealth had pro forma revenue of $12.4 million on a pro forma basis, or 32% of total pro forma revenue, reflecting the combined operations for the full three-month period. Integrated care management revenues were not impacted by pro forma adjustments for the quarter, so revenue remained at $11.3 million, which represented our second largest segment on a pro forma basis at 29% of total revenue. Behavioral health revenue was also consistent with gap results at $8.3 million, accounting for 21% of total pro forma revenue. Finally, the digital pharmacy segment had pro forma revenue of $7.2 million in the second quarter, or 18% of total revenues, reflecting the full three months of revenue from IGI MedQuest. While we are not able to offer year earlier pro forma revenue figures for comparison, let me provide you with a little color on the trends we saw within the various segments to give you a better sense of our overall performance. On a pro forma basis, total revenues increased 28% from Q1 2020 to Q2 2022. The company's second quarter 2021 pro forma revenue of $39.2 million is approximately 38% higher than the combined unaudited revenues of the companies in the second quarter of 2020. Gross profit margin was 36.4% on a pro forma basis in the second quarter of 2021. By segment, pro forma gross margins were as follows. Integrated care management, 40.9%. Global telehealth, 36.7%, digital pharmacy, 38%, and behavioral health, 28.4%. We view gross margin as a key metric for up health and a useful metric for comparing our results to our peers. Accordingly, let me also provide some additional color on our pro forma gross margin, the trend perspective, as well as framing them within the context of our overall financial model. Gross margins decreased from Q1's 43.4% level, partly as a result of volumes, particularly in behavioral health and in the U.S. telehealth business, and as a result of mixed factors in integrated care management. We believe that the volume trends in behavioral health and U.S. telemedicine are increasing, and we've seen higher volumes in July. The integrated care management group during the second quarter ended into new phases of a population health management contract in Europe. The first phase of that contract had lower gross margins than the overall margins of the integrated care management group, while the second phase of that contract, which is expected to begin next week, has considerably higher gross margins. Upheld's second quarter pro forma adjusted EBITDA was $2.3 million, in line with our expectations. In addition to transaction-related expenses, adjustments were made to non-recurring expenses, including transaction bonuses and Gig Capital II-related operating costs. I'd like to spend a few minutes discussing the company's fundraising at the closing of the transaction on June 9th, 2021. At the closing of the transaction, UpHealth raised a total of approximately $245 million, consisting of proceeds remaining in the trust, a $30 million pipe offering, and a $160 million convertible mode offering. In accordance with the publicly released business combination agreement, the company issued approximately 2 million fewer shares to shareholders of Uphelf Holdings to offset higher closing debt balances pertaining to additional working capital that was incurred by the various entities as a result of the longer than projected combination closing duration. At June 30th, the company had approximately $99 million in cash against short-term debt of approximately $67 million, excluding the current portion of the derivative liability associated with the convertible note. I should note that, as detailed in the 10-Q, we recently extended the maturity of two seller notes totaling $19 million to September of 2022, which reduces our short-term debt. And we also extended the maturity date of our forward share purchase agreement. We are confident that our cash position provides us sufficient resources to fund our working capital and capital expenditure requirements. The company has made excellent progress in terms of establishing and integrating its financial systems and reporting capabilities. We've hired a strong finance and accounting team and have completed the first phase of our workday implementation at the up health level. Turning to our outlook, we continue to expect accelerating growth in the second half of the year with the deployment of additional capital to meet increasing demand. And we are reiterating our guidance for 2021. That concludes our prepared remarks. Now we're ready now to take questions.