UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q


(Mark One)


þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 001-34746
R1 RCM INC.
(Exact name of registrant as specified in its charter)
Delaware02-0698101
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification Number)
401 North Michigan Avenue Suite 2700 Chicago, Illinois60611
Suite 2700
Chicago
Illinois
(Address of principal executive offices)(Zip code)
(312) 324-7820
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareRCMNASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroý
Accelerated filerý☐Non-accelerated filero☐Smaller reporting companyo☐Emerging growth companyo
(Do not check if a smaller reporting company)☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐     No R☑
As of OctoberApril 28, 2017,2020, the registrant had 104,515,603114,894,490 shares of common stock, par value $0.01 per share, outstanding.



Table of Contents






Table of Contents

3
34
45
56
67
78
3124
4132
4133

4334
4434
4436
4538
Item 4.
Mine Safety Disclosures
45
Other Information
4539
Item 6.
Exhibits
46
SIGNATURES
47






R1 RCM Inc.
Consolidated Balance Sheets
(In millions, except per share data)


PART I — FINANCIAL INFORMATION
ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS

ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS
3
  September 30, December 31,
  2017 2016
  (unaudited)  
Assets    
Current assets:    
Cash and cash equivalents $142.8
 $181.2
Accounts receivable, net 7.7
 4.0
Accounts receivable, net - related party 18.0
 1.8
Prepaid income taxes 0.9
 3.8
Prepaid expenses and other current assets 16.1
 13.8
Total current assets 185.5
 204.6
Property, equipment and software, net 50.2
 32.8
Non-current deferred tax assets 105.8
 169.9
Restricted cash equivalents 1.5
 1.5
Other assets 11.4
 6.3
Total assets $354.4
 $415.1
Liabilities    
Current liabilities:    
Accounts payable 6.9
 7.9
Current portion of customer liabilities 0.9
 69.7
Current portion of customer liabilities - related party 20.1
 14.2
Accrued compensation and benefits 29.2
 24.8
Other accrued expenses 16.1
 18.5
Total current liabilities 73.2
 135.1
Non-current portion of customer liabilities 0.3
 1.0
Non-current portion of customer liabilities - related party 9.1
 110.0
Other non-current liabilities 12.2
 9.7
Total liabilities $94.8
 $255.8
     
8.00% Series A convertible preferred stock: par value $0.01 per share, 370,000 authorized, 223,023 shares issued and outstanding as of September 30, 2017 (aggregate liquidation value of $227.5); 370,000 authorized, 210,160 shares issued and outstanding as of December 31, 2016 (aggregate liquidation value of $214.4) 184.7
 171.6
Stockholders’ equity (deficit)    
Common stock, $0.01 par value, 500,000,000 shares authorized, 116,639,819 shares issued and 104,505,034 shares outstanding at September 30, 2017; 116,425,524 shares issued and 106,659,542 shares outstanding at December 31, 2016 1.2
 1.2
Additional paid-in capital 339.8
 349.2
Accumulated deficit (204.3) (304.7)
Accumulated other comprehensive loss (2.2) (2.8)
Treasury stock, at cost, 12,134,785 shares as of September 30, 2017; 9,765,982 shares as of December 31, 2016 (59.6) (55.2)
Total stockholders’ equity (deficit) 74.9
 (12.3)
Total liabilities and stockholders’ equity (deficit) $354.4
 $415.1


R1 RCM Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)


(Unaudited)
 March 31,December 31,
 20202019
Assets
Current assets:
Cash and cash equivalents106.0  $92.0  
Accounts receivable, net of $4.6 million and $2.8 million allowance57.6  52.3  
Accounts receivable, net of $0.1 million and $0.0 million allowance - related party36.3  30.8  
Prepaid expenses and other current assets43.9  41.6  
Total current assets243.8  216.7  
Property, equipment and software, net116.7  116.9  
Operating lease right-of-use assets73.8  77.9  
Intangible assets, net161.3  164.7  
Goodwill253.2  253.2  
Non-current deferred tax assets55.6  64.2  
Non-current portion of restricted cash equivalents1.0  0.5  
Other assets37.5  35.0  
Total assets$942.9  $929.1  
Liabilities
Current liabilities:
Accounts payable$24.8  $20.2  
Current portion of customer liabilities13.3  14.0  
Current portion of customer liabilities - related party31.0  34.1  
Accrued compensation and benefits48.1  95.1  
Current portion of operating lease liabilities13.3  12.8  
Current portion of long-term debt16.3  16.3  
Other accrued expenses60.6  40.0  
Total current liabilities207.4  232.5  
Non-current portion of customer liabilities - related party19.3  18.6  
Non-current portion of operating lease liabilities78.4  82.7  
Long-term debt363.3  337.7  
Other non-current liabilities8.5  10.4  
Total liabilities676.9  681.9  
8.00% Series A convertible preferred stock, par value $0.01, 370,000 shares authorized, 271,859 shares issued and outstanding as of March 31, 2020 (aggregate liquidation value of $277.3); 370,000 shares authorized, 266,529 shares issued and outstanding as of December 31, 2019 (aggregate liquidation value of $271.9)234.5  229.1  
Stockholders’ equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 128,362,786 shares issued and 114,575,975 shares outstanding at March 31, 2020; 127,807,546 shares issued and 114,021,280 shares outstanding at December 31, 20191.3  1.3  
Additional paid-in capital375.2  372.7  
Accumulated deficit(260.4) (277.8) 
Accumulated other comprehensive loss(11.0) (4.5) 
Treasury stock, at cost, 13,786,811 shares as of March 31, 2020; 13,786,266 shares as of December 31, 2019(73.6) (73.6) 
Total stockholders’ equity31.5  18.1  
Total liabilities and stockholders’ equity$942.9  $929.1  
See accompanying notes to consolidated financial statements.

4

R1 RCM Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
(In millions, except share and per share data)



 Three Months Ended March 31,
 20202019
Net services revenue ($208.4 million and $181.8 million for the three months ended March 31, 2020 and 2019, from related party, respectively)$320.5  $275.9  
Operating expenses:
Cost of services253.9  237.2  
Selling, general and administrative25.5  22.5  
Other expenses8.7  8.8  
Total operating expenses288.1  268.5  
Income (loss) from operations32.4  7.4  
Net interest expense (income)3.8  10.2  
Income (loss) before income tax provision (benefit)28.6  (2.8) 
Income tax provision (benefit)10.4  (3.0) 
Net income (loss)$18.2  $0.2  
Net income (loss) per common share:
Basic$0.06  $(0.04) 
Diluted$0.05  $(0.04) 
Weighted average shares used in calculating net income (loss) per common share:
Basic114,441,043  109,802,632  
Diluted169,620,178  109,802,632  
Consolidated statements of comprehensive income (loss)
Net income (loss)18.2  0.2  
Other comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax(4.4) 0.2  
Foreign currency translation adjustments(2.1) 0.5  
Comprehensive income (loss)$11.7  $0.9  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (Unaudited) (Unaudited)
Net services revenue ($112.2 million and $275.3 million for the three and nine months ended September 30, 2017, respectively, and $22.7 and $366.2 million for the three and nine months ended September 30, 2016 from related party, respectively) $123.2
 $125.5
 $309.5
 $486.4
Operating expenses:        
Cost of services 111.8
 47.4
 289.1
 137.6
Selling, general and administrative 15.1
 16.2
 41.6
 58.4
Other 1.4
 0.5
 2.6
 20.0
Total operating expenses 128.3
 64.1
 333.3
 216.0
Income (loss) from operations (5.1) 61.4
 (23.8) 270.4
Net interest income —
 0.1
 0.1
 0.2
Income (loss) before income tax provision (5.1) 61.5
 (23.7) 270.6
Income tax provision (benefit) (1.5) 24.1
 (5.1) 106.6
Net income (loss) $(3.6) $37.4
 $(18.6) $164.0
Net income (loss) per common share:        
Basic $(0.08) $0.18
 $(0.31) $0.62
Diluted $(0.08) $0.18
 $(0.31) $0.62
Weighted average shares used in calculating net income (loss) per common share:        
Basic 102,225,422
 100,934,561
 102,022,129
 99,870,685
Diluted 102,225,422
 102,176,280
 102,022,129
 101,018,450
Consolidated statements of comprehensive income (loss)      
Net income (loss) (3.6) 37.4
 (18.6) 164.0
Other comprehensive loss:        
Foreign currency translation adjustments (0.2) 0.2
 0.6
 —
Comprehensive income (loss) $(3.8) $37.6
 $(18.0) $164.0

Reconciliation of net income (loss) to income (loss) available to common shareholders:
Basic:        Basic:
Net income (loss) $(3.6) $37.4
 $(18.6) $164.0
Net income (loss)$18.2  $0.2  
Less dividends on preferred shares (4.4) (4.1) (13.1) (58.5)Less dividends on preferred shares(5.4) (5.0) 
Less income allocated to preferred shareholders —
 (15.1) —
 (43.4)Less income allocated to preferred shareholders(6.2) —  
Net income (loss) available/allocated to common shareholders - basic $(8.0) $18.2
 $(31.7) $62.1
Net income (loss) available/allocated to common shareholders - basic$6.6  $(4.8) 
Diluted:        Diluted:
Net income (loss) $(3.6) $37.4
 $(18.6) $164.0
Net income (loss)$18.2  $0.2  
Less dividends on preferred shares (4.4) (4.1) (13.1) (58.5)Less dividends on preferred shares(5.4) (5.0) 
Less income allocated to preferred shareholders —
 (15.0) —
 (43.1)Less income allocated to preferred shareholders(5.0) —  
Net income (loss) available/allocated to common shareholders - diluted $(8.0) $18.3
 $(31.7) $62.4
Net income (loss) available/allocated to common shareholders - diluted$7.8  $(4.8) 
See accompanying notes to consolidated financial statements.

5

R1 RCM Inc.
Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited)(Unaudited)
(In millions, except share and per share data)



 
  Common Stock Treasury Stock 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
other
comprehensive
(loss)
 Total
  Shares Amount Shares Amount        
Balance at December 31, 2016 116,425,524
 $1.2
 (9,765,982) $(55.2) $349.2
 $(304.7) $(2.8) $(12.3)
Impact of adoption of Topic 606 —
 —
 —
 —
 —
 113.4
 —
 113.4
Impact of adoption of ASU 2016-09 —
 —
 —
 —
 1.5
 (0.9) —
 0.6
Adjusted Balance at January 1, 2017 116,425,524
 1.2
 (9,765,982) (55.2) 350.7
 (192.2) (2.8) 101.7
Share-based compensation expense —
 —
 —
 —
 8.6
 —
 —
 8.6
Issuance of common stock related to share-based compensation plans 155,535
 —
 —
 —
 —
 —
 —
 —
Exercise of vested stock options 58,760
 —
 —
 —
 0.1
 —
 —
 0.1
Dividends paid/accrued dividends —
 —
 —
 —
 (13.1) —
 —
 (13.1)
Acquisition of treasury stock related to equity award plans —
 —
 (728,798) —
 —
 —
 —
 —
Treasury stock purchases and forfeitures —
 —
 (1,640,005) (4.4) —
 —
 —
 (4.4)
Reclassification of excess share-based compensation —
 —
 —
 —
 (6.5) 6.5
 —
 —
Foreign currency translation adjustments —
 —
 —
 —
 —
 —
 0.6
 0.6
Net (loss) income —
 —
 —
 —
 —
 (18.6) —
 (18.6)
Balance at September 30, 2017 116,639,819
 $1.2
 (12,134,785) $(59.6) $339.8
 $(204.3) $(2.2) $74.9
 Common StockTreasury StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
(Loss)		Total
 SharesAmountSharesAmount    
Balance at December 31, 2019127,807,546  $1.3  (13,786,266) $(73.6) $372.7  $(277.8) $(4.5) $18.1  
Impact of credit-loss standard adoption, net of tax of $0.3 million—  —  —  —  —  (0.8) —  (0.8) 
Adjusted balance at January 1, 2020127,807,546  $1.3  (13,786,266) $(73.6) $372.7  $(278.6) $(4.5) $17.3  
Share-based compensation expense—  —  —  —  4.8  —  —  4.8  
Issuance of common stock related to share-based compensation plans1,720  —  —  —  —  —  —  —  
Exercise of vested stock options553,520  —  —  —  3.1  —  —  3.1  
Dividends paid/accrued—  —  —  —  (5.4) —  —  (5.4) 
Acquisition of treasury stock related to share-based compensation plans—  —  (545) —  —  —  —  —  
Net change on derivatives designated as cash flow hedges, net of tax of $1.5 million—  —  —  —  —  —  (4.4) (4.4) 
Foreign currency translation adjustments—  —  —  —  —  —  (2.1) (2.1) 
Net income (loss)—  —  —  —  —  18.2  —  18.2  
Balance at March 31, 2020128,362,786  $1.3  (13,786,811) $(73.6) $375.2  $(260.4) $(11.0) $31.5  
See accompanying notes to consolidated financial statements.

 Common StockTreasury StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
(Loss)		Total
 SharesAmountSharesAmount    
Balance at December 31, 2018123,353,656  $1.2  (12,811,755) $(62.6) $361.0  $(289.8) $(3.5) $6.3  
Share-based compensation expense—  —  —  —  4.5  —  —  4.5  
Issuance of common stock related to share-based compensation plans2,613  —  —  —  —  —  —  —  
Exercise of vested stock options145,235  —  —  —  0.4  —  —  0.4  
Dividends paid/accrued—  —  —  —  (5.0) —  —  (5.0) 
Acquisition of treasury stock related to share-based compensation plans—  —  (342,998) (3.3) —  —  —  (3.3) 
Forfeitures—  —  (1,208) —  —  —  —  —  
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million—  —  —  —  —  —  0.2  0.2  
Foreign currency translation adjustments—  —  —  —  —  —  0.5  0.5  
Net income (loss)—  —  —  —  —  0.2  —  0.2  
Balance at March 31, 2019123,501,504  $1.2  (13,155,961) $(65.9) $360.9  $(289.6) $(2.8) $3.8  
See accompanying notes to consolidated financial statements.

6

R1 RCM Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In millions)




 Nine Months Ended September 30,
 2017 2016 Three Months Ended March 31,
 (Unaudited) 20202019
Operating activities    Operating activities
Net income (loss) $(18.6) $164.0
Net income (loss)$18.2  $0.2  
Adjustments to reconcile net income (loss) to net cash used in operations:    
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization 11.5
 7.3
Depreciation and amortization15.7  12.9  
Amortization of debt issuance costsAmortization of debt issuance costs0.2  0.6  
Share-based compensation 8.2
 25.2
Share-based compensation4.8  4.4  
Loss on disposal 0.2
 —
Provision (recovery) for doubtful receivables 0.1
 0.1
Provision for credit lossesProvision for credit losses0.8  1.0  
Deferred income taxes (5.6) 106.5
Deferred income taxes8.9  (4.1) 
Non-cash lease expenseNon-cash lease expense2.9  2.7  
Changes in operating assets and liabilities:    Changes in operating assets and liabilities:
Accounts receivable and related party accounts receivable (15.4) 1.2
Accounts receivable and related party accounts receivable(12.5) 33.0  
Prepaid income taxes 3.0
 0.2
Prepaid expenses and other assets (6.7) (7.9)Prepaid expenses and other assets(5.2) (3.3) 
Accounts payable 0.3
 (1.4)Accounts payable2.8  3.0  
Accrued compensation and benefits 4.3
 8.3
Accrued compensation and benefits(46.6) 9.1  
Lease liabilitiesLease liabilities(2.6) (2.7) 
Other liabilities (0.3) 3.0
Other liabilities16.0  12.4  
Customer liabilities and customer liabilities - related party 14.7
 (375.8)Customer liabilities and customer liabilities - related party(2.8) 1.9  
Net cash used in operating activities (4.3) (69.3)
Net cash provided by operating activitiesNet cash provided by operating activities0.6  71.1  
Investing activities    Investing activities
Purchases of property, equipment, and software (30.1) (10.4)Purchases of property, equipment, and software(13.3) (14.8) 
Proceeds from maturation of short-term investments —
 1.0
Net cash used in investing activities (30.1) (9.4)Net cash used in investing activities(13.3) (14.8) 
Financing activities    Financing activities
Series A convertible preferred stock and warrant issuance, net of issuance costs —
 178.7
Borrowings on revolverBorrowings on revolver50.0  —  
Repayment of senior secured debtRepayment of senior secured debt(4.1) (0.7) 
Repayments on revolverRepayments on revolver(20.0) —  
Exercise of vested stock options —
 0.1
Exercise of vested stock options3.1  0.4  
Purchase of treasury stock (2.0) (2.0)
Shares withheld for taxes (2.4) —
Shares withheld for taxes—  (3.3) 
Net cash (used in) provided by financing activities (4.4) 176.8
Effect of exchange rate changes in cash 0.4
 0.3
Net increase (decrease) in cash and cash equivalents (38.4) 98.4
Cash and cash equivalents, at beginning of period 181.2
 103.5
Cash and cash equivalents, at end of period $142.8
 $201.9
Finance lease paymentsFinance lease payments(0.6) (0.2) 
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities28.4  (3.8) 
Effect of exchange rate changes in cash, cash equivalents and restricted cashEffect of exchange rate changes in cash, cash equivalents and restricted cash(1.2) 0.2  
Net increase in cash, cash equivalents and restricted cashNet increase in cash, cash equivalents and restricted cash14.5  52.7  
Cash, cash equivalents and restricted cash, at beginning of periodCash, cash equivalents and restricted cash, at beginning of period92.5  65.1  
Cash, cash equivalents and restricted cash, at end of periodCash, cash equivalents and restricted cash, at end of period$107.0  $117.8  
Supplemental disclosures of cash flow information    Supplemental disclosures of cash flow information
Accrued dividends payable to Preferred Stockholders $4.5
 $6.1
Accrued liabilities related to purchases of property, equipment and software $2.6
 $0.5
Accrued dividends payable to preferred stockholdersAccrued dividends payable to preferred stockholders$5.4  $5.0  
Accrued and other liabilities related to purchases of property, equipment and softwareAccrued and other liabilities related to purchases of property, equipment and software$18.4  $20.6  
Accounts payable related to purchases of property, equipment and software $0.6
 $—
Accounts payable related to purchases of property, equipment and software$3.1  $1.4  
Interest paidInterest paid$3.2  $5.1  
Income taxes paid $(1.1) $(0.7)Income taxes paid$0.9  $0.5  
Income taxes refunded $3.4
 $0.6
Income taxes refunded$—  $0.1  
See accompanying notes to consolidated financial statements.

