R1 RCM 10Q 2019 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER: 001-34746

R1 RCM INC.

(Exact name of registrant as specified in its charter)



Delaware	02-0698101
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

401 North Michigan Avenue	60611
Suite 2700
Chicago
Illinois
(Address of principal executive offices)	(Zip code)

(312) 324-7820

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	RCM	NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of October 29, 2019, the registrant had 112,864,978 shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

R1 RCM Inc.

Consolidated Balance Sheets

(In millions, except share and per share data)

PART I — FINANCIAL INFORMATION


ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

R1 RCM Inc.

Consolidated Balance Sheets

(In millions, except share and per share data)



	(Unaudited)
	September 30,			December 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	55.6		$	62.8
Current portion of restricted cash equivalents	—			1.8
Accounts receivable, net	39.6			42.2
Accounts receivable, net - related party	45.8			55.2
Prepaid expenses and other current assets	49.1			34.8
Total current assets	190.1			196.8
Property, equipment and software, net	114.8			95.2
Operating lease right-of-use assets	75.0			—
Intangible assets, net	168.2			180.5
Goodwill	253.2			254.8
Non-current deferred tax assets	66.8			57.5
Non-current portion of restricted cash equivalents	0.5			0.5
Other assets	32.7			22.2
Total assets	$	901.3		$	807.5
Liabilities
Current liabilities:
Accounts payable	$	24.7		$	9.9
Current portion of customer liabilities	10.9			14.7
Current portion of customer liabilities - related party	34.6			51.1
Accrued compensation and benefits	69.7			77.0
Current portion of operating lease liabilities	11.1			—
Current portion of long-term debt	16.3			2.7
Other accrued expenses	35.8			40.8
Total current liabilities	203.1			196.2
Non-current portion of customer liabilities - related party	17.8			17.7
Non-current portion of operating lease liabilities	81.8			—
Long-term debt	351.6			251.0
Long-term debt - related party	—			105.0
Other non-current liabilities	8.4			22.9
Total liabilities	662.7			592.8

8.00% Series A convertible preferred stock, par value $0.01, 370,000 shares authorized, 261,303 shares issued and outstanding as of September 30, 2019 (aggregate liquidation value of $266.5); 370,000 shares authorized, 246,233 shares issued and outstanding as of December 31, 2018 (aggregate liquidation value of $251.2)	223.8			208.4
Stockholders’ equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 126,166,326 shares issued and 112,864,575 shares outstanding at September 30, 2019; 123,353,656 shares issued and 110,541,901 shares outstanding at December 31, 2018	1.3			1.2
Additional paid-in capital	370.8			361.0
Accumulated deficit	(285.6		)	(289.8		)
Accumulated other comprehensive loss	(4.4		)	(3.5		)
Treasury stock, at cost, 13,301,751 shares as of September 30, 2019; 12,811,755 shares as of December 31, 2018	(67.3		)	(62.6		)
Total stockholders’ equity	14.8			6.3
Total liabilities and stockholders’ equity	$	901.3		$	807.5

See accompanying notes to consolidated financial statements.

R1 RCM Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(In millions, except share and per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net services revenue ($204.5 million and $583.7 million for the three and nine months ended September 30, 2019, respectively, and $155.3 million and $433.4 million for the three and nine months ended September 30, 2018, respectively, from related party)	$	301.2		$	250.4		$	872.1		$	605.6
Operating expenses:
Cost of services	241.9			219.3			725.2			547.9
Selling, general and administrative	28.3			29.6			76.6			69.1
Other expenses	7.4			7.3			26.9			22.9
Total operating expenses	277.6			256.2			828.7			639.9
Income (loss) from operations	23.6			(5.8		)	43.4			(34.3		)
Loss on debt extinguishment	—			—			(18.8		)	—
Net interest (expense) income	(5.0		)	(10.0		)	(25.1		)	(15.6		)
Income (loss) before income tax provision (benefit)	18.6			(15.8		)	(0.5		)	(49.9		)
Income tax provision (benefit)	9.4			(2.4		)	(4.7		)	(10.3		)
Net income (loss)	$	9.2		$	(13.4	)	$	4.2		$	(39.6	)
Net income (loss) per common share:
Basic	$	0.02		$	(0.17	)	$	(0.10	)	$	(0.50	)
Diluted	$	0.01		$	(0.17	)	$	(0.10	)	$	(0.50	)
Weighted average shares used in calculating net income (loss) per common share:
Basic	112,230,439			109,089,507			111,005,255			107,921,457
Diluted	165,622,407			109,089,507			111,005,255			107,921,457
Consolidated statements of comprehensive income (loss)
Net income (loss)	9.2			(13.4		)	4.2			(39.6		)
Other comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax	(0.5		)	0.4			(0.2		)	(0.2		)
Foreign currency translation adjustments	(1.2		)	(1.5		)	(0.7		)	(3.4		)
Comprehensive income (loss)	$	7.5		$	(14.5	)	$	3.3		$	(43.2	)




Basic:
Net income (loss)	$	9.2		$	(13.4	)	$	4.2		$	(39.6	)
Less dividends on preferred shares	(5.3		)	(4.8		)	(15.4		)	(14.2		)
Less income allocated to preferred shareholders	(1.9		)	—			—			—
Net income (loss) available/allocated to common shareholders - basic	$	2.0		$	(18.2	)	$	(11.2	)	$	(53.8	)
Diluted:
Net income (loss)	$	9.2		$	(13.4	)	$	4.2		$	(39.6	)
Less dividends on preferred shares	(5.3		)	(4.8		)	(15.4		)	(14.2		)
Less income allocated to preferred shareholders	(1.5		)	—			—			—
Net income (loss) available/allocated to common shareholders - diluted	$	2.4		$	(18.2	)	$	(11.2	)	$	(53.8	)

See accompanying notes to consolidated financial statements.

R1 RCM Inc.

Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

(In millions, except share and per share data)



	Common Stock			Treasury Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss)			Total
	Shares	Amount		Shares		Amount
Balance at December 31, 2018	123,353,656	$	1.2	(12,811,755	)	$	(62.6	)	$	361.0		$	(289.8	)	$	(3.5	)	$	6.3
Share-based compensation expense	—	—		—		—			4.5			—			—			4.5
Issuance of common stock related to share-based compensation plans	2,613	—		—		—			—			—			—			—
Exercise of vested stock options	145,235	—		—		—			0.4			—			—			0.4
Dividends paid/accrued	—	—		—		—			(5.0		)	—			—			(5.0		)
Acquisition of treasury stock related to share-based compensation plans	—	—		(342,998	)	(3.3		)	—			—			—			(3.3		)
Forfeitures	—	—		(1,208	)	—			—			—			—			—
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million	—	—		—		—			—			—			0.2			0.2
Foreign currency translation adjustments	—	—		—		—			—			—			0.5			0.5
Net income (loss)	—	—		—		—			—			0.2			—			0.2
Balance at March 31, 2019	123,501,504	$	1.2	(13,155,961	)	$	(65.9	)	$	360.9		$	(289.6	)	$	(2.8	)	$	3.8
Share-based compensation expense	—	—		—		—			4.8			—			—			4.8
Issuance of common stock related to share-based compensation plans	359,488	—		—		—			—			—			—			—
Exercise of vested stock options	1,329,175	0.1		—		—			7.3			—			—			7.4
Dividends paid/accrued	—	—		—		—			(5.1		)	—			—			(5.1		)
Acquisition of treasury stock related to share-based compensation plans	—	—		(143,739	)	(1.4		)	—			—			—			(1.4		)
Net change on derivatives designated as cash flow hedges, net of tax of $0.0 million	—	—		—		—			—			—			0.1			0.1
Net income (loss)	—	—		—		—			—			(5.2		)	—			(5.2		)
Balance at June 30, 2019	125,190,167	$	1.3	(13,299,700	)	$	(67.3	)	$	367.9		$	(294.8	)	$	(2.7	)	$	4.4
Share-based compensation expense	—	—		—		—			3.8			—			—			3.8
Issuance of common stock related to share-based compensation plans	57,555	—		—		—			—			—			—			—
Exercise of vested stock options	918,604	—		—		—			4.3			—			—			4.3
Dividends paid/accrued	—	—		—		—			(5.2		)	—			—			(5.2		)
Acquisition of treasury stock related to share-based compensation plans	—	—		(2,051	)	—			—			—			—			—
Net change on derivatives designated as cash flow hedges, net of tax of ($0.2) million	—	—		—		—			—			—			(0.5		)	(0.5		)
Foreign currency translation adjustments	—	—		—		—			—			—			(1.2		)	(1.2		)
Net income (loss)	—	—		—		—			—			9.2			—			9.2
Balance at September 30, 2019	126,166,326	$	1.3	(13,301,751	)	$	(67.3	)	$	370.8		$	(285.6	)	$	(4.4	)	$	14.8

See accompanying notes to consolidated financial statements.

R1 RCM Inc.

Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

(In millions, except share and per share data)



		Common Stock			Treasury Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss)			Total
		Shares	Amount		Shares		Amount
Balance at December 31, 2017		116,650,388	$	1.2	(12,240,427	)	$	(59.6	)	$	337.9		$	(244.5	)	$	(1.6	)	$	33.4
Share-based compensation expense		—	—		—		—			2.7			—			—			2.7
Issuance of common stock related to share-based compensation plans		3,603	—		—		—			—			—			—			—
Issuance of common stock and stock warrants		4,665,594	—		—		—			19.3			—			—			19.3
Exercise of vested stock options		100,012	—		—		—			0.2			—			—			0.2
Dividends paid/accrued		—	—		—		—			(4.6		)	—			—			(4.6		)
Acquisition of treasury stock related to share-based compensation plans		—	—		(362,402	)	(1.9		)	—			—			—			(1.9		)
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million		—	—		—		—			—			—			(0.2		)	(0.2		)
Foreign currency translation adjustments		—	—		—		—			—			—			(0.5		)	(0.5		)
Net income (loss)		—	—		—		—			—			(23.3		)	—			(23.3		)
Balance at March 31, 2018		121,419,597	$	1.2	(12,602,829	)	$	(61.5	)	$	355.5		$	(267.8	)	$	(2.3	)	$	25.1
Share-based compensation expense		—	—		—		—			5.2			—			—			5.2
Reclassification of equity award		—	—		—		—			1.3			—			—			1.3
Issuance of common stock related to share-based compensation plans		289,500	—		—		—			—			—			—			—
Exercise of vested stock options		1,017,576	—		—		—			2.6			—			—			2.6
Dividends paid/accrued		—	—		—		—			(4.8		)	—			—			(4.8		)
Acquisition of treasury stock related to share-based compensation plans		—	—		(134,898	)	(1.0		)	—			—			—			(1.0		)
Forfeitures		—	—		(18,945	)	—			—			—			—			—
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million		—	—		—		—			—			—			(0.4		)	(0.4		)
Foreign currency translation adjustments		—	—		—		—			—			—			(1.4		)	(1.4		)
Net income (loss)		—	—		—		—			—			(2.9		)	—			(2.9		)
Balance at June 30, 2018		122,726,673	$	1.2	(12,756,672	)	$	(62.5	)	$	359.8		$	(270.7	)	$	(4.1	)	$	23.7
Share-based compensation expense		—	—		—		—			4.9			—			—			4.9
Issuance of common stock related to share-based compensation plans		6,993	—		—		—			(0.1		)	—			—			(0.1		)
Exercise of vested stock options	��	298,272	—		—		—			0.8			—			—			0.8
Dividends paid/accrued		—	—		—		—			(4.8		)	—			—			(4.8		)
Acquisition of treasury stock related to share-based compensation plans		—	—		(1,092	)	—			—			—			—			—
Forfeitures		—	—		(42,485	)	—			—			—			—			—
Net change on derivatives designated as cash flow hedges, net of tax of ($0.1) million		—	—		—		—			—			—			0.4			0.4
Foreign currency translation adjustments		—	—		—		—			—			—			(1.5		)	(1.5		)
Net income (loss)		—	—		—		—			—			(13.4		)	—			(13.4		)
Balance at September 30, 2018		123,031,938	$	1.2	(12,800,249	)	$	(62.5	)	$	360.6		$	(284.1	)	$	(5.2	)	$	10.0

See accompanying notes to consolidated financial statements.

