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
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):
|
| | | | | | | | | | | | | | | | |
| | 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, | | |
| | | | | | 2020 | | 2019 |
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 shares | | | | | | 114,441,043 | | | 109,802,632 | |
Add: Effect of dilutive equity awards | | | | | | 11,893,514 | | | — | |
Add: Effect of dilutive warrants | | | | | | 43,285,621 | | | — | |
Diluted weighted average common shares | | | | | | 169,620,178 | | | 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
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, | | |
| | | | | | 2020 | | 2019 |
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, 2020 | | December 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):
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Prepaid expenses and other current assets | | $ | 4.2 | | | $ | 4.0 | |
Other assets | | 21.1 | | | 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.
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.
|
| | | | |
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
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
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
The following table provides consolidated operating results and other operating data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended March 31, | | | | 2020 vs. 2019 Change | | |
| | | | | | | | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | (In millions except percentages) | | | | | | | |
Consolidated Statement of Operations Data: | | | | | | | | | | | | | | | |
Net operating fees | | | | | | | | | $ | 280.9 | | | $ | 241.3 | | | $ | 39.6 | | | 16 | % |
Incentive fees | | | | | | | | | 16.8 | | | 12.2 | | | 4.6 | | | 38 | % |
Other | | | | | | | | | 22.8 | | | 22.4 | | | 0.4 | | | 2 | % |
Net services revenue | | | | | | | | | 320.5 | | | 275.9 | | | 44.6 | | | 16 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of services | | | | | | | | | 253.9 | | | 237.2 | | | 16.7 | | | 7 | % |
Selling, general and administrative | | | | | | | | | 25.5 | | | 22.5 | | | 3.0 | | | 13 | % |
Other expenses | | | | | | | | | 8.7 | | | 8.8 | | | (0.1) | | | (1) | % |
Total operating expenses | | | | | | | | | 288.1 | | | 268.5 | | | 19.6 | | | 7 | % |
Income (loss) from operations | | | | | | | | | 32.4 | | | 7.4 | | | 25.0 | | | 338 | % |
Net interest (expense) income | | | | | | | | | 3.8 | | | 10.2 | | | (6.4) | | | (63) | % |
Net income (loss) before income tax provision | | | | | | | | | 28.6 | | | (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 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 service fees | 8.3 |
| | 4.2 |
| | 4.1 |
| | 97.6 | % | | 24.1 |
| | 11.3 |
| | 12.8 |
| | 113.3 | % |
Total net services revenue | 123.2 |
| | 125.5 |
| | (2.3 | ) | | (1.8 | )% | | 309.5 |
| | 486.4 |
| | (176.9 | ) | | (36.4 | )% |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of services | 111.8 |
| | 47.4 |
| | 64.4 |
| | 135.9 | % | | 289.1 |
| | 137.6 |
| | 151.5 |
| | 110.1 | % |
Selling, general and administrative | 15.1 |
| | 16.2 |
| | (1.1 | ) | | (6.8 | )% | | 41.6 |
| | 58.4 |
| | (16.8 | ) | | (28.8 | )% |
Other | 1.4 |
| | 0.5 |
| | 0.9 |
| | 180.0 | % | | 2.6 |
| | 20.0 |
| | (17.4 | ) | | (87.0 | )% |
Total operating expenses | 128.3 |
| | 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;
•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 | | |
| | | | | | | | | | 2020 | | 2019 | | Amount | | % |
| | | | | | | | | | (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 expense | | | | | | | | | | 15.7 | | | 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 |
| | — |
|
Other | 1.4 |
| | 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, | | |
| | | | | 2020 | | 2019 |
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
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
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, | | | |
| | 2020 | | 2019 | |
| | (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
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
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total | |
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. |
| | | |
2017 | 1,919 |
|
2018 | 7,645 |
|
2019 | 6,940 |
|
2020 | 7,144 |
|
2021 | 6,907 |
|
2022 | 3,964 |
|
Thereafter | 19,037 |
|
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.
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| | | | |
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
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.
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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.
PART II
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.
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
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.
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.
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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:
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Period | | Number of Shares Purchased (1) | | Average Price Paid per Share | | 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) |
January 1, 2020 through January 31, 2020 | | 310 | | | $ | 12.47 | | | — | | | $ | 49.0 | |
February 1, 2020 through February 29, 2020 | | 114 | | | $ | 12.50 | | | — | | | $ | 49.0 | |
March 1, 2020 through March 31, 2020 | | 121 | | | $ | 12.60 | | | — | | | $ | 49.0 | |
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Period | Number 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 |
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August 1, 2017 through August 31, 2017 | | 19,988 |
| | $ | 3.30 |
| | | — |
| | $ | 49.0 |
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September 1, 2017 through September 30, 2017 | | — |
| | $ | — |
| | | — |
| | $ | 49.0 |
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(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.
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Item 3. | Defaults upon Senior Securities |
None
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Item 4. | Mine Safety Disclosure |
Not applicable.
None
The following are filed or incorporated by reference as a part of this Quarterly Report on Form 10-Q:
(a)
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Exhibit Number | Exhibit Description |
| Employment Offer LetterAmendment No. 1 to Credit Agreement, dated as of March 20, 2020, by and betweenamong the CompanyRegistrant, the other parties party thereto as Credit Parties (as defined therein), Bank of America, N.A., as administrative agent and Thomas A. Lesica, dated February 16, 2017the financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (file No. 001-34746) filed on March 23, 2020 (Exhibits and schedules were omitted pursuant to Item 601(b)(10) of Regulation S-K and will be furnished to the Securities and Exchange Commission upon request) |
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101.INS | XBRL 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.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.LAB | XBRL Labels Linkbase Document |
101.DEF | XBRL Taxonomy Extension Schema Document |
101.PRE101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Management contract or compensatory plan or arrangement.
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| Portions of this exhibit (indicated therein by asterisks) have been omitted for confidential treatment.
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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.
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| R1 RCM INC. |
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By: | R1 RCM INC. |
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By: | /s/ Joseph Flanagan |
| Joseph Flanagan |
| President and Chief Executive Officer |
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By: | /s/ Christopher RicaurteRichard B. Evans, Jr. |
| Christopher RicaurteRichard B. Evans, Jr. |
| Interim Chief Financial Officer and Treasurer |
Date: October 31, 2017May 5, 2020