7



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements



1.Business Description and Basis of Presentation
Business Description
R1 RCM Inc. (the "Company"“Company”) is a leading provider of technology-enabled revenue cycle management ("RCM"(“RCM”) services and physician advisory services ("PAS") to healthcare providers, including health systems and hospitals, physician groups, and municipal and private emergency medical service (“EMS”) providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for its customers. The Company achieves these results for its customers by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections from patients and payers. The Company does so by deploying a unique operating model that leverages its extensive healthcare site experience, innovative technology and process excellence.
The Company's primary service offering consists of end-to-end RCM, which encompasses patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections. The Company deploys its RCM services through a co-managed relationship or an operating partner relationship. Under a co-managed relationship, the Company leverages its customers’ existing RCM staff and processes, and supplements them withFor further information regarding the Company's infused management, subject matter specialists, proprietary technologybusiness, including relationships with Ascension Health (“Ascension”), TowerBrook Capital Partners (“TowerBrook”), IHC Health Services, Inc. (“Intermountain”), and other resources. Under an operating partner relationship, the Company provides comprehensive revenue cycle infrastructureIntermedix, refer to providers, including all revenue cycle personnel, technology, and process workflow. The Company also offers modular services, allowing customers to engage the Company for only specific componentsNote 1 of its end-to-end RCM service offering. The Company's PAS offering complements the Company's RCM offering by strengthening customer’s compliance with certain third-party payer requirements and limiting denials of claims. For example,Annual Report on Form 10-K for the Company's PAS offering helps customers determine whether to classify a hospital visit as an in-patient or an out-patient observation case for billing purposes.fiscal year ended December 31, 2019 (the “2019 Form 10-K”).

SCI Solutions, Inc. Acquisition

On February 16, 2016,January 9, 2020, the Company entered into a long-term strategic partnershipStock Purchase Agreement with Ascension Health Alliance,Clearsight Intermediate Holdings, Inc. (“Seller Blocker”) and Clearsight Group Holdings, LLC (the “Seller”) providing for the parentpurchase (the “SCI Acquisition”) by the Company from the Seller of all of the Company's largest customerissued and the nation’s largest Catholic and non-profit health system, and TowerBrook Capital Partners ("TowerBrook"), an investment management firm (the "Transaction"). As partoutstanding equity interests of Seller Blocker, which owns all of the Transaction,issued and outstanding equity interests of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”). SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. On April 1, 2020, the Company amendedcompleted the acquisition of SCI. For details on the closing, refer to Note 10, Debt and restated its Master Professional Services Agreement ("A&R MPSA") with Ascension Health ("Ascension") effective February 16, 2016 with a term of ten years. Pursuant to the A&R MPSA and with certain limited exceptions, the Company will become the exclusive provider of RCM services and PAS with respect to acute care services provided by the hospitals affiliated with Ascension that execute supplement agreements with the Company.Note 21, Subsequent Events.
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of September 30, 2017,March 31, 2020, the results of operations of the Company for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, and the cash flows of the Company for the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019. These financial statements include the accounts of R1 RCM Inc. and its wholly ownedwholly-owned subsidiaries. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"(“GAAP”) for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2017. Beginning with the quarter ended March 31, 2017, the Company changed the presentation in its financial statements to be stated in millions instead of thousands.  Therefore, previously reported amounts for fiscal 2016 may differ due to rounding.



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements


2020.
When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on2019 Form 10-K for the year ended December 31, 2016 (the "2016 10-K"). As of January 1, 2017, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") and ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). See Note 6, Revenue Recognition, and Note 9, Share-Based Compensation, for discussion on the impact of the adoption of these standards on the Company's policies for revenue and stock compensation, respectively.10-K.
2.Recent Accounting Pronouncements


Recently Issued Accounting Standards and Disclosures

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which supersedes existing guidance on accounting for leases in Topic 840, Leases. ASU 2016-02 generally requires all leases to be recognized in the consolidated balance sheet. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02
are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this prospective guidance on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. ASU 2016-18 requires that the Consolidated Statement of Cash Flows explain the change in total cash and cash equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. ASU 2016-18 also requires a reconciliation between the total of cash and cash equivalents and restricted cash presented in the Consolidated Statement of Cash Flows and the cash and cash equivalents balance presented in the Consolidated Balance Sheet. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of the adoption of this prospective guidance on its consolidated financial statements.
3.Fair Value of Financial Instruments
The Company records its financial assets and liabilities at fair value. The accounting standard for fair value (i) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, (ii) establishes a framework for measuring fair value, (iii) establishes a hierarchy of fair value measurements based upon the ability to observe inputs used to value assets and liabilities, (iv) requires consideration of nonperformance risk and (v) expands disclosures about the methods used to measure fair value. The accounting standard establishes a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect the Company’s assumptions about valuation. The three levels of the hierarchy are defined as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices

8



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. The change will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 utilizing a modified retrospective transition method. Adoption of the new standard resulted in the recording of additional allowance for credit losses of $1.1 million and a corresponding impact to retained earnings and deferred tax assets. The adoption also required changes to the Company's process of estimating expected credit losses on trade receivables and customer contract assets.
3.Fair Value of Financial Instruments
The Company's accounting policy for identical or similar assets or liabilitiesfair values, including details of the fair value hierarchy levels, are outlined in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.Note 4 of the Company's 2019 Form 10-K.
The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other accrued expenses, approximate their fair values, due to the short-term nature of these instruments. See Note 20, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts and interest rate swaps.

The Company does not have any financial assets or liabilities that are required to be measured atbelieves the carrying value of the senior term loan (see Note 10, Debt) approximates fair value on a recurring basis.as it is variable rate bank debt.

4.Accounts Receivable and Allowance for Doubtful AccountsCredit Losses


Accounts receivable is comprised of unpaid balances pertaining to non-RCMmodular services fees and end-to-end RCM customers, net receivable balances for end-to-end RCM customers after considering cost reimbursements owed to such customers, including related accrued balances.balances, and amounts due from physician RCM and PM customers.

On January 1, 2020 (the "adoption date"), the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts receivables with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate future expected credit losses on such instruments before an impairment may occur. On the adoption date the Company recorded an initial increase of $1.1 million to the Company's allowance for credit losses, with an offset recorded as an opening adjustment to accumulated deficit and deferred tax assets.

The Company evaluates its accounts receivable for expected credit losses quarterly. The Company maintains an estimated allowance for doubtful accountscredit losses to reduce its accounts receivable to the amount that it believes will be collected. This allowance is based on the Company’s historical experience, its assessment of each customer’s ability to pay, the length of time a balance has been outstanding, input from key customerCompany resources assigned to each customer, and the status of any ongoing operations with each applicable customer.customer, and environmental factors such as significant shifts in the healthcare environment which the Company believes may have impacted or will impact its customers’ financial health and ability to pay.

The full effects of COVID-19 on the Company’s clients are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience may differ significantly from historical collection trends.

The Company has presented the rollforward below on a consolidated basis as the currently expected credit losses for its large Integrated Delivery Network customers are not anticipated to be material.

Movements in the allowance for doubtful accountscredit losses are as follows (in thousands)millions):


9


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
2017 2016 2017 2016 20202019
Beginning balance$151
 $41
 $66
 $99
Beginning balance$2.8  $1.1  
Cumulative effect of ASC 326 adoptionCumulative effect of ASC 326 adoption1.1  —  
Provision (recoveries)(6) 114
 85
 87
Provision (recoveries)0.8  1.0  
Write-offs—
 (7) (6) (38)Write-offs—  —  
Ending balance$145
 $148
 $145
 $148
Ending balance$4.7  $2.1  


5.Property, Equipment and Software
Property, equipment and software consist of the following (in millions):
  September 30, 2017 December 31, 2016
Computer and other equipment $29.2
 $23.3
Leasehold improvements 21.4
 16.0
Software 42.8
 28.1
Office furniture 7.4
 4.9
Property, equipment and software, gross 100.8
 72.3
Less accumulated depreciation and amortization (50.6) (39.5)
Property, equipment and software, net $50.2
 $32.8


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

 March 31, 2020December 31, 2019
Buildings and land$4.6  $4.6  
Computer and other equipment56.4  50.7  
Leasehold improvements30.7  31.1  
Software129.5  123.0  
Office furniture8.6  9.4  
Property, equipment and software, gross229.8  218.8  
Less accumulated depreciation and amortization(113.1) (101.9) 
Property, equipment and software, net$116.7  $116.9  
The following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):
 Three Months Ended March 31,
 20202019
Cost of services$10.9  $8.9  
Selling, general and administrative1.3  0.5  
Total depreciation and amortization$12.2  $9.4  

6. Leases

The Company's accounting policy for leases, including the elections made as part of the adoption of ASC 842 effective January 1, 2019, are outlined in Note 8 of the Company's 2019 Form 10-K. The components of lease costs are as follows (in millions):

Three Months Ended March 31,
20202019
Operating lease cost$4.9  $4.6  
Finance lease cost:
Amortization of right-of-use assets0.2  0.2  
Interest on lease liabilities0.1  0.1  
Sublease income(0.6) (0.6) 
Total lease cost$4.6  $4.3  
10


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Cost of services $4.0
 $2.6
 $10.4
 $6.9
Selling, general and administrative 0.5
 0.1
 1.1
 0.4
Total depreciation and amortization $4.5
 $2.7
 $11.5
 $7.3

Supplemental cash flow information related to leases are as follows (in millions):
6.
Three Months Ended March 31,
20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$4.9  $4.5  
Operating cash flows for finance leases0.1  0.1  
Financing cash flows for finance leases0.6  0.2  
ROU assets obtained in exchange for lease obligations:
Operating leases1.7  0.2  
Finance leases—  0.5  

The Company presents all non-cash transactions related to adjustments to the lease liability or right-of-use asset as non-cash transactions. This includes all non-cash charges related to any modification or reassessment events triggering remeasurement.

Supplemental balance sheet information related to leases are as follows (in millions):

March 31, 2020December 31, 2019
Weighted average remaining lease term:
Operating leases7 years8 years
Finance leases2 years2 years
Weighted average incremental borrowing rate:
Operating leases8.81 %8.84 %
Finance leases6.51 %6.45 %

Maturities of lease liabilities as of March 31, 2020 are as follows (in millions):

Operating LeasesFinance Leases
Remainder of 2020$15.4  $0.2  
202118.2  0.5  
202215.9  0.1  
202315.0  0.1  
202414.7  —  
202514.6  —  
Thereafter33.6  —  
Total127.4  0.9  
Less:
Imputed interest35.7  0.1  
Present value of lease liabilities$91.7  $0.8  

7. Intangible Assets

11


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at March 31, 2020 and December 31, 2019 (in millions, except weighted average useful life):
March 31, 2020December 31, 2019
Weighted Average Useful LifeGross Carrying ValueAccumulated AmortizationNet Book ValueGross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships17 years$160.9  $(18.0) $142.9  $160.9  $(15.6) $145.3  
Technology6 years26.8  (8.4) 18.4  26.8  (7.4) 19.4  
Total intangible assets$187.7  $(26.4) $161.3  $187.7  $(23.0) $164.7  

Intangible asset amortization expense was $3.5 million and $3.5 million for the three months ended March 31, 2020 and 2019, respectively.

Estimated annual amortization expense related to intangible assets with definite lives as of March 31, 2020 is as follows (in millions):

Remainder of 2020$10.4  
202113.9  
202213.9  
202313.9  
202411.0  
20259.5  
Thereafter88.7  
Total$161.3  

8. Goodwill

In the first three months of 2020, there were no events or circumstances that would have required an interim impairment test. Annually, during the fourth quarter, goodwill is tested for impairment.

There were no changes in the carrying amount of goodwill for the three months ended March 31, 2020.

9. Revenue Recognition
The Company follows the guidance under Topic 606, Revenue from Contracts with Customers, (“Topic 606”). Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contact term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.


Periods prior to January 1, 2017Disaggregation of Revenue

Revenue is generally recognized when all ofIn the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured.

Net service fees, as reported in the consolidated statement of operations and comprehensive income (loss), consist of: (a) RCM services fees and (b) professional service fees earned on a fixed fee, transactional fee or time and materials basis. The Company’s primary source oftable, revenue is RCM services fees. RCM services fees are primarily contingent, but along with fixed fees are generally viewed as one deliverable. To the extent that certain RCM services fees are fixed and not subject to refund, adjustment or concession, such fees are generally recognized as revenue on a straight-line basis over the term of the contract.

On a limited basis, the Company enters into contracts with multiple accounting elements which may include a combination of fixed fee or transactional fee elements. The selling price of each element is determineddisaggregated by using management's best estimate of selling price. Revenues are recognized in accordance with the accounting policies for the separate elements.
RCM services fees that are contingent in nature are recognized as revenue once all the criteria for revenue recognition are met, which is generally at the end of a contract or other contractual agreement event. Revenue is recognized for RCM services fees upon the contract reaching the end of its stated term (such that the contractual relationship will not continue in its current form) to the extent that: (i) cash has been received for invoiced fees and (ii) there are no disputes at the conclusion of the term of the contract.

If fees or services are disputed by a customer at the end of a contract, a settlement agreement entered into with the customer triggers revenue recognition. An other "contractual agreement event" occurs when a renewal, amendment to an existing contract, or other settlement agreement is executed in which the parties reach agreement on prior fees. Revenue is recognized up to the amount covered by such agreements.

RCM services fees consist of the following contingent fees: (i) Net Operating Fees and (ii) Incentive Fees.

Net Operating Fees

source (in millions):

12



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

The Company generates net operating fees to the extent the Company is able to assist customers in reducing the cost of revenue cycle operations. In limited cases, the Company earns a fixed fee instead of a fee based on the mechanics described below. The Company’s net operating fees consist of:

i) gross base fees invoiced to customers; less

ii) corresponding costs of customers’ revenue cycle operations which the Company pays pursuant to its RCM agreements, including salaries and benefits for the customers' RCM personnel, and related third-party vendor costs; less

iii) any cost savings the Company shares with customers.

Net operating fees are recorded as deferred customer billings until the Company recognizes revenue for a customer contract at the end of a contract or reaches an "other contractual agreement event". The amount of unpaid costs of customers’ revenue cycle operations and shared cost savings are reported as accrued service costs within customer liabilities in the consolidated balance sheets.

Incentive Fees

The Company generates revenue in the form of performance-based fees when the Company improves the customers’ financial or operational metrics. These performance metrics vary by customer contract. However, certain contracts contain a contract-to-date performance metric that is not resolved until the end of the term of the contract.

Periods commencing January 1, 2017

Nature of Goods and Services

The Company's primary source of revenue is its end-to-end RCM services fees. The Company also generates revenue through its modular RCM services, where customers will engage the Company for only specific components of its end-to-end RCM service offering on a fixed-fee or transactional basis, as well as its PAS offering.

Revenue Cycle Management

RCM services fees are primarily variable and performance related, and are generally viewed as the consideration earned in satisfaction of a single performance obligation. RCM services fees consist of net operating fees, incentive fees, and other fees.

Net Operating Fees

The Company’s net operating fees consist of:

i) gross base fees invoiced to customers; less
Three Months Ended March 31,
20202019
Net operating fees$280.9  $241.3  
Incentive fees16.8  12.2  
Other22.8  22.4  
Net services revenue$320.5  $275.9  
        
ii) corresponding costs of customers’ revenue cycle operations which the Company pays pursuant to its RCM agreements, including salaries and benefits for the customers' RCM personnel, and related third-party vendor costs.

The Company recognizes revenue related to net operating fees ratably as the performance obligation for the RCM services is satisfied. Base fees are typically billed in advance of the quarter and paid in three monthly payments as the entity performs and the customer simultaneously receives and consumes the benefits provided by the services provided. The costs of customers’ revenue cycle operations which the company pays pursuant to its RCM agreements are accrued based on the service period.



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Incentive Fees

The Company recognizes revenue related to incentive fees ratably as the performance obligation for RCM services is satisfied, to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. Incentive fees are structured to reflect quarterly or annual, performance and are evaluated on a contract-by-contract basis. Incentive fees are typically billed and paid on a quarterly basis.

RCM Other

The Company recognizes revenue related to other RCM fees as RCM services are provided. These services typically consist of the Company's modular RCM services offering, which consists of an obligation to provide services for a specific component of its end-to-end RCM service offering. Fees are typically variable in nature with the entire amount being included in revenue in the month of service. The customer simultaneously receives and consumes the benefits provided by the services and the fees are typically billed on a monthly basis with payment terms of up to 30 days. To the extent that certain service fees are fixed and not subject to refund, adjustment or concession, these fees are generally recognized into revenue ratably as the performance obligation is satisfied.

Other Services

The Company recognizes revenue from PAS in the period in which the service is performed. The Company’s PAS arrangements typically consist of an obligation to provide specific services to customers on a when and if needed basis. These services are provided under a fixed price per unit arrangement. These contracts are evaluated on a contract-by-contract basis. Fees for the Company's PAS arrangements are typically billed on a monthly basis with 30 to 60 day payment terms.

Bundled Services

Modular RCM services may be sold separately or bundled in a contract and end-to-end RCM services are typically sold separately but may be bundled with PAS services. PAS services are commonly sold separately. The typical length of an end-to-end RCM contract is three to ten years (subject to the parties' respective termination rights) but varies from customer to customer. PAS and modular RCM agreements generally vary in length between one and three years.

For bundled arrangements, the Company accounts for individual services as a separate performance obligation if a service is separately identifiable from other items in the bundled arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The transaction price is allocated between separate services in a bundle based on their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells its RCM, PAS, or modular services. PAS services are provided at a customer’s election but do not represent material rights as the services are priced at standalone selling price throughout the life of the agreement. In certain situations, the Company allocates variable consideration to a distinct service, or services, within a contract. The Company allocates variable payments to one or more, but not all, of the distinct services in a contract when (i) the variable payment relates specifically to the Company’s efforts to transfer the distinct service and (ii) the variable payment is for an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to its customer.