R1 RCM Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Nine Months Ended September 30,
	2019			2018
Operating activities
Net income (loss)	$	4.2		$	(39.6	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization	39.9			27.6
Amortization of debt issuance costs	1.4			0.9
Share-based compensation	12.8			13.8
Loss on disposal	—			0.8
Loss on debt extinguishment	18.8			—
Provision for doubtful receivables	2.3			0.5
Deferred income taxes	(9.4		)	(12.7		)
Non-cash lease expense	8.5			—
Changes in operating assets and liabilities:
Accounts receivable and related party accounts receivable	9.8			(10.8		)
Prepaid expenses and other assets	(20.1		)	(18.0		)
Accounts payable	10.5			(6.0		)
Accrued compensation and benefits	(7.3		)	15.2
Lease liabilities	(8.9		)	—
Other liabilities	1.0			16.3
Customer liabilities and customer liabilities - related party	(20.2		)	6.0
Net cash provided by (used in) operating activities	43.3			(6.0		)
Investing activities
Purchases of property, equipment, and software	(43.1		)	(20.1		)
Acquisition of Intermedix, net of cash acquired	—			(462.8		)
Net cash used in investing activities	(43.1		)	(482.9		)
Financing activities
Issuance of senior secured debt, net of discount and issuance costs	321.8			253.1
Issuance of subordinated notes, net of discount and issuance costs	—			105.5
Borrowings on revolver	60.0			—
Payment of debt issuance costs related to the Senior Revolver	—			(0.4		)
Repayment of senior secured debt	(272.7		)	—
Repayment of subordinated notes and prepayment penalty	(112.2		)	—
Repayments on revolver	(10.0		)	—
Issuance of common stock and stock warrants, net of issuance costs	—			19.2
Exercise of vested stock options	9.5			3.6
Shares withheld for taxes	(4.7		)	(2.9		)
Finance lease payments	(0.6		)	—
Net cash (used in) provided by financing activities	(8.9		)	378.1
Effect of exchange rate changes in cash, cash equivalents and restricted cash	(0.3		)	(0.9		)
Net increase in cash, cash equivalents and restricted cash	(9.0		)	(111.7		)
Cash, cash equivalents and restricted cash, at beginning of period	65.1			166.4
Cash, cash equivalents and restricted cash, at end of period	$	56.1		$	54.7
Supplemental disclosures of cash flow information
Accrued dividends payable to preferred stockholders	$	5.2		$	4.8
Accrued and other liabilities related to purchases of property, equipment and software	$	20.1		$	21.7
Accounts payable related to purchases of property, equipment and software	$	5.2		$	0.6
Interest paid	$	22.6		$	7.5
Income taxes paid	$	3.5		$	2.5
Income taxes refunded	$	0.1		$	0.4

See accompanying notes to consolidated financial statements.

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

1. Business Description and Basis of Presentation

Business Description

R1 RCM Inc. (the "Company") is a leading provider of technology-enabled revenue cycle management ("RCM") services to healthcare providers, including hospitals, physician groups, and municipal and private emergency medical service ("EMS") providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for its customers.

The Company achieves these results for its customers by managing healthcare providers' revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections from patients and payers. The Company does so by deploying a unique operating model that leverages its extensive healthcare site experience, innovative technology, and process excellence. The Company assists its 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 the Company's customers.

The Company's primary service offering consists of end-to-end RCM services for integrated healthcare delivery networks, which the Company deploys through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, the Company provides comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology, and process workflow. Under a co-managed relationship, the Company leverages its customers’ existing RCM staff and processes, and supplements them with the Company's infused management, subject matter specialists, proprietary technology, and other resources. Under the operating partner model, the Company records higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are employees of the Company and more third-party contracts are controlled by the Company. 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 the Company's co-managed revenue.

The Company also offers modular services, allowing customers to engage the Company for only specific components of its end-to-end RCM service offering, such as physician advisory services ("PAS"), practice management ("PM"), and revenue integrity solutions ("RIS", formerly known as revenue capture services). The Company's PAS offering assists healthcare organizations in complying with payer requirements regarding whether to classify a hospital visit as in-patient or an out-patient observation case for billing purposes. The Company's 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 the Company. The Company's 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.

Ascension

On February 16, 2016, the Company entered into a long-term strategic partnership with Ascension Health Alliance, the parent of the Company's largest customer and the nation’s largest Catholic and non-profit health system, and TowerBrook Capital Partners ("TowerBrook"), an investment management firm (the "Transaction"). As part of the Transaction, the Company amended and restated its Master Professional Services Agreement ("A&R MPSA") with Ascension Health ("Ascension") effective February 16, 2016 with a term of ten years. Pursuant to the A&R MPSA and with certain limited exceptions, the Company became the exclusive provider of RCM services and PAS with respect to acute care services provided by the hospitals affiliated with Ascension that execute supplement agreements with the Company.

Intermountain

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

On January 23, 2018, the Company entered into an Amended and Restated Services Agreement (the "Intermountain Services Agreement"), with IHC Health Services, Inc. ("Intermountain") having a 10-year term. Pursuant to the Intermountain Services Agreement, the Company provides revenue cycle management services to Intermountain hospitals and medical group providers under the operating partner model. In addition, the Company provides revenue cycle management services to Intermountain's homecare, hospice and palliative care, durable medical equipment and infusion therapy business. In conjunction with the execution of the Intermountain Services Agreement, the Company entered into a Securities Purchase Agreement (the "Intermountain Purchase Agreement") with Intermountain, pursuant to which the Company sold to Intermountain, in private placements under the Securities Act of 1933, (i) 4,665,594 shares of common stock, and (ii) a warrant to acquire up to 1,500,000 shares of Common Stock at an initial exercise price of $6.00 per share, on the terms and subject to the conditions set forth in the Warrant Agreement, for an aggregate purchase price of $20 million.

Intermedix

On May 8, 2018, the Company completed the acquisition of Intermedix through the merger of Project Links Merger Sub, Inc., a wholly-owned indirect subsidiary of the Company, with and into Intermedix, with Intermedix surviving the merger as a wholly-owned indirect subsidiary of the Company (the “Acquisition”). Intermedix is one of the largest providers of RCM and PM services to physician groups and EMS providers in the United States ("U.S."). Intermedix has a diverse customer base of approximately 700 customers and 2,200 employees located in offices within the U.S., Lithuania, the United Kingdom, and New Zealand.

Basis of Presentation

The accompanying unaudited consolidated financial statements reflect the Company's financial position as of September 30, 2019, the results of operations of the Company for the three and nine months ended September 30, 2019 and 2018, and the cash flows of the Company for the nine months ended September 30, 2019 and 2018. These financial statements include the accounts of R1 RCM Inc. and its wholly-owned subsidiaries. All intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2019.

When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K").

2. Recent Accounting Pronouncements

Recently Issued Accounting Standards and Disclosures

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which superseded existing guidance on accounting for leases in Topic 840, Leases. ASU 2016-02 generally requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective transition method, utilizing a cumulative-effect adjustment, without restating prior period comparative financial statements. The Company elected the package of practical expedients upon transition that retained the lease

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

classification and initial directs costs for any leases that existed prior to adoption of the standard. Adoption of the new standard resulted in the recording of additional right-of-use ("ROU") assets and lease liabilities of approximately $75.2 million and $90.8 million, respectively, as of January 1, 2019. The adoption had no impact on prior period retained earnings. See Note 7 Leases for more information on the Company's leasing arrangements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The Company adopted ASU 2018-15 effective January 1, 2019 using the prospective method of adoption. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification ("ASC") 350-40 to determine which implementation costs to defer and recognize as an asset. ASU 2018-15 will impact amounts capitalized into other assets on the balance sheet.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. The change will result in earlier recognition of credit losses. The Company will adopt ASU 2016-13 effective January 1, 2020 utilizing a modified retrospective transition method. The Company does not expect a material impact to its consolidated financial statements, including accounting policies and processes.

3. Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value. The accounting standard for fair value (i) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, (ii) establishes a framework for measuring fair value, (iii) establishes a hierarchy of fair value measurements based upon the ability to observe inputs used to value assets and liabilities, (iv) requires consideration of nonperformance risk, and (v) requires disclosures about the methods used to measure fair value. The accounting standard establishes a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect the Company’s assumptions about valuation. The three levels of the hierarchy are defined as follows:


•	Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;

•

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and


•	Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other accrued expenses, approximate their fair values, due to the short-term nature of these instruments. See Note 21, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts.

The Company believes the carrying value of the senior term loan entered into in 2019 (see Note 11, Debt) approximates fair value as it is variable rate bank debt. The fair value of the Company's senior term loan entered into in 2018 was estimated based on the quoted market prices for the same or similar issue, and was considered a Level 2 measurement. The fair value of the Company's subordinated notes issued in 2018 was estimated based on market indications compared to the inputs of the existing agreement and was considered a Level 2 measurement.

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

4. Acquisition

Intermedix Holdings, Inc.

On May 8, 2018, the Company completed the acquisition of Intermedix. The Acquisition has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the Acquisition. The purchase price for the Acquisition was $469.2 million.

The final fair value of assets acquired and liabilities assumed is (in millions):




	Purchase Price Allocation
Total purchase consideration	$	469.2

Allocation of consideration to assets acquired and liabilities assumed:
Cash, cash equivalents, and restricted cash	$	6.4
Accounts receivable, net	35.5
Prepaid expenses and other current assets	11.6
Property, equipment and software, net	25.4
Intangible assets, net	191.1
Goodwill	253.2
Other assets	0.3
Accounts payable	(6.4		)
Current portion of customer liabilities	(8.6		)
Accrued compensation and benefits	(7.7		)
Other accrued expenses	(6.2		)
Deferred income tax liabilities	(25.4		)
Net assets acquired	$	469.2

The goodwill recognized is primarily attributable to synergies that are expected to be achieved from the integration of Intermedix. None of the goodwill is expected to be deductible for income tax purposes.

Measurement period adjustments

The Company had various measurement period adjustments due to tax return information and additional knowledge gained since December 31, 2018. The significant adjustments included a reduction of deferred income tax liabilities of $1.7 million related to updated tax return information. No subsequent adjustments were made after the measurement period closed in the second quarter of 2019.

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

Pro Forma Results

The following table summarizes, on a pro forma basis, the combined results of the Company as though the Acquisition had occurred as of January 1, 2017. These pro forma results are not necessarily indicative of either the actual consolidated results had the Acquisition occurred as of January 1, 2017 or of the future consolidated operating results. Pro forma results are (in millions):



	Three Months Ended			Nine Months Ended
	September 30, 2018			September 30, 2018
Net services revenue	$	250.3		$	675.8
Net income (loss)	$	(12.8	)	$	(40.6	)

Adjustments were made to earnings to adjust depreciation and amortization to reflect fair value of identified assets acquired, to record the effects of extinguishing the debt of Intermedix and replacing it with the debt of the Company, and to record the income tax effect of these adjustments.

5. Accounts Receivable and Allowance for Doubtful Accounts

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

The Company maintains an estimated allowance for doubtful accounts to reduce its accounts receivable to the amount that it believes will be collected. This allowance is based on the Company’s historical experience, its assessment of each customer’s ability to pay, the length of time a balance has been outstanding, input from key Company resources assigned to each customer, and the status of any ongoing operations with each applicable customer.

Movements in the allowance for doubtful accounts are as follows (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Beginning balance	$	2.1		$	0.6	$	1.1		$	0.4
Provision (recoveries)	1.3			0.3		2.5			0.5
Write-offs	(0.6		)	—		(0.8		)	—
Ending balance	$	2.8		$	0.9	$	2.8		$	0.9

6. Property, Equipment and Software

Property, equipment and software consist of the following (in millions):



	September 30, 2019			December 31, 2018
Buildings and land	$	4.6		$	4.6
Computer and other equipment	46.6			48.6
Leasehold improvements	30.9			27.9
Software	112.9			85.9
Office furniture	9.4			9.7
Property, equipment and software, gross	204.4			176.7
Less accumulated depreciation and amortization	(89.6		)	(81.5		)
Property, equipment and software, net	$	114.8		$	95.2

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

The following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of services	$	9.2	$	7.7	$	26.7	$	17.5
Selling, general and administrative	1.4		2.0		2.7		3.4
Total depreciation and amortization	$	10.6	$	9.7	$	29.4	$	20.9

7. Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and long-term portion of operating lease liabilities on the consolidated balance sheets. Finance lease ROU assets are included in property, equipment and software, net, and the current and non-current portion of financing lease liabilities are included in other accrued expenses and other non-current liabilities, respectively, on the consolidated balance sheets.

ROU assets represent the Company's right to control the use of an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating and financing lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the incremental borrowing rate, determined based on the information available at lease commencement date, is used in calculating the present value of lease payments. The ROU asset also includes any lease prepayments made and excludes lease incentives. Leases may include options to extend or terminate the lease and lease terms incorporate these when it is reasonably certain that the option will be exercised.

The Company elected to not separate lease and non-lease components for building and equipment leases. The Company will account for the lease and non-lease components, such as fixed service charges, as a single lease component. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense is recognized for these short-term leases on a straight-line basis over the lease term.

The Company has operating and finance leases for corporate offices, operational facilities, shared service centers, and certain equipment. Leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 10 years. In circumstances where there are significant foreign tax incentives, the Company has determined it to be reasonably certain to exercise the renewal options. The Company subleases certain office spaces to third parties.

The Company elected to not separate lease and non-lease components for equipment leased to customers as part of certain service arrangements. The lease components are combined with the non-lease components and accounted for under ASC 606.