Disaggregation of Revenue

In the following table, revenue is disaggregated by source of revenue (in millions):


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

  Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
RCM services: net operating fees $104.6
 $255.4
RCM services: incentive fees 7.5
 20.2
RCM services: other 2.8
 9.8
Other services fees 8.3
 24.1
Total net service revenue $123.2
 $309.5

Contract Balances


The following table provides information about receivables, contractscontract assets, and contract liabilities from contracts with customers (in millions):
March 31, 2020December 31, 2019
Receivables (1)$93.9  $83.1  
Contract assets (2)2.1  2.0  
Contract liabilities (2)26.0  25.3  
 September 30, 2017At adoption
Receivables, which are included in accounts receivable, net25.7
30.5
Contract assets—
—
Contract liabilities12.5
20.9


(1) Receivables are included in accounts receivable, net. The balance includes accounts receivable, net - related party.
(2) Contract assets and contract liabilities are included in other current assets and customer liabilities, respectively. The Company recognized revenuecontract liabilities balance contains related party amounts, including $3.9 million and $4.2 million of $0.3current customer liabilities and $19.3 million and $18.6 million of non-current customer liabilities for the three months ended September 30, 2017 related to changes in transaction price estimates during the quarter for certain revenue cycle management contracts.March 31, 2020 and year ended December 31, 2019, respectively.

The Company recognized a decrease in revenue of $0.4 million during the three months ended September 30, 2017, which amount was included in contract liabilities at the beginning of the period.


A receivable is recognized in the period the Company provides services when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30-60 days.


Significant changes in the contract assets and the contract liabilities balances during the three months ended September 30, 2017 are as follows (in millions):
Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Contract assetsContract liabilitiesContract assetsContract liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period$—  $86.0  $—  $67.5  
Increases due to cash received, excluding amounts recognized as revenue during the period—  0.8  —  0.5  
Three Months Ended September 30, 2017
Contract assetsContract liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period—40.9
Increases due to cash received, excluding amounts recognized as revenue during the period—1.9
Transferred to receivables from contract assets recognized at the beginning of the period——
Increases as a result of cumulative catch-up adjustment arising from changes in the estimate of the stage of completion, excluding amounts transferred to receivables during the period——


The Company recognized revenue of $86.0 million and $67.5 million during the three months ended March 31, 2020 and 2019, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $85.0 million and $66.7 million for the three months ended March 31, 2020 and 2019, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.

Transaction Price Allocated to the Remaining Performance Obligation


The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in millions). The estimated revenue does not include amounts of variable consideration that are constrained.

13



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Net operating feesIncentive fees
RCM Other
Net operating feesIncentive feesOther Other Services fees
2017$3.4
$6.1
$1.4
 $—
201813.5
9.7
2.9
 —
2019—
—
2.7
 —
2020—
—
2.2
 —
2020$53.2  $3.1  
2021202121.8  —  
2022202211.7  —  
202320238.2  —  
202420244.0  —  
202520254.0  —  
Thereafter—
—
11.3
 —
Thereafter0.5  —  
Total$16.9
$15.8
$20.5
 $—
Total$103.4  $3.1  
        

The amounts presented in the table above primarily consistinclude variable fee estimates for the non-cancellable term of the Company's physician groups and EMS providers RCM services contracts, fixed fees which are typically recognized ratably
as the performance obligation is satisfied, orand incentive fees which are measured cumulatively over the contractually defined performance period.


Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services within the Company's PAS contracts that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606as revenues when the customer exercises its option to purchase additional goods or services.


10. Debt

The carrying amounts of debt consist of the following (in millions):
March 31, 2020December 31, 2019
Senior Revolver$70.0  $40.0  
Senior Term Loan312.8  316.9  
Unamortized discount and issuance costs(3.2) (2.9) 
Total debt379.6  354.0  
Less: Current maturities(16.3) (16.3) 
Total long-term debt$363.3  $337.7  

Senior Secured Credit Facilities

On June 26, 2019, the Company has electedand certain of its subsidiaries entered into a new senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the optional exemptions fromlenders named therein, for senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $325.0 million senior secured term loan facility (the “Senior Term Loan”) issued at 99.66% of par and a $100.0 million senior secured revolving credit facility (the “Senior Revolver”).

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly,“swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of March 31, 2020, the Company applieshad $70.0 million in borrowings, 0 letters of credit outstanding, and $30.0 million of availability under the practical expedient in paragraph 606-10-55-18 to its stand-alone PAS contracts and modular RCM services and does not disclose information about variable consideration from remaining performance obligations for whichSenior Revolver.

Borrowings under the Company recognizes revenue. PAS performance obligations are typically short in duration (often less than 1 day) with any uncertainty relatedSenior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an Alternate Base Rate (“ABR”) equal to the associated variable consideration resolved as each incrementgreater of service (completion(a) the prime rate of a levelBank of care review or an appeal) is completed which reflectsAmerica, N.A., (b) the value the Customer receives from the Company’s fulfillment of the performance obligation. Modular RCM services performance obligations for variable consideration are of short duration with fees corresponding to the value the customer has realized, for example, patient accounts collected on behalf of the Customer or medical record lines transcribed.
The Company also applies the guidance in paragraph 606-10-50-14A(b) to variable consideration within its end-to-end RCM contracts and does not disclose information about remaining, wholly unsatisfied performance obligations for variable consideration that the Company is able to allocate to one or more, but not-all, of the performance obligations in its contracts in accordance with paragraph 606-10-32-40. The Company’s end-to-end RCM services performance obligations are satisfied over time and are substantially the same from period to period under either a co-managed or operating partner model. Fees are variable and consist of net operating fees and incentive fees with the uncertainty related to net operating fees and certain incentive fees being resolved quarterly with the uncertainty of other incentive fees being resolved annually. The information presented in the table above includes estimates for incentive fees where the uncertainty related to the final fee is resolved on longer than a quarterly basis and to the extent the Company does not believe the associated consideration is constrained.
Changes in Accounting Policies

Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these consolidated financial statements.

The Company adopted Topic 606 with a date of the initial application of January 1, 2017. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company adopted Topic 606, effective January 1, 2017, using the modified retrospective method, applying Topic 606 to contracts that were not complete as of the date of initial application. Therefore, the comparative informationfederal

14



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

hasfunds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on the Company's Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not been adjustedbe less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus between 1.75% and continues2.75%, dependent on the Company's Net Leverage Ratio. The interest rate as of March 31, 2020 was 2.99%. The Company is also required to be reportedpay an unused commitment fee to the lenders under Topic 605. The detailsthe Senior Revolver at a rate between 0.30% and 0.50% of the significant changesaverage daily unutilized commitments thereunder dependent on the Company's net leverage ratio.

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and quantitative impactthe ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the changes are set out below.
RCM services fees
RCM services fees that are variable in nature were recognized under Topic 605 as revenue once allCompany’s junior indebtedness; (xi) change the criteria for revenue recognition are met, which is generally atCompany’s lines of business; (xii) make certain acquisitions; and (xiii) limitations on the endletter of a contract or other contractual agreement event. Revenue previously has been recognized for RCM service fees upon the contract reaching the endcredit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of its stated term (such that the contract relationship will not continue in its current form) to the extent that cash has been received for invoiced fees and there are no disputes at the conclusion of the term of the contract.

Under Topic 606, the Company recognizes service fees that are variable in nature over time as the service is provided to the customer to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty related to the estimated revenue is subsequently resolved. Net operating fees are typically recognized on a quarterly basis as the RCM services are rendered and measurement of the net operating fees earned during the distinct performance period is objectively determinable. Incentive fees are calculated quarterly based upon contractually defined agreed-upon performance metrics and are recognized as revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty related to the estimated revenue is subsequently resolved.

Fixed fees are generally recognized over the term of the contract on a ratable basis as the performance obligation is satisfied.

Other services fees
The PAS contract between the Company and customer typically stipulates the price per unitdefault. In addition, the Company is entitledrequired to for each unitmaintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of service performed. Certain contracts include minimum fees and volume discounts but the Company does not knowcovenants in the quantity or mixCredit Agreement as of service types the customer will request until the request is made. The length of time it takes the Company to perform each service can vary dependingMarch 31, 2020.

For further details on the nature of the service or complexity of the specific situation or case. Revenue previously had been recognized for PAS service fees when the service was completed.

Under Topic 606, the Company recognizes revenue on a monthly basis when services are completed during the month consistent with recognition under Topic 605.

Deferred contract costs
Eligible, one-time, nonrecurring fulfillment costs associated with the initial phases of the Ascension A&R MPSA and with the transition of additional Ascension hospitals under separate contracts are deferred and subsequently amortized. These costs are amortized on a straight-line basis over the expected period of benefit. Under Topic 606, the Company will continueCompany's debt, refer to amortize associated assets over the remaining life of the contract as services are provided.

Impacts on Financial Statements

The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2017 (in millions, except per share data):



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

i.Consolidated balance sheets

  Impact of changes in accounting policies
  As reported September 30, 2017 Adjustments Balances without adoption of Topic 606
Assets      
Current assets:      
Cash and cash equivalents $142.8
 $—
 $142.8
Accounts receivable, net 7.7
 (0.3) 7.4
Accounts receivable, net - related party 18.0
 (11.2) 6.8
Prepaid income taxes 0.9
 —
 0.9
Prepaid expenses and other current assets 16.1
 (0.3) 15.8
Total current assets 185.5
 (11.8) 173.7
Property, equipment and software, net 50.2
 —
 50.2
Non-current deferred tax assets 105.8
 158.4
 264.2
Restricted cash equivalents 1.5
 —
 1.5
Other assets 11.4
 0.2
 11.6
Total assets $354.4
 $146.8
 $501.2
Liabilities     
Current liabilities:     
Accounts payable 6.9
 (1.1) 5.8
Current portion of customer liabilities 0.9
 41.9
 42.8
Current portion of customer liabilities - related party 20.1
 (1.2) 18.9
Accrued compensation and benefits 29.2
 —
 29.2
Other accrued expenses 16.1
 (1.3) 14.8
Total current liabilities 73.2
 38.3
 111.5
Non-current portion of customer liabilities 0.3
 —
 0.3
Non-current portion of customer liabilities - related party 9.1
 360.2
 369.3
Other non-current liabilities 12.2
 —
 12.2
Total liabilities $94.8
 $398.5
 $493.3
  —
   
8.00% Series A convertible preferred stock 184.7
 —
 184.7
Stockholders’ equity (deficit)     
Common stock 1.2
 —
 1.2
Additional paid-in capital 339.8
 —
 339.8
Accumulated deficit (204.3) (251.7) (456.0)
Accumulated other comprehensive loss (2.2) —
 (2.2)
Treasury stock (59.6) —
 (59.6)
Total stockholders’ equity (deficit) 74.9
 (251.7) (176.8)
Total liabilities and stockholders’ equity (deficit) $354.4
 $146.8
 $501.2




R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

ii.Consolidated statements of operations and comprehensive income (loss) -
  Impact of changes in accounting policies
  As reported three months ended September 30, 2017 Adjustments Balances without adoption of Topic 606 As reported nine months ended September 30, 2017 Adjustments Balances without adoption of Topic 606
Net services revenue $123.2
 $(82.4) $40.8
 $309.5
 $(236.5) $73.0
Operating expenses:   
 
     
Cost of services 111.8
 (3.8) 108.0
 289.1
 (10.3) 278.8
Selling, general and administrative 15.1
 —
 15.1
 41.6
 —
 41.6
Other 1.4
 —
 1.4
 2.6
 —
 2.6
Total operating expenses 128.3
 (3.8) 124.5
 333.3
 (10.3) 323.0
Income (loss) from operations (5.1) (78.6) (83.7) (23.8) (226.2) (250.0)
Net interest income —
 —
 —
 0.1
 —
 0.1
Income (loss) before income tax provision (5.1) (78.6) (83.7) (23.7) (226.2) (249.9)
Income tax provision (benefit) (1.5) (30.1) (31.6) (5.1) (87.9) (93.0)
Net income (loss) $(3.6) $(48.5) $(52.1) $(18.6) $(138.3) $(156.9)
Consolidated statements of comprehensive income (loss) 
 
     
Net income (loss) $(3.6) $(48.5) $(52.1) $(18.6) $(138.3) $(156.9)
Other comprehensive loss:   
 
     
Foreign currency translation adjustments (0.2) —
 (0.2) 0.6
 —
 0.6
Comprehensive income (loss) $(3.8) $(48.5) $(52.3) $(18.0) $(138.3) $(156.3)



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

iii.Consolidated statements of cash flows -
  Impact of changes in accounting policies
  As reported September 30, 2017 Adjustments Balances without adoption of Topic 606
Operating activities      
Net income (loss) $(18.6) $(138.3) $(156.9)
Adjustments to reconcile net income (loss) to net cash used in operations:     
Depreciation and amortization 11.5
 —
 11.5
Share-based compensation 8.2
 —
 8.2
Loss on disposal 0.2
 —
 0.2
Provision (recovery) for doubtful receivables 0.1
 —
 0.1
Deferred income taxes (5.6) (87.9) (93.5)
Changes in operating assets and liabilities:     —
Accounts receivable and related party accounts receivable (15.4) 6.9
 (8.5)
Prepaid income taxes 3.0
 —
 3.0
Prepaid expenses and other assets (6.7) —
 (6.7)
Accounts payable 0.3
 (1.1) (0.8)
Accrued compensation and benefits 4.3
 —
 4.3
Other liabilities (0.3) (1.4) (1.7)
Customer liabilities and customer liabilities - related party 14.7
 221.8
 236.5
Net cash used in operating activities (4.3) —
 (4.3)
Investing activities     
Purchases of property, equipment, and software (30.1) —
 (30.1)
Proceeds from maturation of short-term investments —
 —
 —
Net cash used in investing activities (30.1) —
 (30.1)
Financing activities     
Series A convertible preferred stock and warrant issuance, net of issuance costs —
 —
 —
Exercise of vested stock options —
 —
 —
Purchase of treasury stock (2.0) —
 (2.0)
Shares withheld for taxes (2.4) —
 (2.4)
Net cash (used in) provided by financing activities (4.4) —
 (4.4)
Effect of exchange rate changes in cash 0.4
 —
 0.4
Net increase (decrease) in cash and cash equivalents (38.4) —
 (38.4)
Cash and cash equivalents, at beginning of period 181.2
 —
 181.2
Cash and cash equivalents, at end of period $142.8
 $—
 $142.8
7. Customer Liabilities
Customer liabilities include (i) accrued service costs (amounts due and accrued for cost reimbursements),
(ii) deferred customer billings (net operating fees invoiced or accrued and incentive fees collected that have not met all revenue recognition criteria), (iii) refund liabilities (amounts potentially due as a refund to the Company's customers on incentive fees), (iv) customer deposits (consisting primarily of net operating fees under the Company’s RCM contracts that are paid prior to the service period and amounts due as a refund to the Company's customers on incentive fees) and (v) Deferred Revenue (contract liabilities) (fixed or variable fees amortized to revenue over the


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

service period). Deferred customer billings are classified as current based on the customer contract end dates or other termination events that fall within twelve months of the balance sheet dates. Accrued service cost, refund liabilities and contract liabilities are classified as current or non-current based on the anticipated period in which the liabilities are expected to be settled or the revenue is expected to be recognized.
Customer liabilities consist of the following (in millions):
 September 30, December 31,
 2017 2016
Deferred customer billings, current$—
 $68.2
Accrued service costs, current (1)
17.6
 14.8
Customer deposits, current—
 0.9
Refund liabilities, current (1)0.3
 —
Deferred revenue (contract liabilities), current (1)3.1
 —
Current portion of customer liabilities$21.0
 $83.9
Deferred customer billings, non-current (2)$—
 $110.0
Refund liabilities, non-current—
 —
Customer deposits, non-current—
 —
Deferred revenue (contract liabilities), non-current (2)9.4
 1.0
Non current portion of customer liabilities$9.4
 $111.0
Total customer liabilities$30.4
 $194.9

(1) Includes $17.6 million, $0.3 million and $2.2 million in current accrued service costs, refund liabilities and deferred revenue respectively, for a related party that are included in the current portion of customer liabilities - related party in the accompanying consolidated balance sheets at September 30, 2017. Includes $13.2 million and $1.0 million in current accrued service costs and customer deposits, respectively, for a related party that are included in the current portion of customer liabilities - related party in the accompanying consolidated balance sheet at December 31, 2016.
(2) Includes $9.1 million in deferred revenue for a related party that are included in the non-current portion of customer liabilities - related party in the accompanying consolidated balance sheet at September 30, 2017. Includes $110.0 million in deferred customer billings for a related party that are included in the non-current portion of customer liabilities - related party in the accompanying consolidated balance sheet at December 31, 2016.
8.Stockholders’ Equity (Deficit)
Preferred Stock and Warrant
The Company has 5,000,000 shares of authorized preferred stock, each with a par value of $0.01. The preferred stock may be issued from time to time in one or more series. The board of directors of the Company ("Board") is authorized to determine the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock. On February 16, 2016, at the close of the Transaction, the Company issued to TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the "Investor"): (i) 200,000 shares of its 8.00% Series A Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock" or "Preferred Stock"), for an aggregate price of $200 million and (ii) an exercisable warrant to acquire up to 60 million shares of its common stock with an exercise price of $3.50 per common share and a term of ten years. The Series A Preferred Stock is immediately convertible into shares of common stock. As of September 30, 2017 and December 31, 2016, the Company had 223,023 and 210,160 shares of preferred stock outstanding, respectively. See Note 12, 8% Series A Convertible Preferred Stock, for additional information.
Common Stock


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Each outstanding share13 of the Company's common stock, par value $0.01 per share ("common stock"), is entitled to one vote per share on all matters submitted to a vote by shareholders. Subject2019 Form 10-K.

Incremental Term Loan

On March 20, 2020, the Company entered into Amendment No. 1 to the rights of any preferred stockCredit Agreement (the “Amendment”), pursuant to which may from timethe lenders named in the Amendment agreed to time be outstanding, the holders of outstanding shares of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive pro rata all assets legally available for distribution to stockholders. No dividends were declared or paidprovide an additional $191.1 million incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the common stock during 2017 or 2016.same terms as its existing Senior Term Loan provided under the Credit Agreement.
Treasury Stock
On November 13, 2013,The Incremental Term Loan was drawn substantially concurrently with the Board authorized a repurchase of up to $50.0 millionclosing of the Company’s common stock in the open market or in privately negotiated transactions.SCI Acquisition on April 1, 2020. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time at the sole discretionproceeds of the Board. Any repurchased shares will be availableIncremental Term Loan were used to fund the purchase price for use in connectionthe SCI Acquisition and related expenses. For further details on the closing, refer to Note 21, Subsequent Events. The Incremental Term Loan has terms consistent with the Company’s stock plans and for other corporate purposes. The Company funds the repurchases from cash on hand. During the year ended December 31, 2016, the Company repurchased 158,557 sharesthose of the Company stock for $0.4 million. DuringSenior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the threesame affirmative and nine months ended September 30, 2017, 342,130negative covenants and 855,474 shares were repurchased for $1.3 million and $2.5 million, respectively. No shares have been retired. Asevents of September 30, 2017 and December 31, 2016,default as those applicable to the Company held in treasury 5,341,481 and 4,465,919 shares of repurchased stock, respectively.Senior Term Loan under the Credit Agreement.

Treasury stock also includes repurchases of Company stock related to employees’ tax withholding upon vesting of restricted shares. For the three and nine months ended September 30, 2017, the Company repurchased 19,988 and 784,531 shares related to employees’ tax withholding upon vesting of restricted shares. Additionally, treasury stock includes restricted stock awards that have been canceled or forfeited. See Note 9, Share-Based Compensation.
9.11.Share-Based Compensation

The share-based compensation expense relating to the Company’s stock options, restricted stock awards ("RSAs"(“RSAs”), restricted stock units ("RSUs"(“RSUs”) and performance-based restricted stock units ("PBRSUs"(“PBRSUs”) for the three months ended September 30, 2017March 31, 2020 and 20162019 was $2.4$4.8 million and $4.8$4.4 million, respectively, with related tax benefits of approximately $0.9$0.7 million and $1.9 million, respectively. The share-based compensation expense relating to the Company’s stock options, RSAs, RSUs and PBRSUs for the nine months ended September 30, 2017 and 2016 was $8.2 million and $25.3 million, respectively, with related tax benefits of approximately $3.2 million and $10.0$0.7 million, respectively.


As of January 1, 2017, the Company adopted ASU 2016-09. The Company elected to change its accounting policy to accountaccounts for forfeitures as they occur under the new standard. The change was applied on a modified retrospective basis with a cumulative effect adjustment recorded to increase accumulated deficit by $1.0 million, increase additional paid-in capital by $1.5 million and increase non-current deferred tax assets by $0.5 million as of January 1, 2017.occur. Excess tax benefits and shortfalls for share-based payments are nowrecognized in income tax expense (benefit) and included in operating activities rather than in financing activities. The changes have been applied prospectively in accordance with ASU 2016-09Company recognized $0.6 million and prior periods have not been adjusted.

Amendments related to accounting for excess tax benefits and shortfalls have been adopted prospectively, resulting in recognition of excess tax benefits and shortfalls in$1.9 million income tax expenses (benefit) rather than additional paid-in capital. For the three and nine months ended September 30, 2017, the Company recognized $0.0 million and $0.9 million of income tax expensebenefit from shortfallswindfalls associated with vesting and exercises of equity awards.awards for the three months ended March 31, 2020 and 2019, respectively.
Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):

15



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Share-Based Compensation Expense Allocation Details:        
Cost of services $1.2
 $1.3
 $3.3
 $4.8
Selling, general and administrative 1.2
 3.5
 4.8
 18.7
Other —
 —
 0.1
 1.8
Total share-based compensation expense (1) $2.4
 $4.8
 $8.2
 $25.3
(1) Includes $0 million and $0.1 million in share-based compensation expense paid in cash during the three and nine months ended September 30, 2016, respectively.  In addition to the share-based compensation expense recorded above, $0.1 million and $0.4 million of share-based compensation expense was capitalized to deferred contract costs for the three and nine months ended September 30, 2017, respectively. See Note 16, Deferred Contract Costs, for further discussion.
 Three Months Ended March 31,
 20202019
Share-Based Compensation Expense Allocation Details:
Cost of services$1.9  $1.3  
Selling, general and administrative2.9  3.0  
Other—  0.1  
Total share-based compensation expense$4.8  $4.4  
The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. The Company uses Monte Carlo simulations are used to estimate the fair value of its market-based PBRSUs. The market-based PBRSUs vest upon satisfaction of both time-based requirements and performancemarket targets based on share price. Expected life is based on the market condition to which the vesting is tied.
The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the ninethree months ended September 30, 2017March 31, 2020 and 2016:2019:
 Three Months Ended March 31,
 20202019
Expected dividend yield—%—%
Risk-free interest rate1.7%2.4% to 2.5%
Expected volatility43%40% to 45%
Expected term (in years)5.52.00 to 5.50
  Nine Months Ended September 30,
  2017 2016
Expected dividend yield —
 —
Risk-free interest rate 1.8% to 2.3% 1.2% to 1.9%
Expected volatility 40% to 45% 45% to 50%
Expected term (in years) 2.34 to 6.29 6.25
Forfeitures —% 5.68% annually

The risk-free interest rate input is based on U.S. Treasury instruments, and the expected volatility of the share price is based uponon review of the historical volatility levels of the Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life for 2017 and 2016 option grants.life. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.

Stock options

A summary of the options activity during the three months ended March 31, 2020 is shown below:




OptionsWeighted-
Average
Exercise
Price
Outstanding at December 31, 201910,680,340  $5.59  
Granted7,602  12.69  
Exercised(553,520) 5.53  
Canceled/forfeited(61,766) 2.46  
Expired(1,176,000) 14.71  
Outstanding at March 31, 20208,896,656  $4.41  
Outstanding, vested and exercisable at March 31, 20206,362,802  $5.04  
Outstanding, vested and exercisable at December 31, 20197,868,280  $6.57  

16



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Stock optionsRestricted stock awards, restricted stock units, and performance-based restricted stock units 
A summary of the optionsRSA, RSU, and PBRSU activity during the ninethree months ended September 30, 2017March 31, 2020 is shown below:
Weighted-
Average Grant
Date Fair Value
RSAsRSUsPBRSUsRSUPBRSU
Outstanding and unvested at December 31, 2019—  1,373,356  4,119,436  $8.03  $6.37  
Granted—  20,510  —  12.70  —  
Vested—  (1,720) —  2.33  —  
Forfeited—  (46,367) (111,223) 6.10  5.40  
Outstanding and unvested at March 31, 2020—  1,345,779  4,008,213  $8.18  $6.40  
Shares surrendered for taxes for the three months ended March 31, 2020—  545  —  
Cost of shares surrendered for taxes for the three months ended March 31, 2020 (in millions)
$—  $—  $—  
Shares surrendered for taxes for the three months ended March 31, 2019342,378  620  —  
Cost of shares surrendered for taxes for the three months ended March 31, 2019 (in millions)
$3.3  $—  $—  
  Shares 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2016 20,418,607
 $6.26
Granted 3,581,904
 3.32
Exercised (58,760) 2.37
Canceled/forfeited (5,897,038) 9.42
Outstanding at September 30, 2017 18,044,713
 4.66
Outstanding, vested and exercisable at September 30, 2017 5,676,001
 $8.99
Outstanding, vested and exercisable at December 31, 2016 7,993,168
 $11.34

OnOutstanding PBRSUs issued prior to May 12, 2017,2019 vest upon satisfaction of both time-based requirements and market targets based on share price with certain awards vesting between December 31, 2020 and December 31, 2022. Depending on the Company offered certain employees and directors an opportunity to elect to exchange certain stock options for new options covering a fewerpercentage level at which the market-based condition is satisfied, the number of shares of common stock. Under this offer, the Company accepted for exchange 4,279,463 options. All surrendered options were canceledvesting could be between 0% and the Company issued 1,728,795 new stock options in exchange for such tendered options. The exchange ratios were established with the intent not to generate incremental share-based compensation expense and were established just prior to commencement350% of the offer. The incremental compensation associated withnumber of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 vest on December 31, 2021 upon satisfaction of both time-based and performance-based conditions. These conditions include cumulative adjusted EBITDA and end-to-end RCM agreement growth targets. Depending on the fluctuations inpercentage level at which the Company’s common stock priceperformance-based conditions are satisfied, the number of shares vesting could be between the date the exchange ratios were established0% and the commencement200% of the offer was insignificant.number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all PBRSUs is 9,007,166.
Restricted stock awards
A summary12. Other Expenses
Other expenses (income) consist of the restricted stock activity during the nine months ended September 30, 2017 is shown below:following (in millions):
Three Months Ended March 31,
 20202019
Severance and related employee benefits$1.1  $(1.4) 
Strategic initiatives (1)3.2  3.4  
Transitioned employees restructuring expense (2)(0.1) 4.2  
Digital Transformation Office (3)—  2.5  
Other (4)4.5  0.1  
Total other expenses$8.7  $8.8  

17
  Shares 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at December 31, 2016 5,862,712
 $3.01
Granted —
 —
Vested (2,675,782) 3.50
Forfeited (728,798) 1.31
Outstanding and unvested at September 30, 2017 2,458,132
 $2.98

RSA vesting is based on the passage of time. The amount of share-based compensation expense is based on the fair value of the Company's common stock on the respective grant dates and is recognized ratably over the vesting period.

The Company's RSA agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSAs in lieu of their payment of the required personal employment-related taxes. During the nine months ended September 30, 2017 and 2016, employees delivered to the Company 733,769 and 981,505 shares of stock, respectively, which the Company recorded at a cost of approximately $1.8 million and $2.0 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.
Restricted stock units
A summary of the restricted stock activity during the nine months ended September 30, 2017 is shown below:



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

  Shares 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at December 31, 2016 1,346,774
 $2.35
Granted 265,345
 2.88
Vested (155,535) 2.35
Forfeited (250,960) 2.35
Outstanding and unvested at September 30, 2017 1,205,624
 $2.47
The Company's RSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSUs in lieu of their payment of the required personal employment-related taxes. During the nine months ended September 30, 2017 and 2016, employees delivered to the Company 50,762 and no shares of stock, respectively, which the Company recorded at a cost of approximately $0.2 million and $0.0 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.
Performance-based restricted stock units
In the third quarter of 2017, the Company began to grant PBRSUs to its employees. The PBRSUs vest upon satisfaction of both time-based requirements and performance targets based on share price with certain awards vesting on December 31, 2019 and certain awards vesting on December 31, 2020. If certain price targets are reached, the number of shares vesting could be up to 150% or, in certain cases, up to 200% of the number of PBRSUs originally granted. A summary of the PBRSU activity during the three months ended September 30, 2017 is shown below:
  Shares 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at June 30, 2017 —
 $—
Granted 3,117,297
 3.21
Vested —
 —
Forfeited (17,230) 3.21
Outstanding and unvested at September 30, 2017 3,100,067
 $3.21
10. Other

Other costs are comprised of reorganization-related and certain other costs. For the three months ended September 30, 2017 and 2016, the Company incurred $1.4 million and $0.5 million in other costs, respectively. For the nine months ended September 30, 2017 and 2016, the Company incurred $2.6 million and $20.0 million in other costs, respectively.
Other costs consist of the following (in millions):


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Severance and employee benefits$—
 $(0.3) $0.3
 $2.5
Facility charges—
 —
 —
 0.7
Non-cash share based compensation—
 —
 0.1
 1.8
Reorganization-related—
 (0.3) 0.4
 5.0
Transaction fees (1)—
 —
 —
 13.3
Defined contribution plan contributions (2)—
 —
 —
 0.9
Restatement costs—
 0.8
 —
 0.8
Acquisition related diligence and costs (3)1.4
 —
 1.4
 —
Transitioned employees restructuring expense (4)—
 —
 0.8
 —
Other1.4
 0.8
 2.2
 15.0
Total other$1.4
 $0.5
 $2.6
 $20.0

(1)Costs related to retention payments and legal fees paid in connection with the closing of the Transaction (see Note 12).
(2) Additional contributions to the Company's defined contribution plan for the year ended December 31, 2016.
(3) Costs related to evaluating, pursuing and pursuing acquisition opportunitiesintegrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s inorganic growth strategy. Costs include employee time and expenses spent on activities, vendor spend, and severance and retention amounts associated with integration activities.
(4)(2) As part of the transition of Ascension personnel to the Company in conjunction with the A&R MPSA,under certain operating partner model contracts, the Company has agreed to reimburse, Ascensionor directly pay the affected employees, for certain severance and retention costs related to certain Ascension employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.

(3) Project costs related to the Company's effort to automate its transactional environment.
Reorganization-related(4) For the three months ended March 31, 2020, includes $2.6 million of expenses pertaining to appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
During the second and fourth quarters of 2016, the Company initiated restructuring plans consisting of reductions in its workforce in order to align the size and composition of its workforce to its current client base, better position itself for already committed future growth, and enable the Company to more efficiently serve contracted demand.

The Company's reorganization activity was as follows (in millions):

 Severance and Employee Benefits Facilities and Other Costs Total
Reorganization liability at December 31, 2016$1.6
 $0.5
 $2.1
Restructuring charges0.4
 —
 0.4
Cash payments(1.7) (0.5) (2.2)
        Non-cash charges(0.1) $—
 (0.1)
Reorganization liability at September 30, 2017$0.2
 $—
 $0.2
11.13.Income Taxes


Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company’s intention is to permanently reinvest its foreign earnings outside


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

the United States.  As a result, the effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.

The Tax Cut and Jobs Act (“Tax Act”) enacted on December 22, 2017 includes two sets of provisions aimed at preventing or decreasing U.S. tax base erosion - the global intangible low-taxed income (“GILTI”) provisions and the base erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company included the current year impact of the GILTI tax and BEAT in the estimated annual effective tax rate calculation.

The Company recognized income tax benefitexpense for the three and nine months ended September 30, 2017 was lower thanMarch 31, 2020 on the amount derived by applyingyear-to-date pre-tax income. The deviation from the federal statutory tax rate of 35%21% is primarily dueattributable to recognizing the provisions for GILTI plus the geographical mix of earnings, permanent differences and discrete items recognized in the period.items. The income tax expense for the three and nine months ended September 30, 2016March 31, 2020 was higher than the amount derived by applying the federal statutory tax rate of 35%21% primarily due to GILTI and discrete items.

The Company recognized income tax benefit for the three months ended March 31, 2019 on the year-to-date pre-tax loss. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions of BEAT and GILTI plus the geographical mix of earnings and permanent differences. The income tax benefit for the three months ended March 31, 2019 was higher than the amount derived by applying the federal statutory tax rate of 21% primarily due to discrete items as well as the impact of state taxes.items.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since 20132016 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years.


As of January 1, 2017,At December 31, 2019, the Company adopted ASU 2016-09. The Company elected to change its accounting policy to account for forfeitures as they occur under the new standard. The change was applied on a modified retrospective basis with a cumulative effect adjustment recorded to increase non-current deferred tax assets by $0.5 million as of January 1, 2017. Excess tax benefits for share-based payments are now included in net cash used in operating activities rather than net cash used in financing activities. The changes have been applied prospectively in accordance with ASU 2016-09 and prior periods have not been adjusted.

Amendments related to accounting for excess tax benefits and shortfalls have been adopted prospectively, resulting in recognition of excess tax benefits and shortfalls as part of income tax expense rather than additional paid-in capital. For the three and nine months ended September 30, 2017, the Company recognized $0.0 and $0.9 million of income tax expense from shortfalls associated with vesting and exercises of equity awards.

The Company wrote-off approximately $0.4 million and $1.5 million of deferred tax assets due to the expiration of shared-based awards and recognized as discrete expense during the three and nine months ended September 30, 2017. During 2016, deferred tax assets written-off due to the expiration of share-based awards were recognized as a reduction in additional paid-in capital.

During the nine months ended September 30, 2017, the Company corrected the deferred tax asset balance associated with share-based compensation.  In 2015 and 2016, the Company incorrectly recorded excess share-based compensation of approximately $2.6 and $4.0 million. This excess share-based compensation expense resulted inhad gross deferred tax assets of approximately $2.5 million being erroneously recorded in the consolidated balance sheet at December 31, 2016. The Company has determined these amounts are immaterial to the quarterly and annual periods in 2015, 2016 and 2017.  In addition to correcting the deferred tax balance, the Company reclassified approximately $6.5 million from additional paid-in-capital to accumulated deficit to correct for the excess share-based compensation expense recorded in 2015 and 2016. 

At December 31, 2016, the Company had deferred tax assets of $169.9$135.0 million, of which $71.0$64.1 million related to net operating loss carryforwards. In conjunction with the adoption of ASU 2016-09 and Topic 606, a cumulative effect adjustment was recorded to increase deferred tax assets by $0.5 million for ASU 2016-09 and decrease deferred tax assets by $70.3 million for Topic 606 as of January 1, 2017. The majority of the Company's carryforwards were generated in 2013, 2014 and 2015 when the Company incurred substantial expenses related to the restatement.2016. The Company expects its business growth contracted for under the Ascension A&R MPSA willto be profitable, and allowallowing the Company to utilize its NOL carryforwardscarryforward and other deferred tax assets. Accordingly, the Company believes that it is more likely than not that the remaining deferred tax assets will be realized. Should the Company not operationally execute as expected, and the growth in the Ascension business not be as profitable as expected, such realizability assessment may change.
12.14. 8.00% Series A Convertible Preferred Stock

18



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

At the close of the Transaction on February 16, 2016 (as described in Note 1), the Company issued to the Investor: (i) 200,000 shares of Preferred Stock, for an aggregate price of $200 million, and (ii) a warrant with a term of ten years to acquire up to 60 million shares of common stock, par value $0.01 per share (“common stock”), at an exercise price of $3.50 per share, on the terms and subject to the conditions set forth in the Warrant Agreement (“Warrant”). The Preferred Stock is immediately convertible into shares of common stock.

During the twelve months ended December 31, 2016, the Company incurred direct and incremental expenses of $21.3 million (including $14.0 million in closing fees paid to the Investor) relating to financial advisory fees, closing costs, legal expenses and other offering-related expenses in connection with the Transaction. These direct and incremental expenses reduced the carrying amount of the Preferred Stock. In connection with the issuance of the Preferred Stock, a beneficial conversion feature of $48.3 million was recognized. Since the Preferred Stock is presently convertible into common stock, this amount was subsequently accreted to the carrying amount of the Preferred Stock, and treated as a deemed preferred stock dividend in the calculation of earnings per share.is held by a related party, TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the “Investor”).

Dividend Rights

The holders of the Preferred Stock are entitled to receive cumulative dividends January 1, April 1, July 1 and October 1 of each year (dividend payment dates), which commenced on April 1, 2016, at a rate equal to 8% per annum (preferred dividend) multiplied by the liquidation preference per share, initially $1,000 per share adjusted for any unpaid cumulative preferred dividends. For the first seven years after issuance, the dividends on the Preferred Stock will be paid-in-kind. As of September 30, 2017, the Company had accrued dividends of $4.5 million associated with the Preferred Stock, which was paid in additional shares of Preferred Stock in October 2017.