The components of lease costs are as follows (in millions):



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost	$	4.9		$	14.3
Finance lease cost:
Amortization of right-of-use assets	0.2			0.6
Interest on lease liabilities	—			0.1
Sublease income	(0.6		)	(1.7		)
Total lease cost	$	4.5		$	13.3

Supplemental cash flow information related to leases are as follows (in millions):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	13.8
Operating cash flows for finance leases	0.1
Financing cash flows for finance leases	0.6
ROU assets obtained in exchange for lease obligations:
Operating leases	11.6
Finance leases	0.5

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

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



	September 30, 2019
Operating leases
Operating lease right-of-use assets	$	75.0

Current portion of operating lease liabilities	$	11.1
Non-current portion of operating lease liabilities	81.8
Total operating lease liabilities	$	92.9

Finance leases
Property, equipment and software, gross	$	2.8
Accumulated depreciation	(0.9		)
Property, equipment and software, net	$	1.9

Other accrued expenses	$	1.0
Other non-current liabilities	0.4
Total finance lease liabilities	$	1.4

Weighted average remaining lease term:
Operating leases	8 years
Finance leases	2 years

Weighted average borrowing rate:
Operating leases	8.74		%
Finance leases	6.33		%

Maturities of lease liabilities as of September 30, 2019 are as follows (in millions):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	Operating Leases		Finance Leases
Remainder of 2019	$	4.8	$	0.2
2020	18.0		0.8
2021	16.7		0.4
2022	15.1		0.1
2023	14.7		—
2024	14.4		—
Thereafter	48.2		—
Total	131.9		1.5
Less:
Imputed interest	39.0		0.1
Present value of lease liabilities	$	92.9	$	1.4

8. Intangible Assets

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at September 30, 2019 and December 31, 2018 (in millions, except weighted average useful life):



		September 30, 2019							December 31, 2018
	Weighted Average Useful Life	Gross Carrying Value		Accumulated Amortization			Net Book Value		Gross Carrying Value		Accumulated Amortization			Net Book Value
Customer relationships	17 years	$	160.9	$	(13.2	)	$	147.7	$	160.9	$	(6.1	)	$	154.8
Tradename	1 year	—		—			—		1.1		(1.1		)	—
Technology	6 years	26.8		(6.3		)	20.5		26.8		(2.9		)	23.9
Favorable leasehold interests	1-8 years	—		—			—		2.3		(0.5		)	1.8
Total intangible assets		$	187.7	$	(19.5	)	$	168.2	$	191.1	$	(10.6	)	$	180.5

Intangible asset amortization expense was $3.5 million and $10.5 million for the three and nine months ended September 30, 2019, and $4.5 million and $6.7 million for the three and nine months ended September 30, 2018.

Estimated annual amortization expense related to intangible assets with definite lives as of September 30, 2019 is as follows (in millions):



Remainder of 2019	$	3.5
2020	13.9
2021	13.9
2022	13.9
2023	13.9
Thereafter	109.1
Total	$	168.2

9. Goodwill

In the first nine months of 2019, there were no events or circumstances that would have required an interim impairment test. Annually, during the fourth quarter, goodwill is tested for impairment.

Changes in the carrying amount of goodwill for the nine months ended September 30, 2019 were (in millions):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	Goodwill
Balance as of December 31, 2018	$	254.8
Measurement period adjustments	(1.6		)
Balance as of September 30, 2019	$	253.2

10. Revenue Recognition

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

Disaggregation of Revenue

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net operating fees	$	266.6	$	220.1	$	760.8	$	529.4
Incentive fees	12.3		8.9		41.9		26.8
Other	22.3		21.4		69.4		49.4
Net services revenue	$	301.2	$	250.4	$	872.1	$	605.6

Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers (in millions):



	September 30, 2019		December 31, 2018
Contract assets	$	1.9	$	1.2
Contract liabilities	24.2		22.3

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

Significant changes in the contract assets and the contract liabilities balances are as follows (in millions):



	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
	Contract assets		Contract liabilities		Contract assets		Contract liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period	$	—	$	69.0	$	—	$	51.1
Increases due to cash received, excluding amounts recognized as revenue during the period	—		1.6		—		6.5
Acquisitions	—		—		1.3		1.9

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

The Company recognized revenue of $69.0 million and $51.1 million during the nine months ended September 30, 2019 and 2018, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $66.7 million and $47.8 million for the nine months ended September 30, 2019 and 2018, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.

Transaction Price Allocated to the Remaining Performance Obligation

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



	Net operating fees		Incentive fees
2019	$	28.3	$	10.1
2020	36.1		19.0
2021	18.1		—
2022	8.8		—
Thereafter	15.4		—
Total	$	106.7	$	29.1

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

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

11. Debt

The carrying amounts of debt consist of the following (in millions):



	September 30, 2019			December 31, 2018
Senior Revolver	$	50.0		$	—
Senior Term Loan	320.9			268.7
Notes (primarily with related parties)	—			110.0
Unamortized discount and issuance costs	(3.0		)	(20.0		)
Total debt	367.9			358.7
Less: Current maturities	(16.3		)	(2.7		)
Total long-term debt	$	351.6		$	356.0

Senior Secured Credit Facilities

On June 26, 2019, the Company and certain of its subsidiaries entered into a new senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the 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

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

million senior secured revolving credit facility (the “Senior Revolver”). In conjunction with entering into the Credit Agreement, the Company repaid in full the credit agreement dated May 8, 2018, the subordinated notes issued under the Subordinated Note Purchase Agreement dated May 8, 2018, and terminated all commitments and discharged all guarantees related to those agreements. The Company evaluated separately the previous credit agreement, subordinated notes, and revolver for debt modification and extinguishment guidance as indicated in ASC 470. The Company deemed the refinancing to be an extinguishment of the old debt, leading to a write-off of the prior issuance costs and recognition of new issuance costs, with the exception of a portion of the revolver which remained with the same lender. The Company recognized a loss on debt extinguishment of $18.8 million in the second quarter of 2019.

The Senior Term Loan and Senior Revolver both have a five-year maturity. The Credit Agreement provides that the Company may make one or more offers to the lenders, and consummate transactions with individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate class of term loans or revolving commitments.

All of the Company’s obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the “Subsidiary Guarantors”). Pursuant to (1) the Security Agreement, dated as of June 26, 2019 (the “Security Agreement”), among the Company, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, and (2) the Guaranty, dated as of June 26, 2019 (the “Guaranty”), among the Company, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, subject to certain exceptions, the obligations under the Senior Secured Credit Facilities are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by the Company and a security interest in substantially all of the Company’s tangible and intangible assets and the tangible and intangible assets of each Subsidiary Guarantor.

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 September 30, 2019, the Company had $50.0 million in borrowings, 0 letters of credit outstanding, and $50.0 million of availability under the Senior Revolver.

At the Company’s option, the Company may add one or more new term loan facilities or increase the commitments under the Senior Revolver (collectively, the “Incremental Borrowings”) in an aggregate amount of up to $115.0 million plus any additional amounts so long as certain conditions, including a consolidated first lien leverage ratio (as defined in the Credit Agreement) of not more than 3.25 to 1.00 (on a pari passu basis) or compliance with the applicable financial covenants for such period (on a junior or unsecured basis), in each case on a pro forma basis, are satisfied.

Borrowings under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an Alternate Base Rate ("ABR") equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on the Company's Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not 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 the Company's Net Leverage Ratio. The interest rate as of September 30, 2019 was 4.79%. The Company is 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 the Company's net leverage ratio.