Conversion Features

Each share of the Preferred Stock may be converted to common stock on any date at the option of the holder into the per share amount (as defined in the Certificate of Designations of the 8.00% Series A Convertible Preferred Stock (the "Series A COD")). Fractional shares resulting from any conversion will be rounded to the nearest whole share.

Redemption Rights

Since the redemption of the Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Preferred Stock is redeemable at the option of the holders upon a fundamental change (as defined in the Series A COD) and is redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company's control, the Company has classified the Preferred Stock in mezzanine equity on the Consolidated Balance Sheets. In the event the Company believes that redemption of the Preferred Stock is probable, the Company would be required to accrete changes in the carrying value to the redemption value over the period until the expected redemption date.

Voting Rights

Each holder of the Preferred Stock is entitled to vote with the common stock on an as-converted basis, and has full voting rights and powers equal to the voting rights and powers of the holders of common stock.


The following summarizes the Preferred Stockpreferred stock activity for the ninethree months ended September 30, 2017:March 31, 2020 (in millions, except per share data):

Preferred Stock
Shares Issued and OutstandingCarrying Value
Balance at December 31, 2019266,529  $229.1  
Dividends paid/accrued dividends5,330  5.4  
Balance at March 31, 2020271,859  $234.5  


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

  Preferred Stock
  Shares Issued and Outstanding Carrying Value
Balance at December 31, 2016 210,160
 $171.6
Dividends paid/accrued dividends 12,863
 13.1
Balance at September 30, 2017 223,023
 $184.7

13.15.Earnings (Loss) Per Share
Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the Preferred Stock,preferred stock, by the weighted average number of common shares outstanding during the period. As the Preferred Stockpreferred stock participates in dividends alongside the Company’s common stock (per their participating dividends), the Preferred Stockpreferred stock would constitute participating securities under ASC 260-10 and are applied to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of RSAs, RSUs, PBRSUs and Preferred Stock.shares issuable upon conversion of preferred stock.
Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
19
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Basic EPS:        
Net income (loss) $(3.6) $37.4
 $(18.6) $164.0
Less dividends on preferred shares (4.4) (4.1) (13.1) (58.5)
Less income allocated to preferred shareholders —
 (15.1) —
 (43.4)
Net income (loss) available/(allocated) to common shareholders - basic $(8.0) $18.2
 $(31.7) $62.1
Diluted EPS:        
Net income (loss) (3.6) 37.4
 (18.6) 164.0
Less dividends on preferred shares (4.4) (4.1) (13.1) (58.5)
Less income allocated to preferred shareholders —
 (15.0) —
 (43.1)
Net income (loss) available/(allocated) to common shareholders - diluted $(8.0) $18.3
 $(31.7) $62.4
Basic weighted-average common shares 102,225,422
 100,934,561
 102,022,129
 99,870,685
Add: Effect of dilutive securities —
 1,241,719
 —
 1,147,765
Diluted weighted average common shares 102,225,422
 102,176,280
 102,022,129
 101,018,450
Net income (loss) per common share (basic) $(0.08) $0.18
 $(0.31) $0.62
Net income (loss) per common share (diluted) $(0.08) $0.18
 $(0.31) $0.62




R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Three Months Ended
March 31,
 20202019
Basic EPS:
Net income (loss)$18.2  $0.2  
Less dividends on preferred shares(5.4) (5.0) 
Less income allocated to preferred shareholders(6.2) —  
Net income (loss) available/(allocated) to common shareholders - basic$6.6  $(4.8) 
Diluted EPS:
Net income (loss)$18.2  $0.2  
Less dividends on preferred shares(5.4) (5.0) 
Less income allocated to preferred shareholders(5.0) —  
Net income (loss) available/(allocated) to common shareholders - diluted$7.8  $(4.8) 
Basic weighted-average common shares114,441,043  109,802,632  
Add: Effect of dilutive equity awards11,893,514  —  
Add: Effect of dilutive warrants43,285,621  —  
Diluted weighted average common shares169,620,178  109,802,632  
Net income (loss) per common share (basic)$0.06  $(0.04) 
Net income (loss) per common share (diluted)$0.05  $(0.04) 
Because of their anti-dilutive effect, 24,808,536525,414 common share equivalents comprised of stock options, RSAs, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2017. 16,706,526 and 12,967,519March 31, 2020.
For the three months ended March 31, 2019, 24,607,310 common share equivalents were excluded for the three and nine months ended September 30, 2016 due to their anti-dilutive effect. Additionally, the Investor's exercisable warrant to acquire up to 60 million shares of the Company's common stock hashave been excluded from the diluted earnings per share calculation because it isof their anti-dilutive effect. Additionally, for all periods presented.the three months ended March 31, 2019, the Investor's and Intermountain's exercisable warrants to acquire up to 60 million and 1.5 million shares, respectively, of the Company's common stock have been excluded from the diluted earnings per share calculation because they are anti-dilutive.

14.
16.Commitments and Contingencies


Legal Proceedings


Other than as described below, the Company is not presently a party to any material litigation or regulatory proceeding and is not aware of any pending or threatened litigation or regulatory proceeding against the Company which, individually or in the aggregate, could have a material adverse effect on its business, operating results, financial condition or cash flows.


On July 22, 2014, the Company was named as a defendant in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Michigan (Anger v. Accretive Health, Inc.), seeking statutory damages, injunctive relief and attorneys’ fees. The primary allegations are that the Company attempted to collect debts without providing the notice required by the Fair Debt Collection Practices Act ("FDCPA") and Michigan Fair Debt Collection Practices Act and failed to abide by the terms of an agreed payment plan in violation of those same statutes. On August 27, 2015, the Court granted in part and denied in part the Company’s motion to dismiss. An amended complaint was filed on November 30, 2015. Discovery was underway, but on July 15, 2016, the court postponed all deadlines in the case as the parties attempted to finalize a confidential agreement in principle to settle the case. On February 23, 2017, the parties reached a settlement in principle and filed the proposed class action settlement with the Court, which conducted a Class Action Fairness Act (CAFA) hearing on whether to approve of the settlement. Members of the putative class were notified of the settlement and were given an opportunity to object or opt-out of the settlement. No objections to the settlement were entered before or at the CAFA hearing on October 4, 2017, and the Court approved the settlement by Order dated October 11, 2017. Accordingly, the Company will pay the $1.3 million settlement amount, less amounts already paid, to a settlement fund to assist members of the class Ascension Michigan ministry patients pay off healthcare debt, to pay for class notice and administration, to pay $15,000 to each of the named class representatives and to reimburse plaintiff’s attorneys’ fees.

In April 2015, the Company was named among other defendants in an employment action brought by a former employee before the Maine Human Rights Commission ("MHRC"), alleging improper termination in retaliation for uncovering alleged Medicare fraud.  The Company filed its response with the MHRC on May 19, 2015 seeking that the Company be dismissed entirely from the action.  On June 23, 2015, the MHRC issued its Notice of Right to Sue and decision to terminate its process with respect to all charges asserted by the former employee. The plaintiff filed a parallel qui tam action in the District of Maine (Worthy v. Eastern Maine Healthcare Systems) making the same allegations, and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees.  The U.S. Department of Justice declined to intervene in the federal court action, and the case was unsealed in April 2015. The Company and other defendants filed motions to dismiss the Third Amended Complaint on March 21, 2016. Those motions were granted with respect to the retaliation claims, but denied with respect to the False Claims Act claims by the federal district court in January 2017. The parties mediated the case before the Magistrate Judge on July 24, 2017 and reached an agreement in principle, and subsequently resolved an additional contingency in order to settle the case. The settlement, which is now finalized, did not have a material impact to the consolidated financial statements.

In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS clients and a place holder, John Doe hospital, representing all PAS clients (USAU.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The SecondThird Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, twice, and the U.S. AttorneysAttorney declined to intervene. The Company filed a motion to dismiss the Second Amended Complaint on July 29, 2016. On March 22, 2017, the district court dismissed all claims against all hospital defendants other than Medstar Inc.’s WHC, and dismissed all claims related to TriCare-related episodes of care. The parties are currently engaged in an initial discovery phase in which the plaintiff has sought broad discovery and brought a motion to compel discovery relating to the defendants that have been dismissed. The motion was denied and the Company believes that it has meritorious defenses to all claims in the case and
20


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
intends to vigorously defend itself against these claims. The Company and plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.
15.17. Related Party Transactions
As a result ofThis note encompasses transactions between Ascension and the closing of the Transaction on February 16, 2016 andAscension's ownership interest in the Investor, Ascension became a related partyCompany pursuant to the Company. See Note 12, 8% Series A Convertible Preferred Stock, for additional information.
The Company provides RCMamended and PAS services to Ascension. The execution of the A&R MPSA, as discussed in Note 1, Business Description and Basis of Presentation, was a contractual settlement agreement of the priorrestated Master Professional Services Agreement between the Company(“A&R MPSA”), including all supplements, amendments and Ascension. The Company recorded revenue of $22.7 million and $366.2 millionother documents entered into in connection therewith. For further details on the Company's agreements with theseAscension, see Note 1 and Note 18 of the Company's 2019 Form 10-K.
Net services for the three and nine months ended September 30, 2016. For the three and nine months ended September 30, 2017, the Company recorded revenue of $112.2 million and $275.3 million from services provided to Ascension respectively.included in the Company’s consolidated statements of operations were (in millions):
At September 30, 2017,
 Three Months Ended March 31,
 20202019
Ascension$208.4  $181.8  
Amounts included in the Company had $20.1 million in current portion of customer liabilitiesCompany's consolidated balance sheets for a related party, consisting of $17.6 million, $0.3 million and $2.2 million in current accrued service costs, refund liabilities and deferred revenue. The Company had $9.1 million in non-current portion of customer liabilities for a related party related to non-current deferred revenue as of September 30, 2017. At December 31, 2016, the Company had $14.2 million in current portion of customer liabilities for a related party, consisting of $13.2 million in current accrued service costs and $1.0 million in current customer deposits. The Company had $110.0 million in non-current portion of customer liabilities for a related party related to deferred customer billings as of December 31, 2016. At September 30, 2017 and December 31, 2016, the Company had $18.0 million and $1.8 million in accounts receivable with Ascension, respectively.excluding debt, are (in millions):
As part of the transition of Ascension personnel to the Company in conjunction with the A&R MPSA, the Company has agreed to reimburse Ascension for certain severance and retention costs related to certain Ascension employees who will not be transitioned to the Company.  As of September 30, 2017 and December 31, 2016, the Company had $0.7 million and $1.7 million in accrued compensation and benefits related to these costs, respectively.
 March 31, 2020December 31, 2019
Accounts receivable, net of $0.1 million and $0.0 million allowance - related party$36.3  $30.8  
Current portion of customer liabilities$31.0  $34.1  
Non-current portion of customer liabilities$19.3  $18.6  
Total customer liabilities$50.3  $52.7  
As
Since Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's sharedglobal business services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.

16.As of December 31, 2019, $0.0 million of the subordinated notes were due to Ascension and TowerBrook. The related party subordinated notes, along with a $2.2 million prepayment penalty, were repaid upon execution of the Credit Agreement on June 26, 2019. For the three months ended March 31, 2020 and 2019, $0.0 million and $3.7 million, respectively, of interest expense was attributable to related parties.
18. Deferred Contract Costs
One-time, non-recurringCertain costs associated with the initial phases of customer contracts and the Ascension A&R MPSA and with therelated transition of additional Ascensioncustomer hospitals and physician groups are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the A&R MPSA,corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations under the A&R MPSA in the future, and are expected to be recovered through the margins realized underrealized. The following table summarizes the A&R MPSA. At September 30, 2017, the Company had $10.6 million in totalbreakout of deferred contract costs and $4.8 million at December 31, 2016.(in millions):



21



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

March 31, 2020December 31, 2019
Prepaid expenses and other current assets$4.2  $4.0  
Other assets21.1  20.8  
Total deferred contract costs$25.3  $24.8  
Of the $10.6 million in deferred eligible costs, $1.3 million is included in prepaid expenses and other current assets and $9.3 million is included in other assets in the accompanying consolidated balance sheets. As of December 31, 2016, deferred eligible costs were included in the other current assets in the accompanying consolidated balance sheets.
The associated assets are amortized as services are transferred to the customer over the remaining life of the contract.contracts. For the three and nine months ended September 30, 2017,March 31, 2020 and 2019, total amortization was $0.2$1.1 million and $0.6$0.7 million, respectively, and there were no0 associated impairment losses. For thethree and nine monthsended September 30, 2016, $1.9 million and $2.8 million amounts had been capitalized, respectively, and no amounts had been amortized.
17.19.Segments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with how its business activities are managed and evaluated. All of the Company’s significant operations are organized around the single business of providing end-to-end management services of revenue cycle operations for U.S.-based hospitals and other medicalhealthcare providers. Accordingly, for purposes of segment disclosures, the Company has only one reporting1 reportable segment. All of the Company’s net services revenue and trade accounts receivable are derived from healthcare
Healthcare providers domiciled in the United States.
Hospital systems affiliated with Ascension have accounted for a significant portion of the Company’s net services revenue each year since the Company’s formation. For the three months ended September 30, 2017March 31, 2020 and 2016,2019, net services revenue from hospitalshealthcare organizations affiliated with Ascension accounted for 91%65% and 18% of the Company's total net services revenue, respectively. For the nine months ended September 30, 2017 and 2016, net services revenue from hospitals affiliated with Ascension accounted for 89% and 75%66% of the Company's total net services revenue, respectively. The loss of customers within the Ascension health system wouldcould have a material adverse impact on the Company’s operations. For the three months ended March 31, 2020 and 2019, Intermountain Healthcare accounted for 15% and 15% of the Company's total net services revenue, respectively.
As of September 30, 2017March 31, 2020 and 2016,December 31, 2019, the Company had a concentration of credit risk with hospitals affiliated with Ascension accounting for 70%39% and 31%37% of accounts receivable, respectively.


20. Derivative Financial Instruments

The Company utilizes cash flow hedges to mitigate its currency risk arising from its global delivery resources and to reduce variability in interest cash flows from its outstanding debt. As of March 31, 2020, the Company has recorded $2.1 million and $3.3 million of existing losses in accumulated other comprehensive income for the foreign currency hedges and interest rate swaps, respectively. The Company estimates that $2.1 million and $1.8 million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months for the foreign currency hedges and interest rate swaps, respectively. The amounts related to foreign currency hedges that were reclassified into cost of services were a net loss of $0.1 million during the three month period ended March 31, 2020, and a net gain of $0.1 million during the three month period ended March 31, 2019. The amounts related to the interest rate swaps that were reclassified into interest expense were a net gain of $0.1 million and $0.0 million during the three month periods ended March 31, 2020 and March 31, 2019, respectively.

The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of March 31, 2020, the Company’s currency forward contracts have maturities extending no later than December 31, 2020. The Company's interest rate swaps extend no later than August of 2022.

As of March 31, 2020, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $40.1 million and $200.0 million, respectively. As of December 31, 2019, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $52.6 million and $100.0 million, respectively. As of March 31, 2020, the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.
22


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
21. Subsequent Events

SCI Solutions, Inc. Acquisition

On April 1, 2020, the Company completed the previously announced acquisition of SCI, pursuant to a stock purchase agreement dated as of January 9, 2020 (the “Stock Purchase Agreement”), by and among the Company, Seller Blocker and Seller.

At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of the Seller Blocker, which owns all of the issued and outstanding equity interests of SCI. The aggregate purchase price consisted of $190 million in cash, which was adjusted pursuant to the Stock Purchase Agreement for estimated cash and working capital at the closing of the transaction, and is subject to a post-closing adjustment process. The Company will also be required to make an additional earn-out payment of up to $10 million if certain financial and operational targets are met within twelve months following the closing date.

The Incremental Term Loan was drawn substantially concurrently with the acquisition of SCI on April 1, 2020. The proceeds of the Incremental Term Loan were used to fund the purchase price for SCI and related expenses. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement. For further details on our debt agreements, refer to Note 10, Debt.
23



Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “R1,” “the Company,” “we,” “our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes. Also refer to Note 1 of our consolidated financial statements.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, that involve substantial risks and uncertainties. These statements are often identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” "designed",“designed,” “may,” “plan,” “predict,” “project,” “would” and similar expressions or variations. These forward-looking statements include, among other things, statements about the potential impacts of the COVID-19 pandemic, our strategic initiatives, our capital plans, our costs, our ability to successfully deliver on our commitments to our customers, our ability to deploy new business as planned, our ability to successfully implement new technologies, our future financial performance, and our liquidity. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the severity, magnitude and duration of the COVID-19 pandemic; responses to the pandemic by the government and healthcare providers and the direct and indirect impacts of the pandemic on our customers and personnel; the disruption of national, state and local economies as a result of the pandemic; the impact of the pandemic on our financial results, including possible lost revenue and increased expenses; as well as those discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and elsewhere in this Report, as well asand those set forth in Part I, Item 1A of the 20162019 Form 10-K as well asand our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Our Business
We areR1 is a leading provider of RCM and PAStechnology-enabled revenue cycle management (“RCM”) services to healthcare providers, including health systems and hospitals, physicians groups, and municipal and private emergency medical service (“EMS”) providers. WeOur services help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician and staff satisfaction for our customers.
While we cannot control the changes in the regulatory environment imposed onWe achieve these results for our customers we believe that our role becomes increasingly more important to our customers as macroeconomic, regulatory andby managing healthcare industry conditions continue to impose financial pressure on healthcare providers to manage theirproviders’ revenue cycle operations, effectively and efficiently.
Our primary service offering consists of end-to-end RCM, which encompassesencompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections.collections from patients and payers. We deploydo so by deploying a unique operating model that leverages our extensive healthcare site experience, innovative technology and process excellence. We assist our RCM customers in managing their revenue cycle operating costs while simultaneously increasing the portion of the maximum potential services revenue they receive. Together, these benefits can generate significant and sustainable improvements in operating margins and cash flows for our customers.
Our primary service offering consists of end-to-end RCM services for health systems, hospitals, physician groups, and EMS providers, which we deploy through a co-managed relationship or an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused
24


management, subject matter specialists, proprietary technology solutions and other resources. Under anthe operating partner relationship,model, we provide comprehensiverecord higher revenue cycle infrastructureand expenses due to providers, includingthe fact that almost all of the revenue cycle personnel technology,are our employees and process workflow. more third-party vendor contracts are controlled by us. Under the co-managed model, the majority of the revenue cycle personnel and more third-party vendor contracts remain with the customer and those costs are netted against our co-managed revenue. For the three months ended March 31, 2020 and 2019, substantially all of our net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.

We also offer modular services, allowing clientscustomers to engage us for only specific components of our end-to-end RCM service offering.offering, such as physician advisory services (“PAS”), practice management (“PM”), revenue integrity solutions (“RIS”), patient experience, coding management, and business office. Our PAS offering complements our RCM offering by strengthening our customer’s complianceassists healthcare organizations in complying with certain third-party payer requirements and limiting denials of claims. For example, our PAS offering helps customers determineregarding whether to classify a hospital visit as an in-patient or an out-patient observation case for billing purposes. Our PM services offer administrative and operational support to allow healthcare providers to focus on delivering high quality patient care and outsource non-core functions to us. Our RIS offering includes charge capture, charge description master (“CDM”) maintenance and pricing services that help providers ensure they are capturing the maximum net compliant revenue for services delivered. Our patient experience offering helps patients manage their data in one easy-to-use environment, enabling eligibility validation and insurance plan attribution, demographic accuracy, meeting authorization and referral requirements, medical necessity validation, and patient out-of-pocket cost estimation. Our coding management offering drives performance, quality, and consistent results via business intelligence and analysis, human capital management, an accountability framework, and a quality management program. Our business office service can help providers with the entire billing function or to specifically recoup revenue that may otherwise be lost by focusing skilled resources in lower priority areas with significant revenue potential.

Once implemented, our technology solutions, processes and services are deeply embedded in our customers’ day-to-day revenue cycle operations. We believe our service offerings are adaptable to meet an evolving healthcare regulatory environment, technology standards and market trends.
We operate our business as a single segment configured with our significant operations and offerings organized around the business of providing end-to-end RCM services to U.S.-based hospitals and otherrevenue cycle operations for healthcare providers.
Business UpdateSCI Solutions, Inc. Acquisition



On February 16, 2016,January 9, 2020, we entered into a Stock Purchase Agreement with Clearsight Intermediate Holdings, Inc. (“Seller Blocker”) and Clearsight Group Holdings, LLC (the “Seller”) providing for the A&R MPSA with Ascension for purchase (the “SCI Acquisition”) by us from the Seller of all of the issued and outstanding equity interests of Seller Blocker, which owns all of the issued and outstanding equity interests of scheduling.com, Inc. d/b/a 10-year term, becoming the
exclusiveSCI Solutions, Inc. (“SCI”). SCI is a leading provider of RCMsoftware-as-a-service (“SaaS”)-based scheduling and PAS servicespatient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to Ascension hospitals that execute supplement agreements with us. We started onboardingall market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. On April 1, 2020, we completed the first phaseacquisition of new hospitalsSCI. The aggregate purchase price consisted of $190 million in mid-2016,cash, which was followed byadjusted pursuant to the second phase of new hospitals in mid-2017. We expectStock Purchase Agreement for estimated cash and working capital at the final phase of hospitals to be onboarded in mid-2018. The A&R MPSA is structured as an operating partner model, whereby a significant number of Ascension’s revenue cycle employees become our employees. As a result, our employee count has increased by over 5,000 employees since mid-2016. The operating partner model also requires the transitionclosing of the non-payroll expenses supportingtransaction, and is subject to a hospital’s revenue cycle operationspost-closing adjustment process. We will also be required to become direct expensesmake an additional earn-out payment of up to $10 million if certain financial and operational targets are met within twelve months following the closing date.

On June 26, 2019, we entered into a senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and the lenders named therein for senior secured credit facilities consisting of a $325.0 million senior secured term loan facility (the “Senior Term Loan”) and a $100.0 million senior secured revolving credit facility. On March 20, 2020, we entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $191.1 million incremental
25


delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.

The Incremental Term Loan was drawn substantially concurrently with the acquisition of SCI. The proceeds of the Company. New hospitals onboarded, alongIncremental Term Loan were used to fund the purchase price for SCI and related expenses. The Incremental Term Loan has terms consistent with direct control of payroll and non-payroll expenses, have been the primary driversthose of the growth in our revenueSenior Term Loan, including with respect to interest, maturity, amortization and costprepayments and has the same affirmative and negative covenants and events of services in 2017.default as those applicable to the Senior Term Loan under the Credit Agreement.


Coronavirus Pandemic

In May 2017,December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in Wuhan, China and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The United States, where we announcedare headquartered and where the expansionmajority of our relationship with Ascension. The expanded relationship addscustomers’ operations are based, has declared a health systemstate of emergency. Governments around the world have enacted temporary closures of businesses, issued stay-at-home orders, and taken other restrictive measures in response to the COVID-19 pandemic. Within the United States, our company has been designated an essential business, which was acquired by Ascension after the signing of the A&R MPSA and increases the scope of our contract by adding physician RCM services for all Ascension ministries in Wisconsin. We expect to begin onboarding this expanded scope of business in the fourth quarter of 2017.
By the end of 2017, we expect to have onboarded or started the onboarding process for more than 85% of the new Ascension hospitals under the A&R MPSA. Consequently, we believe we are in a position to meaningfully increase our sales and marketing efforts to win new business. In July 2017, we launched a portfolio of five modular solutions to complement our end-to-end RCM offerings. The sophistication of our capabilities and additional flexibility for health systems to contract withallows us for specific components of the revenue cycle should position us favorably to win new business. Additionally, we also announced the appointment of a new chief commercial officer in August 2017. In addition to organic growth, we also expect to continue to serve our customers.

The COVID-19 pandemic has not had a significant impact on our results of operations for the three months ended March 31, 2020. However, given the ongoing challenges associated with efforts to contain the spread of COVID-19 and related business impact for our customers, we initiated a number of actions in March 2020 to ensure (1) the health and safety of our workforce and (2) uninterrupted and, in many respects, expanded support for our customers and the patients and communities they serve. Our efforts to date include: restricting all non-essential domestic and international travel; repositioning more than 15,000 global employees to a work-from-home operating environment; offering free COVID-19 testing; expanding paid time off for employees impacted by low work volumes; providing appreciation bonuses to our front-line, patient facing services employees; launching a new remote patient registration tool to minimize contact between patients and registration staff and conserve personal protective equipment; leveraging capabilities acquired via our SCI acquisition to assist customers with processes to restart elective procedure scheduling; offering in-depth regulatory analysis and guidance for our customers given numerous changes to healthcare regulatory federal and state rules; and providing customers with operational best practices for implementation and revenue cycle management of telehealth services.

In light of the uncertainties caused by the COVID-19 pandemic, we have implemented measures to control costs and cash spending, including freezing hiring for non-critical roles, reducing capital expenditures, eliminating discretionary spending, and suspending our 401(k) match and non-essential travel for the remainder of 2020. We are deferring our payroll tax remittances to the federal government as allowed under the CARES Act. We have also accelerated a corporate cost savings initiative that was originally planned for the fourth quarter. We have conducted a comprehensive review of our cost structure and capital expenditure needs to identify additional potential opportunities to further reduce cost structure and preserve our liquidity. As we navigate the uncertainties of the pandemic, our focus has been on balancing long-term growth opportunities with short-term challenges.

Given the length and extent of numerous shelter-in-place orders and restrictions, there was a decrease in patient volumes for our customers starting in mid-March 2020. We have continued to employ our workforce that is idled due to lower patient volumes because it is important to have that capacity available to serve our customers as volumes return.

The impact of the COVID-19 pandemic is fluid and continues to evolve. We cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. However, we continue to assess its impact on our business and are actively pursue acquisitionsmanaging our response. For further details on the potential impact of COVID-19 on our business, refer to complement our existing capabilities and further enhance our market presence.“Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

CONSOLIDATED RESULTS OF OPERATIONS
26


The following table provides consolidated operating results and other operating data for the periods indicated:
 Three Months Ended March 31,2020 vs. 2019
Change
 20202019Amount%
 (In millions except percentages)
Consolidated Statement of Operations Data:
Net operating fees$280.9  $241.3  $39.6  16 %
Incentive fees16.8  12.2  4.6  38 %
Other22.8  22.4  0.4  2 %
Net services revenue320.5  275.9  44.6  16 %
Operating expenses:
Cost of services253.9  237.2  16.7  7 %
Selling, general and administrative25.5  22.5  3.0  13 %
Other expenses8.7  8.8  (0.1) (1)%
Total operating expenses288.1  268.5  19.6  7 %
Income (loss) from operations32.4  7.4  25.0  338 %
Net interest (expense) income3.8  10.2  (6.4) (63)%
Net income (loss) before income tax provision28.6  (2.8) 31.4  n.m.  
Income tax provision (benefit)10.4  (3.0) 13.4  n.m.  
Net income (loss)$18.2  $0.2  $18.0  n.m.  
 Three Months Ended September 30, 2017 vs. 2016
Change		 Nine Months Ended September 30, 2017 2017 vs. 2016
Change
 2017 2016 Amount % 2017 2016 Amount %
 (In millions except percentages)
Consolidated Statement of Operations Data:            
RCM services: net operating fees$104.6
 $49.0
 $55.6
 113.5 % 255.4
 300.3
 $(44.9) (15.0)%
RCM services: incentive fees7.5
 68.5
 (61.0) (89.1)% 20.2
 166.5
 (146.3) (87.9)%
RCM services: other2.8
 3.8
 (1.0) (26.3)% 9.8
 8.3
 1.5
 18.1 %
Other service fees8.3
 4.2
 4.1
 97.6 % 24.1
 11.3
 12.8
 113.3 %
Total net services revenue123.2
 125.5
 (2.3) (1.8)% 309.5
 486.4
 (176.9) (36.4)%
Operating expenses:               
Cost of services111.8
 47.4
 64.4
 135.9 % 289.1
 137.6
 151.5
 110.1 %
Selling, general and administrative15.1
 16.2
 (1.1) (6.8)% 41.6
 58.4
 (16.8) (28.8)%
Other1.4
 0.5
 0.9
 180.0 % 2.6
 20.0
 (17.4) (87.0)%
Total operating expenses128.3
 64.1
 64.2
 100.2 % 333.3
 216.0
 117.3
 54.3 %
Income (loss) from operations(5.1) 61.4
 (66.5) (108.3)% (23.8) 270.4
 (294.2) (108.8)%
Net interest income—
 0.1
 (0.1) (100.0)% 0.1
 0.2
 (0.1) (50.0)%
Net income (loss) before income tax provision(5.1) 61.5
 (66.6) (108.3)% (23.7) 270.6
 (294.3) (108.8)%
Income tax provision (benefit)(1.5) 24.1
 (25.6) (106.2)% (5.1) 106.6
 (111.7) (104.8)%
Net income (loss)$(3.6) $37.4
 $(41.0) (109.6)% (18.6) 164.0
 $(182.6) (111.3)%



n.m. - not meaningful  
Use of Non-GAAP Financial Information
As of January 1, 2017, the Company adopted Topic 606, Revenue from Contracts with Customers (“Topic 606”) and thus for the three and nine months ended September 30, 2017, the Company followed the guidance under Topic 606. Under the newly adopted guidance, revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contract term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.
For periods prior to 2017, we typically invoiced customers for base fees and incentive fees on a quarterly or monthly basis, and typically received cash from customers on a similar basis. For GAAP reporting purposes, we only recognized those net operating fees and incentive fees as net services revenue to the extent that all the criteria for revenue recognition were met, which was generally upon contract renewal, termination or other contractual agreement event. As such, net operating and incentive fees were typically recognized for GAAP purposes in periods subsequent to the periods in which the services are provided. Therefore, our net services revenue and other items in our GAAP consolidated financial statements typically included the effects of billings and collections from periods prior to the period in which revenue was recognized.
We supplement our GAAP consolidated financial statements with the following non-GAAP financial measures: gross cash generated from customer contracting activities (2016), net cash generated from customer contracting activities (2016) andmeasure adjusted EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees. The non-GAAP measures of gross and net cash generated from customer contracting activities, that were utilized by the Company in 2016, are the metrics most comparable to net services revenue and net income, respectively. The Company will provide these metrics for comparability in light of the differences in our revenue recognition year over year.
Selected Non-GAAP Measures
Gross and Net Cash Generated from Customer Contracting Activities

Gross and net cash generated from customer contracting activities reflects the change in the deferred customer billings, relative to GAAP net services revenue. Deferred customer billings include the portion of both (i) invoiced or accrued net operating fees and (ii) cash collections of incentive fees, in each case, that have not met our revenue recognition criteria. Deferred customer billings are included in the detail of our customer liabilities balance in the consolidated balance sheet. Deferred customer billings are reduced by the amounts of revenue recognized when a revenue recognition event occurs. Gross cash generated from customer contracting activities is defined as GAAP net services revenue, plus the change in deferred customer billings. Accordingly, gross cash generated from customer contracting activities is the sum of (i) invoiced or accrued net operating fees, (ii) cash collections on incentive fees and (iii) other services fees. Net cash generated from customer contracting activities is defined as adjusted EBITDA, plus the change in deferred customer billings.We anticipate the use of these non-GAAP measures to be limited to the year and quarters ended in 2017. Beginning in 2018, there will be two comparable periods of GAAP metrics under Topic 606 and we expect disclosure of these metrics to not be necessary on a go forward basis.
Gross and net cash generated from customer contracting activities include invoices issued to customers that may remain uncollected or may be subject to credits, and cash collected may be returned to our customers in the form of concessions or other adjustments. Customer concessions and other adjustments have occurred in the past and we cannot determine the likelihood that they will again occur in the future.


These non-GAAP measures are used throughout this Quarterly Report on Form 10-Q including in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income,income/expense, income tax provision,provision/benefit, depreciation and amortization expense, share-based compensation expense, reorganization-related expense arising from debt extinguishment, strategic initiatives costs, transitioned employee restructuring expense, digital transformation office expenses, and certain other items. Prior to 2017,items which are detailed in the use of adjusted EBITDA to measure operating and financial performance was limited by our revenue recognition criteria, pursuant to which GAAP net services revenue was recognized at the end of a contract or "other contractual agreement event". As such, adjusted EBITDA did not adequately match corresponding cash flows resulting from customer contracting activities.table below.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
Gross and net cash generated from customer contracting activities include invoiced or accrued net operating fees, and collected incentive fees which may be subject to adjustment or concession prior to the end of a contract or "other contractual agreement event";
Gross and net cash generated from customer contracting activities include progress billings on incentive fees that have been collected for a number of our RCM contracts. These progress billings have, from time-to-time been subject to adjustments, and the fees included in these non-GAAP measures may be subject to adjustments in the future;
•Adjusted EBITDA and net cash generated from customer contracting activities dodoes not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA and net cash generated from customer contracting activities dodoes not reflect share-based compensation expense;
•Adjusted EBITDA and net cash generated from customer contracting activities dodoes not reflect income tax expenses or cash requirements to pay taxes;
27


•Adjusted EBITDA and netdoes not reflect interest expenses or cash generated from customer contracting activities dorequired to pay interest;
•Adjusted EBITDA does not reflect certain Otherother expenses which may require cash payments;
•Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither adjusted EBITDA nor net cash generated from customer contracting activitiesdoes not reflect cash requirements for such replacements or other purchase commitments, including lease commitments; and
•Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table represents a reconciliation of gross cash generated from customer contracting activities to net services revenue, the most comparable GAAP measure, for each of the periods indicated:


  Three Months Ended September 30, 2017 vs. 2016
Change		 Nine Months Ended September 30, 2017 2017 vs. 2016
Change
  2017 2016 Amount % 2017 2016 Amount %
  (In millions except percentages)
RCM services: net operating fees $104.6
 $49.0
 $55.6
 113.5 % 255.4
 300.3
 $(44.9) (15.0)%
RCM services: incentive fees 7.5
 68.5
 (61.0) (89.1)% 20.2
 166.5
 (146.3) (87.9)%
RCM services: other 2.8
 3.8
 (1.0) (26.3)% 9.8
 8.3
 1.5
 18.1 %
Other services fees 8.3
 4.2
 4.1
 97.6 % 24.1
 11.3
 12.8
 113.3 %
Net services revenue 123.2
 125.5
 (2.3) (1.8)% 309.5
 486.4
 (176.9) (36.4)%
Change in deferred customer billings (non-GAAP) (1) n.a.
 (65.8) n.m.
 n.m.
 n.a. (347.5) n.m.
 n.m.
Gross cash generated from customer contracting activities (non-GAAP) n.a.
 $59.7
 n.m.
 n.m.
 n.a
 138.9
 n.m.
 n.m.
n.m. - not meaningful
n.a. - Due to the adoption of Topic 606 as of January 1, 2017, the non-GAAP measure of gross cash generated from customer contracting activities, that was utilized by the Company in 2016, is not applicable for 2017. Gross cash generated from customer contracting activities has been provided for the three and nine months ended September 30, 2016 as it is the most comparable metric to net services revenue for the three and nine months ended September 30, 2017.