The Credit Agreement requires the Company to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year 2020, 50% (which percentage will be reduced upon the Company’s achievement of certain total net leverage ratios) of the Company’s annual excess cash flow; (ii) 100% of net cash proceeds of all non-ordinary course assets sales or other dispositions of property or casualty events, subject to certain exceptions

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

and thresholds; and (iii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Credit Agreement. Commencing September 30, 2019, the Company is required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of $4.1 million through June 30, 2021, $6.1 million through June 30, 2023, and $8.1 million through March 31, 2024, with the balance payable at maturity.

The Credit Agreement contains 2 financial covenants. (1) The Company is required to maintain at the end of each fiscal quarter, commencing with the quarter ended September 30, 2019, a consolidated total net leverage ratio of not more than 4.75 to 1.00. This consolidated ratio will step down in increments to 4.50 to 1.00 commencing with the fiscal quarter ending June 30, 2020, 4.25 to 1.00 commencing with the fiscal quarter ending June 30, 2021, and 3.50 to 1.00 commencing with the fiscal quarter ending June 30, 2022. (2) The Company is required to maintain at the end of each such fiscal quarter, commencing with the quarter ended September 30, 2019, a consolidated interest coverage ratio of not less than 2.50 to 1.00. This consolidated ratio will step up in increments to 2.75 to 1.00 commencing with the fiscal quarter ending June 30, 2020, 3.00 to 1.00 commencing with the fiscal quarter ending June 30, 2021, and 3.25 to 1.00 commencing with the fiscal quarter ending June 30, 2022.

The Credit Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the Company’s junior indebtedness; (xi) change the Company’s 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. The Company was in compliance with all of the covenants in the Credit Agreement as of September 30, 2019.

Debt Issuance Costs

The Company incurred debt issuance costs of $2.8 million in relation to the Credit Agreement which were allocated to the Senior Term Loan and Senior Revolver, respectively.

12. Share-Based Compensation

The share-based compensation expense relating to the Company’s stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") for the three months ended September 30, 2019 and 2018 was $3.8 million and $4.8 million, respectively, with related tax benefits of approximately $0.9 million and $1.2 million, respectively. The share-based compensation expense relating to the Company's stock options, RSAs, RSUs and PBRSUs for the nine months ended September 30, 2019 and 2018 was $12.8 million and $13.8 million, respectively, with related tax benefits of approximately $2.3 million and $3.5 million, respectively.

The Company accounts for forfeitures as they occur. In the third quarter of 2019, the Company recognized a reversal of $1.0 million of expense due to the resignation of the Company's former Chief Financial Officer. Excess tax benefits and shortfalls for share-based payments are recognized in income tax expense (benefit) and included in operating activities. The Company recognized $0.7 million and $0.0 million income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended September 30, 2019 and 2018, respectively. The Company recognized $4.1 million and $2.0 million income tax benefit from windfalls associated with vesting and exercises of equity awards for the nine months ended September 30, 2019 and 2018, respectively.

Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Share-Based Compensation Expense Allocation Details:
Cost of services	$	1.5	$	1.6	$	4.3	$	4.4
Selling, general and administrative	2.3		3.2		8.4		9.3
Other	—		—		0.1		0.1
Total share-based compensation expense	$	3.8	$	4.8	$	12.8	$	13.8

The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. Monte Carlo simulations are used to estimate the fair value of its market-based PBRSUs. The market-based PBRSUs vest upon satisfaction of both time-based requirements and market targets based on share price. Expected life is based on the market condition to which the vesting is tied.

The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the nine months ended September 30, 2019 and 2018:



	Nine Months Ended September 30,
	2019	2018
Expected dividend yield	—%	—%
Risk-free interest rate	1.8% to 2.5%	2.3% to 2.8%
Expected volatility	40% to 45%	40% to 45%
Expected term (in years)	2.00 to 5.50	2.59 to 6.25

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

Stock options

A summary of the options activity during the nine months ended September 30, 2019 is shown below:



	Options		Weighted- Average Exercise Price
Outstanding at December 31, 2018	13,884,470		$	5.36
Granted	42,253		10.31
Exercised	(2,393,014	)	5.04
Canceled/forfeited	(445,886	)	2.53
Expired	(3,920	)	12.98
Outstanding at September 30, 2019	11,083,903		$	5.56
Outstanding, vested and exercisable at September 30, 2019	8,083,208		$	6.59
Outstanding, vested and exercisable at December 31, 2018	7,712,264		$	7.37

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

Restricted stock awards, restricted stock units, and performance-based restricted stock units

A summary of the RSA, RSU, and PBRSU activity during the nine months ended September 30, 2019 is shown below:



										Weighted- Average Grant Date Fair Value
	RSAs			RSUs			PBRSUs			RSA		RSU		PBRSU
Outstanding and unvested at December 31, 2018	1,095,544			1,126,681			4,610,448			$	3.02	$	4.50	$	4.72
Granted	—			744,892			1,034,534			—		10.77		10.28
Vested	(1,094,336		)	(419,656		)	—			3.02		4.06		—
Forfeited	(1,208		)	(120,376		)	(699,440		)	5.38		6.44		6.07
Outstanding and unvested at September 30, 2019	—			1,331,541			4,945,542			$	—	$	7.98	$	5.69

Shares surrendered for taxes for the nine months ended September 30, 2019	380,564			108,224			—
Cost of shares surrendered for taxes for the nine months ended September 30, 2019 (in millions)	$	3.7		$	1.0		$	—
Shares surrendered for taxes for the nine months ended September 30, 2018	404,466			93,926			—
Cost of shares surrendered for taxes for the nine months ended September 30, 2018 (in millions)	$	2.2		$	0.7		$	—

PBRSUs issued prior to May 2019 vest upon satisfaction of both time-based requirements and market targets based on share price. Depending on the percentage level at which the market-based condition is satisfied, the number of shares vesting could be between 0% and 350% of the number of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 vest upon satisfaction of both time-based and performance-based conditions. These conditions include cumulative adjusted EBITDA and end-to-end RCM agreement growth targets. Depending on the percentage level at which the performance-based conditions are satisfied, the number of shares vesting could be between 0% and 200% of the number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all PBRSUs is 10,379,872.

13. Other Expenses

Other expenses (income) consist of the following (in millions):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Severance and related employee benefits	$	1.3		$	1.0		$	1.7		$	2.0
Facility-exit charges	(0.1		)	(0.1		)	(0.2		)	0.1
Strategic initiatives (1)	3.9			4.6			15.0			16.5
Transitioned employees restructuring expense (2)	0.9			1.3			3.8			3.8
Digital Transformation Office	1.3			—			5.7			—
Other	0.1			0.5			0.9			0.5
Total other expenses	$	7.4		$	7.3		$	26.9		$	22.9

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

(1) Costs related to evaluating, pursuing and integrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s growth strategy. Costs include employee time and expenses spent on activities, vendor spend, and severance and retention amounts associated with integration activities.

(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company. At September 30, 2019, the Company's reorganization liability was $1.8 million, offset by $0.5 million of receivables.

14. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.

The Tax Cut and Jobs Act ("Tax Act") was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Tax Reform permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018.

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

The Company recognized income tax expense for the three months ended September 30, 2019 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions of BEAT and GILTI plus the geographical mix of earnings, permanent differences and discrete items. The income tax benefit for the nine months ended September 30, 2019 was higher than the amount derived by applying the federal statutory tax rate of 21% primarily due to discrete items.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since 2015 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years.

At December 31, 2018, the Company had gross deferred tax assets of $104.9 million, of which $60.5 million related to net operating loss carryforwards. The majority of the Company's carryforwards were generated in 2014 and 2016. The Company expects its business growth contracted for under the Ascension A&R MPSA, including the Supplement and Presence Amendment, the Intermountain Services Agreement, and the Intermedix transaction will be profitable and allow the Company to utilize its NOL carryforwards and other deferred tax assets.

15. 8.00% Series A Convertible Preferred Stock

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

The preferred stock is held by a related party, TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the "Investor").

The following summarizes the preferred stock activity for the nine months ended September 30, 2019 (in millions, except per share data):



	Preferred Stock
	Shares Issued and Outstanding	Carrying Value
Balance at December 31, 2018	246,233	$	208.4
Dividends paid/accrued dividends	15,070	15.4
Balance at September 30, 2019	261,303	$	223.8

16. Earnings (Loss) Per Share

Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the preferred stock, by the weighted average number of common shares outstanding during the period. As the preferred stock participates in dividends alongside the Company’s common stock (per their participating dividends), the preferred 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, 2019 and 2018, 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 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):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Basic EPS:
Net income (loss)	$	9.2		$	(13.4	)	$	4.2		$	(39.6	)
Less dividends on preferred shares	(5.3		)	(4.8		)	(15.4		)	(14.2		)
Less income allocated to preferred shareholders	(1.9		)	—			—			—
Net income (loss) available/(allocated) to common shareholders - basic	$	2.0		$	(18.2	)	$	(11.2	)	$	(53.8	)
Diluted EPS:
Net income (loss)	$	9.2		$	(13.4	)	$	4.2		$	(39.6	)
Less dividends on preferred shares	(5.3		)	(4.8		)	(15.4		)	(14.2		)
Less income allocated to preferred shareholders	(1.5		)	—			—			—
Net income (loss) available/(allocated) to common shareholders - diluted	$	2.4		$	(18.2	)	$	(11.2	)	$	(53.8	)
Basic weighted-average common shares	112,230,439			109,089,507			111,005,255			107,921,457
Add: Effect of dilutive equity awards	10,465,800			—			—			—
Add: Effect of dilutive warrants	42,926,168			—			—			—
Diluted weighted average common shares	165,622,407			109,089,507			111,005,255			107,921,457
Net income (loss) per common share (basic)	$	0.02		$	(0.17	)	$	(0.10	)	$	(0.50	)
Net income (loss) per common share (diluted)	$	0.01		$	(0.17	)	$	(0.10	)	$	(0.50	)

Because of their anti-dilutive effect, 1,480,903 common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three months ended September 30, 2019.

For the nine months ended September 30, 2019, 22,795,316 common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. For the three and nine months ended September 30, 2018, 21,952,446 common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. Additionally, for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, 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 for all periods presented.

17. 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.

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 (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 Third Amended Complaint alleges that the Company’s 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, and the U.S.

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

Attorney declined to intervene. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. The outcome is not presently determinable.

18. Related Party Transactions

This note encompasses transactions between Ascension and the Company pursuant to the A&R MPSA, including all supplements, amendments and other documents entered into in connection therewith. See Note 1, Business Description and Basis of Presentation and Note 15, 8.00% Series A Convertible Preferred Stock for further discussion on the agreements with Ascension.

Net services revenue from services provided to Ascension included in the Company’s consolidated statements of operations were (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Ascension	$	204.5	$	155.3	$	583.7	$	433.4

Amounts included in the Company's consolidated balance sheets for Ascension, excluding debt, are (in millions):



	September 30, 2019		December 31, 2018
Accounts receivable, net - related party	$	45.8	$	55.2

Current portion of customer liabilities	$	34.6	$	51.1
Non-current portion of customer liabilities	$	17.8	$	17.7
Total customer liabilities	$	52.4	$	68.8

As part of the transition of Ascension personnel to the Company, 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 in connection with Ascension on-boarding. As of September 30, 2019 and December 31, 2018, the Company had $0.7 million and $0.8 million in accrued compensation and benefits related to these costs, respectively.

As of December 31, 2018, $105.0 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 and nine months ended September 30, 2019, $0.0 million and $7.2 million, respectively, of interest expense was attributable to related parties. For the three and nine months ended September 30, 2018, $3.6 million and $5.8 million, respectively, of interest expense was attributable to related parties.

19. Deferred Contract Costs

Certain costs associated with the initial phases of customer contracts and the related transition of customer hospitals and physician groups are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations in the future, and are expected to be recovered through the margins realized. The following table summarizes the breakout of deferred contract costs (in millions):

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements



	September 30, 2019		December 31, 2018
Prepaid expenses and other current assets	$	3.7	$	2.8
Other assets	20.4		17.4
Total deferred contract costs	$	24.1	$	20.2

The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three and nine months ended September 30, 2019, total amortization was $0.9 million and $2.4 million, respectively, and there were 0 associated impairment losses. For the three and nine months ended September 30, 2018, total amortization was $0.6 million and $1.6 million, respectively, and there were 0 associated impairment losses.

20. 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 healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only 1 reportable segment.

Healthcare providers 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, 2019 and 2018, net services revenue from healthcare organizations affiliated with Ascension accounted for 68% and 62% of the Company's total net services revenue, respectively. For the nine months ended September 30, 2019 and 2018, net services revenue from Ascension accounted for 67% and 72%, respectively. The loss of customers within the Ascension health system could have a material adverse impact on the Company’s operations. For the three months ended September 30, 2019 and 2018, Intermountain Healthcare accounted for 15% and 17% of the Company's total net services revenue, respectively. For the nine months ended September 30, 2019 and 2018, Intermountain Healthcare accounted for 15% and 13% of the Company's total net services revenue, respectively.

As of September 30, 2019 and December 31, 2018, the Company had a concentration of credit risk with Ascension accounting for 54% and 57% of accounts receivable, respectively.

21. 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 September 30, 2019, the Company has recorded $0.4 million and $0.0 million of existing gains in accumulated other comprehensive income for the foreign currency hedges and interest rate swap, respectively. The Company estimates that $0.4 million and $0.0 million of gains reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. The amounts related to foreign currency hedges that were reclassified into cost of services were a net gain of $0.4 million and $0.9 million during the three and nine month period ended September 30, 2019, and a net loss of $0.6 million and $1.0 million during the three and nine month period ended September 30, 2018. The amounts related to the interest rate swap that were reclassified into cost of services were a net gain of $0.0 million during the three and nine month periods ended September 30, 2019 and September 30, 2018.