(1)Deferred customer billings include the portion of both (i) invoiced or accrued net operating fees and (ii) cash collections on incentive fees, in each case, that have not met our revenue recognition criteria. Deferred customer billings are included in the detail of our customer liabilities account in the consolidated balance sheet. Deferred customer billings are reduced by revenue recognized when revenue recognition occurs. Change in deferred customer billings represents the net change in the cumulative net operating fees and incentive fees that have not met revenue recognition criteria under Topic 605.
The following table represents a reconciliation of adjusted EBITDA and net cash generated from customer contracting activities to net income (loss), the most comparable GAAP measure, for each of the periods indicated:
 Three Months Ended March 31,2020 vs. 2019
Change
 20202019Amount%
 (In millions except percentages)
Net income (loss)$18.2  $0.2  $18.0  n.m.  
  Net interest expense (income)3.8  10.2  (6.4) (63)%
  Income tax provision (benefit)10.4  (3.0) 13.4  n.m.  
  Depreciation and amortization expense15.7  12.9  2.8  22 %
  Share-based compensation expense (1)4.8  4.3  0.5  12 %
Other expenses (2)8.7  8.8  (0.1) (1)%
Adjusted EBITDA (non-GAAP)$61.6  $33.4  $28.2  84 %
  Three Months Ended September 30, 2017 vs. 2016 Change Nine Months Ended September 30, 2017 2017 vs. 2016
Change
  2017 2016 Amount % 2017 2016 Amount %
  (In millions except percentages)
Net income (loss) (3.6) 37.4
 $(41.0) (109.6)% (18.6) 164.0
 $(182.6) (111.3)%
Net interest income —
 (0.1) 0.1
 (100.0)% $(0.1)—
(0.2) 0.1
 (50.0)%
Income tax provision (benefit) (1.5) 24.1
 (25.6) (106.2)% (5.1) 106.6
 (111.7) (104.8)%
Depreciation and amortization expense 4.5
 2.7
 1.8
 66.7 % 11.5
 7.3
 4.2
 57.5 %
Share-based compensation expense (1) 2.4
 4.8
 (2.4) (50.0)% 8.2
 23.5
 (15.3) (65.1)%
Other (2) 1.4
 0.5
 0.9
 180.0 % 2.6
 20.0
 (17.4) (87.0)%
Adjusted EBITDA (non-GAAP) 3.1
 69.4
 (66.3) (95.5)% (1.6) 321.2
 (322.8) (100.5)%
Change in deferred customer billings (non-GAAP) (3) n.a.
 (65.8) n.m.
 n.m.
 n.a.
 (347.5) n.m.
 n.m.
Net cash generated from customer contracting activities (non-GAAP) n.a.
 $3.6
 n.m.
 n.m.
 n.a.
 $(26.4) n.m.
 n.m.
n.m. - not meaningful
n.a. - Due(1)  Share-based compensation expense represents the expense associated with stock options, restricted stock units and restricted stock awards granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 11, Share-Based Compensation, to the adoption of Topic 606 as of January 1, 2017, the non-GAAP measure of gross cash generated from customer contracting activities, that was utilized by the CompanyConsolidated Financial Statements included in 2016, is not applicable for 2017. Net cash generated from customer contracting activities has been providedthis Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016 as it is the most comparable metric to adjusted EBITDA for the three and nine months ended September 30, 2017.

Due to rounding, numbers presented in this table may not add up precisely to the totals provided.
(1)Share-based compensation expense represents the expense associated with stock options, restricted stock units and restricted stock awards granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 9, Share-Based Compensation, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
(2)Other costs consist of the following (in millions):



 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Severance and employee benefits$—
 $(0.3) $0.3
 $2.5
Facility charges—
 —
 —
 0.7
Non-cash share based compensation—
 —
 0.1
 1.8
Reorganization-related—
 (0.3) 0.4
 5.0
Transaction fees (i)—
 —
 —
 13.3
Defined contribution plan contributions (ii)—
 —
 —
 0.9
Restatement costs—
 0.8
 —
 0.8
Acquisition related diligence and costs (iii)1.4
 —
 1.4
 —
Transitioned employees restructuring expense (iv)—
 —
 0.8
 —
Other1.4
 0.8
 2.2
 15.0
Total other$1.4
 $0.5
 $2.6
 $20.0
(i) Costs related to retention payments and legal fees paid in connection with the closing of the Transaction (see Note 12).amounts of share-based compensation expense.
(ii) Additional contributions to(2) Other expenses consist of the Company's defined contribution plan for the year ended December 31, 2016.following (in millions):
(iii)
Three Months Ended March 31,
 20202019
Severance and related employee benefits$1.1  $(1.4) 
Strategic initiatives (1)3.2  3.4  
Transitioned employees restructuring expense (2)(0.1) 4.2  
Digital Transformation Office (3)—  2.5  
Other (4)4.5  0.1  
Total other expenses$8.7  $8.8  

(1) Costs related to evaluating, pursuing and pursuing acquisition opportunitiesintegrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s inorganic growth strategy. Costs include employee time and expenses spent on activities, vendor spend, and severance and retention amounts associated with integration activities.
(iv)(2) As part of the transition of Ascension personnel to the Company in conjunction with the A&R MPSA,under certain operating partner model contracts, the Company has agreed to reimburse, Ascensionor directly pay the affected employees, for certain severance and retention costs related to certain Ascension employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.

(3)Deferred customer billings include the portion of both (i) invoiced or accrued net operating fees and (ii) cash collections on incentive fees, in each case, that have not met our revenue recognition criteria. Deferred customer billings are included in the detail of our customer liabilities account in the consolidated balance sheet. Deferred customer billings are reduced by revenue recognized when revenue recognition occurs. Change in deferred customer billings represents the net change in the cumulative net operating fees and incentive fees that have not met revenue recognition criteria.
(3) Project costs related to the Company's effort to automate its transactional environment.
(4) For the three months ended March 31, 2020, includes $2.6 million of expenses pertaining to appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
Three Months Ended September 30, 2017 March 31, 2020Compared to Three Months Ended September 30, 2016March 31, 2019
Net Services Revenue
Revenue decreased
28


Net services revenue increased by $2.3$44.6 million, or 16%, from $125.5$275.9 million for the three months ended September 30, 2016March 31, 2019, to $123.2 million for three months ended September 30, 2017. As noted above, the Company adopted new guidance on revenue recognition as of January 1, 2017. Under the new revenue recognition standard adopted as of January 1, 2017, we recognize revenue when a performance obligation is satisfied by transferring control over a service to a customer, which is typically over the contact term. For the three months ended September 30, 2017, we recognized $123.2 million in revenue. Prior to the adoption of the new standard, revenue was recognized when all the criteria for revenue recognition was met, which was generally upon contract renewal, termination or other contractual agreement event. For the three months ended September 30, 2016, we recognized $116.8 million in revenue due to contractual agreement events. See Note 6, Revenue Recognition, for further explanation of the Company’s revenue recognition policy related to periods starting on or after January 1, 2017.
Net Services Revenue (2017) (GAAP) compared to Gross Cash Generated from Customer Contracting Activities (2016) (non-GAAP)

Due to the adoption of Topic 606 as of January 1, 2017, the non-GAAP measure of gross cash generated from customer contracting activities, that was utilized by the Company in 2016, is not applicable for 2017. However, we have provided a year-over-year comparison of net services revenue to gross cash generated from customer contracting activities as gross cash generated from customer contracting activities for the three months ended September 30, 2016 is the most comparable metric to net services revenue for the three months ended September 30, 2017.
Net services revenue as compared to gross cash generated from customer contracting activities increased by $63.5 million, or 106.4%, from $59.7$320.5 million for the three months ended September 30, 2016, to $123.2 million for the three months ended September 30, 2017.March 31, 2020. The increase was primarily driven by the onboarding of new Ascension hospitals under the A&R MPSA.The transition to the A&R MPSA for Ascension hospitals served


prior to 2016 also contributed to thea $21.4 million increase due to a change in classification of costs from an offset to net operating fees to costas a result of services due to on-boardingnew customers onboarded since the beginning of employees. These two factors resulted in an2019, a $12.1 million increase in revenue of $59.3 million. In addition, other services fees increased by $4.1organic growth at our customers, and a $4.6 million driven by our PAS business.

Gross cash generated from customer contracting activities is a non-GAAP measure. Please see "Selected Consolidated Financial Data - Selected Non-GAAP Measures" for an explanation of how we calculate and use gross cash generated from customer contracting activities and for its reconciliation to revenue, the most comparable GAAP measure.increase in incentive fees.
Cost of Services
Cost of services increased by $64.4$16.7 million, or 135.9%7%, from $47.4$237.2 million for the three months ended September 30, 2016,March 31, 2019, to $111.8$253.9 million for the three months ended September 30, 2017.March 31, 2020. The increase was primarily driven by costs associated with providing services to new Ascension hospitals. In addition, costs also increased due to the transition to the A&R MPSA, which led to change in classification of costs from an offset to net operating fees to cost of services due to on-boarding of employees (discussed above) and an increase in shared services costs driven by increased volume. These two factors resulted in an increase in costs of $61.5 million. In addition,associated with new customers onboarded in the increase in PAS volume resulted in a $2.2 million increase in cost of services.last 12 months, partially offset by lower compensation costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreasedincreased by $1.1$3.0 million, or 6.8%13%, from $16.2$22.5 million for the three months ended September 30, 2016March 31, 2019, to $15.1$25.5 million for the three months ended September 30, 2017.March 31, 2020. The increase was primarily driven by investments in human resources spend to support scaling business operations, as well as sales and marketing spend as the Company increased its efforts to pursue new business operations.
Other Expenses
Other expenses decreased by $0.1 million, or 1%, from $8.8 million for the three months ended March 31, 2019, to $8.7 million for the three months ended March 31, 2020. This decrease was primarily driven by a $2.2 million decline in stock compensation expense,decreased expenses related to transitioned employee restructuring expenses and the Digital Transformation Office (“DTO”). These decreases were partially offset by an increase in general and administrative costsexpenses related to scaling of the business.
Other Costs
Other costs increased by $0.9 million, from $0.5 million, or 180.0%,COVID-19, including appreciation bonuses for the three months ended September 30, 2016, to $1.4 million for the three months ended September 30, 2017.  The increase in costs was primarily related to acquisition-related diligence expenditures.Company’s front-line employees and pandemic response mobilization efforts, and enterprise resource planning (“ERP”) system implementation costs.
Income TaxesTax Provision (Benefit)
Income tax provision decreasedexpense increased by $25.6$13.4 million from $24.1a $3.0 million income tax provision for the three months ended September 30, 2016 to a $1.5 million benefit for the three months ended September 30, 2017, primarily dueMarch 31, 2019 to a decrease in pretax income. Our effective$10.4 million income tax rate was approximately 29% and 39%expense for the three months ended September 30, 2017March 31, 2020, primarily due to higher pre-tax income and 2016,certain permanent items. Our effective tax rate (including discrete items) was approximately 36% and 107% for the three months ended March 31, 2020 and 2019, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year. Our rate for the three months ended September 30, 2017 was impacted by the write-off of deferred tax assets related to stock-based compensation due to the adoption of ASU 2016-09.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenue
Revenue decreased by $176.9 million, or 36.4%, from $486.4 million for the nine months ended September 30, 2016 to $309.5 million for nine months ended September 30, 2017. As noted above, the Company adopted new guidance on revenue recognition as of January 1, 2017. For the nine months ended September 30, 2016, revenue was recognized when all the criteria for revenue recognition was met, which was generally upon contract renewal, termination or other contractual agreement. For the nine months ended September 30, 2016, $450.2 million in revenue was recognized due to contractual agreement events related to Ascension and other RCM clients. A significant portion of this revenue related to services prior to the period of revenue recognition. For the nine months ended September 30, 2017, we recognize revenue when a performance obligation is satisfied by transferring control


over a service to a customer, which is typically over the contact term. The amount recognized in 2016 associated with the contractual termination event was partially offset by services provided to new Ascension hospitals under the A&R MPSA that we were not previously servicing.
See Note 6, Revenue Recognition, for further explanation of the Company’s revenue recognition policy related to periods starting on or after January 1, 2017.
Net Services Revenue (2017) (GAAP) compared to Gross Cash Generated from Customer Contracting Activities (2016) (non-GAAP)

Due to the adoption of Topic 606 as of January 1, 2017, the non-GAAP measure of gross cash generated from customer contracting activities, that was utilized by the Company in 2016, is not applicable for 2017. However, we have provided a year-over-year comparison of net services revenue to gross cash generated from customer contracting activities as gross cash generated from customer contracting activities for the nine months ended September 30, 2016 is the most comparable metric to net services revenue for the nine months ended September 30, 2017.
Net services revenue as compared to gross cash generated from customer contracting activities increased by $170.6 million or 122.8%, from $138.9 million for the nine months ended September 30, 2016, to $309.5 million for the nine months ended September 30, 2017. The increase was primarily driven by the onboarding of new Ascension hospitals under the A&R MPSA. In addition, the increase was also driven by the transition to the A&R MPSA, which resulted in a change in classification of costs from an offset to net operating fees to cost of services due to on-boarding of employees. These two factors primarily resulted in an increase of $157.7 million in revenue. In addition, other service fees increased by $12.8 million primarily due to revenue being recognized in conjunction with the execution of PAS supplements for Ascension affiliates which were executed during 2017, as well as volume increases for Non-Ascension PAS customers.

Gross cash generated from customer contracting activities is a non-GAAP measure. Please see "Selected Consolidated Financial Data - Selected Non-GAAP Measures" for an explanation of how we calculate and use gross cash generated from customer contracting activities and for its reconciliation to revenue, the most comparable GAAP measure.
Cost of Services
Cost of services increased by $151.5 million, or 110.1%, from $137.6 million for the nine months ended September 30, 2016, to $289.1 million for the nine months ended September 30, 2017. The increase was driven by costs associated with providing services to new Ascension hospitals. In addition, costs also increased due to the transition to the A&R MPSA, which led to change in classification of costs from an offset to net operating fees to cost of services due to on-boarding of employees (discussed above) and an increase in shared service costs driven by increased volume. These two factors resulted in an increase in costs of $142.1 million. In addition, the increase in PAS volume resulted in a $6.8 million increase in cost of services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $16.8 million, or 28.8%, from $58.4 million for the nine months ended September 30, 2016 to $41.6 million for the nine months ended September 30, 2017. This decrease was primarily due to a $13.7 million decline in stock compensation expense and $3.0 million of severance costs related to the departure of an executive officer in 2016.
Other Costs
Other costs decreased by $17.4 million, or 87.0% from $20.0 million for the nine months ended September 30, 2016, to $2.6 million for the nine months ended September 30, 2017. The decrease was primarily attributable to $13.3 million in costs related to the closing of the Transaction with Ascension Health Alliance and TowerBrook on


February 16, 2016 and $5.0 million in reorganization related costs during the nine months ended September 30, 2016, offset by $1.4 million of costs incurred during the nine months ended September 30, 2017 for acquisition-related diligence expenditures.
Income Taxes
Income tax provision decreased by $111.7 million from $106.6 million income tax provision for the nine months ended September 30, 2016 to a $5.1 million income tax benefit for the nine months ended September 30, 2017, primarily due to a decrease in pretax income. Our effective tax rate was approximately 22% and 39% for the nine months ended September 30, 2017 and 2016. Our tax rate is affected by discrete items that may occur in any given year, but not consistent from year to year. Our rate for the nine months ended September 30, 2017 was impacted by the write-off of deferred tax assets related to stock based compensation due to the adoption of ASU 2016-09.
CRITICAL ACCOUNTING POLICIES
Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective, or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Part II, Item 7 "Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates"Estimates” of our 20162019 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 20162019 Form 10-K other than the impact of adopting new accounting standards. See Note 6, Revenue Recognition, and Note 9, Share-Based Compensation, in the notes to the consolidated financial statements for discussion of the impact of the adoption of these standards on the Company's policies for revenue and stock compensation, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new accounting guidance, see Note 2, Recent Accounting Pronouncements, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
Liquidity and Capital Resources
29


Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statementsconsolidated statements of Cash Flows,cash flows, are summarized in the following table:
 Three Months Ended March 31,
 20202019
 (In millions)
Net cash provided by operating activities$0.6  $71.1  
Net cash (used in) investing activities$(13.3) $(14.8) 
Net cash provided by (used in) financing activities$28.4  $(3.8) 
  Nine Months Ended September 30,
  2017 2016
  (In millions)
Net cash used in provided by operating activities $(4.3) $(69.3)
Net cash used in investing activities (30.1) (9.4)
Net cash (used in) provided by financing activities (4.4) 176.8
NineThree Months Ended September 30, 2017March 31, 2020 Compared to NineThree Months Ended September 30, 2016March 31, 2019
Operating Activities
Cash used inprovided by operating activities improvedfell by $65.0$70.5 million from cash used of $69.3$71.1 million for the ninethree months ended September 30, 2016,March 31, 2019, to cash used of $4.3$0.6 million for the ninethree months ended September 30, 2017. The decrease resulted from strongerMarch 31, 2020. Cash provided by operating performanceactivities decreased primarily due to the payment of the annual incentive compensation in the first quarter of 2020, as evidenced byopposed to the improvement in adjusted EBITDAsecond quarter of 2019, and the timing of accounts receivables collections for


the ninethree months ended September 30, 2017 as compared to net cash generated for the nine months ended September 30, 2016.March 31, 2019.
Investing Activities
Cash used in investing activities increaseddecreased by $20.7$1.5 million from $9.4$14.8 million for the ninethree months ended September 30, 2016,March 31, 2019, to $30.1$13.3 million for the ninethree months ended September 30, 2017.March 31, 2020. Cash used in investing activities increased primarilydecreased due to an increase in purchases of computer hardware and software andreduced spending on expanding our India operations.for the three months ended March 31, 2020 related to Information Technology (“IT”) spending, partially offset by increased capital expenditures to mobilize work-from-home efforts due to COVID-19.
Financing Activities
Cash provided by financing activities decreasedincreased by $181.2$32.2 million from cash provided by financing activitiesused of $176.8$3.8 million for the ninethree months ended September 30, 2016March 31, 2019, to cash used in financing activitiesprovided of $4.4$28.4 million for the ninethree months ended September 30, 2017.March 31, 2020. This change iswas primarily due to increased borrowing under our revolver in 2020 in order to maintain sufficient cash on hand in light of the investment of $200 million by the Investor in connection with the Transaction offset by transaction costs of $21.3 million during the nine months ended September 30, 2016.COVID-19 pandemic.
Future Capital Needs
In connectionJune 2019, we refinanced our debt, paying off the prior senior credit facility and subordinated notes and replacing them with one senior secured credit facility, including a senior term loan of $325.0 million and a senior revolver providing for borrowings of up to $100.0 million.

On March 20, 2020, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $191.1 million incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.

The Incremental Term Loan was drawn substantially concurrently with the closing of the SCI Acquisition on April 1, 2020. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses.

We continue to invest capital in order to achieve our strategic initiatives,initiatives. In addition, we plan to continue to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers’ existing technologies.technologies in connection with our strategic initiatives. We
30


plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our shared services infrastructure and capabilities, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. Due to the COVID-19 impact on the economy, we have reduced discretionary spending in order to ensure we maintain sufficient cash reserves throughout the time frame which we are impacted. Additionally, in the first quarter of 2020, we borrowed an additional $30 million under our senior revolver to maintain sufficient cash on hand in light of the COVID-19 pandemic.
Additionally, newNew business development remains a priority as we plan to continue to boostinvest in our sales and marketing efforts. We planAdditionally, we expect to continueincur costs associated with implementation and transition costs to add experienced personnel to our sales organization, develop more disciplined sales processes, and create an integrated marketing capability.onboard new customers.
We believe that our available cash balances, and the cash flows expected to be generated from operations, and additional capacity under the revolving credit facility will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months. We also believeNo assurance can be given, however, that our longer-term working capital and other general corporate funding requirementsthis will be satisfied through cash flows fromthe case. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially adversely impact our business, results of operations, and liquidity in future periods.
Debt and Financing Arrangements
Senior Secured Credit Facilities

On June 26, 2019, we entered into a new senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for the new senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $325.0 million senior secured term loan facility (the “Senior Term Loan”) issued at 99.66% of par and a $100.0 million senior secured revolving credit facility (the “Senior Revolver”).

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of March 31, 2020, we had $70.0 million in borrowings, no letters of credit outstanding, and $30.0 million of availability under the Senior Revolver.

Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at: (i) an Alternate Base Rate (“ABR”) equal to the extent necessary, from new borrowing facilitiesgreater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and future financial market activities.(c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on our Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus between 1.75% and 2.75%, dependent on our Net Leverage Ratio. The interest rate as of March 31, 2020 was 2.99%. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.30% and 0.50% of the average daily unutilized commitments thereunder dependent on our net leverage ratio.



OFF-BALANCE SHEET OBLIGATIONS
Operating Leases
The Company rents office spaceCredit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and equipmentour subsidiaries' ability to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase our capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of our junior indebtedness; (xi) change our lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, we are required to maintain minimum consolidated total net leverage
31


and consolidated interest coverage ratios. We were in compliance with all of the covenants in the Credit Agreement as of March 31, 2020.

For further details on our debt, refer to Note 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”).

Incremental Term Loan
On April 1, 2020, substantially concurrently with the closing of the SCI Acquisition, we borrowed an additional $191.1 million under operating leases, primarilyan incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as our existing Senior Term Loan provided under the Credit Agreement. The proceeds of the Incremental Term Loan were used to fund the purchase price for its Chicago corporate office, U.S. shared services centersthe SCI Acquisition and India operations. Office space leaserelated expenses. The Incremental Term Loan has terms range from oneconsistent with those of the Senior Term Loan, including with respect to 10 years, whereas equipment lease terms range from oneinterest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to three years. The Company’s leases contain various rent holidays and rent escalation clauses and entitlements for tenant improvement allowances. Lease payments are amortized to expense on a straight-line basis over the lease term.Senior Term Loan under the Credit Agreement.

CONTRACTUAL OBLIGATIONS

The aggregatefollowing table presents a summary of our contractual obligations as of March 31, 2020 (in millions):
 202020212022202320242025ThereafterTotal
Operating leases (1)$15.4  $18.2  $15.9  $15.0  $14.7  $14.6  $33.6  $127.4  
Purchase and finance lease obligations (2)$8.1  $5.5  $5.2  $4.0  $—  $—  $—  $22.8  
Debt obligations (3)$12.2  $20.3  $24.4  $28.4  $297.5  $—  $—  $382.8  
Interest on debt$9.1  $11.5  $10.6  $9.6  $4.3  $—  $—  $45.1  
Total$44.8  $55.5  $56.1  $57.0  $316.5  $14.6  $33.6  $578.1  

(1) Obligations and commitments to make future minimum rental commitmentspayments under all noncancelablenon-cancelable operating leases having remaining terms in excess of one year as of September 30, 2017 are as follows (in thousands):year.
(2) Includes obligations associated with IT software and service costs.
20171,919
20187,645
20196,940
20207,144
20216,907
20223,964
Thereafter19,037
Total$53,556
(3) We borrowed an additional $191.1 million under the Incremental Term Loan on April 1, 2020.


We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial results.

Item 3.Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of March 31, 2020, we have hedged $100.0 million of our $382.8 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. An additional $100.0 million of our outstanding floating rate debt is hedged to a fixed rate of 1.1065% plus the applicable spread defined in the Credit Agreement. The remaining $182.8 million outstanding is subject to an average variable rate of 2.99% as of March 31, 2020. Assuming the current level of borrowings, a one percentage point increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $1.8 million. 
Our interest income is primarily generated from variable rate interest earned on operating cash accounts. We do not enter into interest rate swaps, caps or collars or other hedging instruments. As a result, we believe that the risk of a significant impact on our operating income from interest rate fluctuations is not material.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee and the Euro because a portion of our operating expenses are incurred by our subsidiarysubsidiaries in India and Lithuania, and are denominated in Indian rupees. However, werupees and Euros, respectively. We do not
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generate anysignificant revenues outside of the United States. For both the ninethree months ended September 30, 2017March 31, 2020 and 2016, 8%2019, 9% and 7% of our expenses were denominated in Indian rupees.foreign currencies, respectively. As of September 30, 2017March 31, 2020 and 2016,2019, we had net assets of $21.1$43.0 million and $15.5$38.7 million in India,foreign entities, respectively. The reduction in earnings from a 10% change in U.S. dollar/Indian Rupee foreign currency spot rates would be $3.0$2.8 million and $2.2 million at March 31, 2020 and 2019, respectively.
For designated cash flow hedges, gains and losses currently recorded in accumulated other comprehensive loss will be reclassified into earnings at the time when certain anticipated intercompany charges are accrued as cost of services. As of March 31, 2020, it was anticipated that approximately $1.3 million at September 30, 2017of losses, net of tax, currently recorded in accumulated other comprehensive loss will be reclassified into cost of services within the next 12 months.

We use sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our hedge portfolio. The sensitivity of the hedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical changes in value of the hedge position and 2016, respectively.does not reflect the offsetting gain or loss on the underlying exposure. A 10% change in the levels of foreign currency exchange rates against the U.S. dollar (or other base currency of the hedge if not a U.S. dollar hedge) with all other variables held constant would have resulted in a change in the fair value of our hedge instruments of approximately $3.5 million as of March 31, 2020.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.




In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2020. Our Chief Executive Officer and interim Chief Financial Officer concluded that, as of September 30, 2017,March 31, 2020, our disclosure controls and procedures were effective.



Changes in Internal Control Over Financial Reporting


There have been no changesDuring the first quarter of 2020, we implemented a new Enterprise Resource Planning (“ERP”) system. The new ERP system was designed and implemented, in part, to enhance the overall system of internal controls over financial reporting through further automation and integration of business processes. In connection with the ERP system implementation, we updated the processes that constitute our internal control over financial reporting, during the third quarter of 2017 that have materially affected, or are reasonably likelyas necessary, to materially affect,accommodate related changes to our internal control over financial reporting.accounting procedures and business processes.




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PART II

Item 1.Legal Proceedings


Other than as described below, we are presently not a party to any material litigation or regulatory proceeding and are not aware of any pending or threatened litigation or regulatory proceeding against us which, individually or in the aggregate, could have a material adverse effect on our business, operating results, financial condition or cash flows.


On July 22, 2014, we were named as a defendant in a putative class action lawsuit filed in the U.S. District Court for the Eastern District of Michigan (Anger v. Accretive Health, Inc.), seeking statutory damages, injunctive relief and attorneys’ fees. The primary allegations are that we attempted to collect debts without providing the notice required by the FDCPA and Michigan Fair Debt Collection Practices Act and failed to abide by the terms of an agreed payment plan in violation of those same statutes. On August 27, 2015, the Court granted in part and denied in part our motion to dismiss. An amended complaint was filed on November 30, 2015. Discovery was underway, but on July 15, 2016, the court postponed all deadlines in the case as the parties attempted to finalize a confidential agreement in principle to settle the case. On February 23, 2017, the parties reached a settlement in principle and filed the proposed class action settlement with the Court, which conducted a Class Action Fairness Act (CAFA) hearing on whether to approve of the settlement. Members of the putative class were notified of the settlement and were given an opportunity to object or opt-out of the settlement before the CAFA hearing on October 4, 2017. No objections to the class settlement were filed. The Court approved the settlement by Order dated October 11, 2017. Accordingly, the Company will pay the $1.3 million settlement, less amounts already paid, to a settlement fund to assist members of the class Ascension Michigan ministry patients pay off healthcare debt, to pay for class notice and administration, to pay $15,000 to each of the named class representatives and depending upon Court approval, to reimburse plaintiff’s attorneys’ fees.

In April 2015, we were named among other defendants in an employment action brought by a former employee before the MHRC alleging improper termination in retaliation for uncovering alleged Medicare fraud.  We filed our response with the MHRC on May 19, 2015 seeking that we be dismissed entirely from the action.  On June 23, 2015, the MHRC issued its Notice of Right to Sue and decision to terminate its process with respect to all charges asserted by the former employee. The plaintiff filed a parallel qui tam action in the District of Maine (Worthy v. Eastern Maine Healthcare Systems) making the same allegations, and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees.  The U.S. Department of Justice declined to intervene in the federal court action, and the case was unsealed in April 2015. The Company and other defendants filed motions to dismiss the Third Amended Complaint on March 21, 2016. Those motions were granted with respect to the retaliation claims, but denied with respect to the other claims by the federal district court on January 18, 2017. The parties mediated the case before the Magistrate Judge on July 24, 2017 and reached an agreement in principle, and subsequently resolved an additional contingency in order to settle the case. The settlement, which is now finalized, did not have a material impact to our consolidated financial statements.

In May 2016, we were served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of our customers, WHC,MedStar Inc.’s Washington Hospital Center (“WHC��), along with WHC and three other hospitals that were PAS clients and a place holder, John Doe hospital, representing all PAS clients (USA(U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.)., and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The SecondThird Amended Complaint which seeks monetary damages, alleges that our PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, twice, and the U.S. AttorneysAttorney declined to intervene. We filed a motion to dismiss the Second Amended Complaint on July 29, 2016. On March 22, 2017, the district court dismissed all claims against all hospital defendants other than Medstar Inc.’s WHC, and dismissed all claims related to TriCare-related episodes of care. The parties are currently engaged in an initial discovery phase in which the plaintiff has sought broad discovery and brought a motion to compel discovery relating to the defendants that have been dismissed. That motion was denied and we believe that we have meritorious defenses to all claims in the case and intend to vigorously defend ourselvesthe Company against these claims. We and the plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.





Item 1A.Risk Factors


In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

There have been no material changes in our risk factors from those disclosed in the 2019 Form 10-K, except as follows:

The novel coronavirus (“COVID-19”) pandemic has negatively affected and will likely continue to negatively affect our 2016 10-K.  The risk factors disclosedbusiness, operating results, and financial condition.

On March 11, 2020, the COVID-19 outbreak was characterized as a pandemic by the World Health Organization. In response to the pandemic, governments around the world have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in Part I, Item 1Aplace orders and shutdowns. These measures have impacted and may further impact all or portions of our 2016 10-K,workforce and operations and the operations of our customers. These impacts include decreases in additionpatient volumes, the need for personal protective equipment and other protective measures for front-line employees, and work-from-home arrangements. Restrictions on our employees’ ability to travel could affect our ability to sell or onboard certain services. Our business, along with the global economy, has been adversely affected by these measures, which have resulted in a significant reductions in spending, volatile economic conditions and business disruptions across markets globally.

Due to the timing and nature of the geographic spread of COVID-19, the adverse impacts to our results of operations for the three months ended March 31, 2020 were limited. However, due to the continued global spread of COVID-19, including throughout the U.S., we anticipate adverse effects on our results of operations throughout our business during the second quarter as more customers experience disruptions to their businesses. In response to governmental restrictions and/or concerns regarding the spread of the virus, many patients and/or providers have delayed or cancelled routine and non-essential medical procedures and physician visits. As a result, a number of our customers have a reduced need for our personnel on site to manage their RCM activities, and we idled our
34


employees in response, while continuing to pay these employees. We also have a large number of employees now working from home, and such arrangements may involve increased use of public Wi-Fi and use of office equipment off premises, which may make our business more vulnerable to cybersecurity breach attempts. This period of uncertainty could also lead to an increase in phishing and other information set forthscams, fraud, theft or other criminal activity. In addition, we have a significant number of personnel internationally, including in this QuarterlyIndia, which has implemented strict travel restrictions across the country. Travel restrictions or other containment measures or the sudden spread of COVID-19 in India or in any other country where we have a large number of personnel or critical operations could impair our ability to manage day-to-day service delivery for our customers, which could result in, among other things, losses of revenue or breaches of our customer contracts if a large number of personnel were unable to work at the same time. Further, adverse impacts to our customers’ businesses as a result of the COVID-19 pandemic could cause delays in, or limit their ability to, make timely payments to us, which could adversely affect our results of operations. The COVID-19 pandemic and the response to it have caused an economic slowdown. An economic slowdown, recession or economic uncertainty as a result of the COVID-19 outbreak could negatively affect us by reducing patient or service volumes and payment ability. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially adversely impact our business, results of operations, and liquidity in future periods.

In recent weeks, the COVID-19 pandemic has also significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets, which can increase the cost of capital and adversely impact our ability to access capital.

These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risks described in the “Risk Factors” section in our Annual Report on Form 10-Q,10-K for the Year Ended December 31, 2019. The extent to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the ultimate geographic spread of the pandemic, the duration of the outbreak, travel restrictions, business closures or business disruption and the actions taken throughout the world, including in our markets, to contain COVID-19 or treat its impact. The severity, magnitude and duration of the COVID-19 pandemic is uncertain, rapidly changing and difficult to predict and depends on events beyond our knowledge or control. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. As a result, we cannot at this time predict the impact of the COVID-19 pandemic, but it could materially affecthave a material adverse effect on our business, results of operations, financial condition and cash flows.

Disruptions in service or results.  Additional risksdamage to our global business services centers and uncertainties not currently known to us or that we deem to be immaterialthird-party operated data centers could also materially adversely affect our business.

Our global business services centers and third-party operated data centers are essential to our business. Our operations depend on our ability to operate our global business services centers and maintain and protect our applications, which are located in data centers that are operated for us by third parties. We cannot control or assure the continued or uninterrupted availability of these third-party data centers. In addition, our information technologies and systems, as well as our data centers and global business services centers, are vulnerable to damage or interruption from various causes, including (1) acts of God and other natural disasters, war, acts of terrorism and pandemics and other public health events, including the COVID-19 pandemic, and (2) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events. We have a business continuity plan and maintain insurance against fires, floods, other natural disasters and general business interruptions to mitigate the adverse effects of a disruption, relocation or change in operating environment at one of our data centers or global business services centers, but the situations we plan for and the amount of insurance coverage we maintain may not be adequate in every particular case. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in service to our customers, or in interruptions, delays or cessations in the direct connections we establish between our customers and payers. Any of these events could impair or inhibit our ability to provide our services, reduce the attractiveness of our services to current or potential customers and adversely affect our financial condition or results.and results of operations.


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In addition, despite the implementation of security measures, our infrastructure, data centers, global business services centers or systems that we interface with, including the internet and related systems, may be vulnerable to physical break-ins, improper employee or contractor access, programming errors, cyber attacks, computer viruses, malicious code, phishing attacks, denial-of-service attacks or other information security threats by third parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. Any of these can cause system failure, including network, software or hardware failure, which can result in service disruptions. As a result, we may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by such breaches.

Our growing global business services operations expose us to risks that could have a material adverse effect on our costs of operations.

We employ a significant number of personnel internationally and expect to continue to add personnel in India. While there are cost and service advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees and has led to a commensurate increase in compensation expense. In the future, we may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure in India.

Our reliance on an international workforce exposes us to disruptions in the business, political and economic environment in those regions. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our global business services operations require us to comply with local laws and regulatory requirements, which are complex and of which we may not always be aware, and expose us to foreign currency exchange rate risk. Our global business services operations may also subject us to trade restrictions, reduced or inadequate protection for intellectual property rights, security breaches, pandemics and other public health events, including the COVID-19 pandemic, and other factors that may adversely affect our business. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of common stock during the periods indicated (in millions, except share and per share data):indicated:
PeriodNumber of Shares  Purchased (1) Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)  Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
January 1, 2020 through January 31, 2020 310    $12.47  —    $49.0  
February 1, 2020 through February 29, 2020114  $12.50  —  $49.0  
March 1, 2020 through March 31, 2020121  $12.60  —  $49.0  

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PeriodNumber of Shares  Purchased (1) Average Price Paid per Share (3) 
Total Number of
 Shares Purchased
 as Part of
 Publicly
 Announced  Plans
 or Programs (2)
  
Maximum Dollar
 Value of Shares
 that May Yet be
 Purchased  Under
 Publicly
 Announced Plans
 or Programs (in millions) (2)
July 1, 2017 through July 31, 2017 342,130
  $3.67
  —
  $49.0
August 1, 2017 through August 31, 2017 19,988
 $3.30
  —
 $49.0
September 1, 2017 through September 30, 2017 —
 $—
  —
 $49.0


(1)Amounts include strategic repurchases and repurchasesIncludes the surrender of shares of our common stock related to employees’ tax withholding upon vesting of 19,988 RSAs for the month ended August 31, 2017.restricted stock. See Note 9,11, Share-Based Compensation, to our consolidated financial statements included in this AnnualQuarterly Report on Form 10-Q.
(2)On November 13, 2013, the Board authorized, subject to the completion of the Restatement,restatement of our financial statements, the repurchase of up to $50.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the "2013“2013 Repurchase Program"Program”). The timing and amount of any shares repurchased under the 2013 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2013 Repurchase Program may be suspended or discontinued at any time. See Note 8, Stockholders' Equity, to our consolidated financial statements included in this Annual Report on Form 10-Q.
(3)
Average price paid per share of common stock repurchased under the 2013 Repurchase Program is the execution price, including commissions paid to brokers.









Item 3.Defaults upon Senior Securities
None



37
Item 4.Mine Safety Disclosure

Not applicable.

Item 5.Other Information

None


Item 6.Exhibits


The following are filed or incorporated by reference as a part of this Quarterly Report on Form 10-Q:


(a)
Exhibit Number
Exhibit Description
10.1*10.1
10.2*10.2+
10.3*31.1
10.4*
Form of Letter Agreement (to be used for executive vice presidents)

31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
32.1
32.2
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Schema Document
101.CALXBRL Calculation Linkbase Document
101.LABXBRL Labels Linkbase Document
101.DEFXBRL Taxonomy Extension Schema Document
101.PRE101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Management contract or compensatory plan or arrangement.



+

Portions of this exhibit (indicated therein by asterisks) have been omitted for confidential treatment.


38


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
R1 RCM INC.
By:R1 RCM INC.
By:/s/ Joseph Flanagan
Joseph Flanagan
President and Chief Executive Officer
By:/s/ Christopher RicaurteRichard B. Evans, Jr.
Christopher RicaurteRichard B. Evans, Jr.
Interim Chief Financial Officer and Treasurer
Date: October 31, 2017May 5, 2020
        



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