The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of September 30, 2019, the Company’s currency forward contracts have maturities extending no later than December 31, 2020.

As of September 30, 2019, the notional amounts of the Company's open foreign currency forward contracts and interest rate swap were approximately $29.5 million and $100.0 million, respectively. As of December 31, 2018, the notional amounts of the Company's open foreign currency forward contracts and interest rate swap were approximately $52.0 million and $0.0 million, respectively. As of September 30, 2019, the Company held no

R1 RCM Inc.

Notes to Unaudited Consolidated Financial Statements

derivatives, or non-derivative hedging instruments, that were designated as 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.



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", “may,” “plan,” “predict,” “project,” “would” and similar expressions or variations. 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, 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 as those set forth in Part I, Item 1A of the 2018 10-K and 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 are a leading provider of technology-enabled RCM services to healthcare providers, including hospitals, physician groups, and municipal and private EMS providers. We 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 on our customers, we believe that our role becomes increasingly more important to our customers as macroeconomic, regulatory and healthcare industry conditions continue to impose financial pressure on healthcare providers to manage their operations effectively and efficiently.

Our primary service offering consists of end-to-end RCM for integrated healthcare delivery networks, which we deploy through an operating partner relationship and a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology, 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, and other resources. Under the operating partner model, the Company records higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are employees of the Company and more third-party vendor contracts are controlled by the Company. 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 the Company's co-managed revenue. For the nine months ended September 30, 2019 and 2018, substantially all of the Company's net operating and incentive fees from end-to-end RCM were generated under the operating partner model.

We also offer modular services, allowing customers to engage us for only specific components of our end-to-end RCM service offering, such as PAS, PM, and RIS. Our PAS offering assists healthcare organizations in complying with payer requirements regarding 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 the Company. Our RIS offering includes charge capture, CDM maintenance and pricing services that help providers ensure they are capturing the maximum net compliant revenue for services delivered.

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 healthcare providers.

Digital Transformation Office

In November 2018, we launched a Digital Transformation Office (“DTO”) to systematically automate our transactional environment on an end-to-end basis. The DTO's three principal objectives include: (1) digitization of the patient and physician interface with the revenue cycle; (2) automation of manual tasks using robotic process automation technology; and (3) use of advanced data analysis methods to improve complex revenue cycle processes such as denials via machine learning and predictive modeling. We expect to complete the original pipeline of automation by the end of the first quarter of 2020, and we continue to uncover opportunities for both net new automations and extending existing automations to capture incremental value.

CONSOLIDATED RESULTS OF OPERATIONS

The following table provides consolidated operating results and other operating data for the periods indicated:



	Three Months Ended September 30,						2019 vs. 2018 Change					Nine Months Ended September 30,						2019 vs. 2018 Change
	2019			2018			Amount			%		2019			2018			Amount			%
	(In millions except percentages)
Consolidated Statement of Operations Data:
Net operating fees	$	266.6		$	220.1		$	46.5		21	%	$	760.8		$	529.4		$	231.4		44	%
Incentive fees	12.3			8.9			3.4			38	%	41.9			26.8			15.1			56	%
Other	22.3			21.4			0.9			4	%	69.4			49.4			20.0			40	%
Net services revenue	301.2			250.4			50.8			20	%	872.1			605.6			266.5			44	%
Operating expenses:
Cost of services	241.9			219.3			22.6			10	%	725.2			547.9			177.3			32	%
Selling, general and administrative	28.3			29.6			(1.3		)	(4	)%	76.6			69.1			7.5			11	%
Other expenses	7.4			7.3			0.1			1	%	26.9			22.9			4.0			17	%
Total operating expenses	277.6			256.2			21.4			8	%	828.7			639.9			188.8			30	%
Income (loss) from operations	23.6			(5.8		)	29.4			507	%	43.4			(34.3		)	77.7			227	%
Loss on debt extinguishment	—			—			—			—	%	(18.8		)	—			(18.8		)	100	%
Net interest (expense) income	(5.0		)	(10.0		)	5.0			(50	)%	(25.1		)	(15.6		)	(9.5		)	61	%
Net income (loss) before income tax provision	18.6			(15.8		)	34.4			218	%	(0.5		)	(49.9		)	49.4			(99	)%
Income tax provision (benefit)	9.4			(2.4		)	11.8			492	%	(4.7		)	(10.3		)	5.6			(54	)%
Net income (loss)	$	9.2		$	(13.4	)	$	22.6		169	%	$	4.2		$	(39.6	)	$	43.8		111	%

Use of Non-GAAP Financial Information

We supplement our GAAP consolidated financial statements with the non-GAAP financial measure 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.

Selected Non-GAAP Measure

Adjusted EBITDA

We define adjusted EBITDA as net income before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense, expense arising from debt extinguishment, strategic initiatives costs, transitioned employee restructuring expense, digital transformation office expenses, facility exit costs, and certain other items which are detailed in the 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:


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;


•	Adjusted EBITDA does not reflect share-based compensation expense;


•	Adjusted EBITDA does not reflect income tax expenses or cash requirements to pay taxes;


•	Adjusted EBITDA does not reflect interest expenses or cash required to pay interest;


•	Adjusted EBITDA does not reflect certain other 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 adjusted EBITDA does 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 adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:



	Three Months Ended September 30,					2019 vs. 2018 Change					Nine Months Ended September 30,						2019 vs. 2018 Change
	2019		2018			Amount			%		2019			2018			Amount			%
	(In millions except percentages)
Net income (loss)	$	9.2	$	(13.4	)	$	22.6		169	%	$	4.2		$	(39.6	)	$	43.8		111	%
Net interest expense (income)	5.0		10.0			(5.0		)	(50	)%	25.1			15.6			9.5			61	%
Income tax provision (benefit)	9.4		(2.4		)	11.8			492	%	(4.7		)	(10.3		)	5.6			(54	)%
Depreciation and amortization expense	14.1		14.2			(0.1		)	(1	)%	39.9			27.6			12.3			45	%
Share-based compensation expense (1)	3.8		4.7			(0.9		)	(19	)%	12.7			13.7			(1.0		)	(7	)%
Loss on debt extinguishment (2)	—		—			—			—	%	18.8			—			18.8			100	%
Other expenses (3)	7.4		7.3			0.1			1	%	26.9			22.9			4.0			17	%
Adjusted EBITDA (non-GAAP)	$	48.9	$	20.4		$	28.5		140	%	$	122.9		$	29.9		$	93.0		311	%

(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 12, 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)	Loss on debt extinguishment represents the loss associated with the repayment of the credit agreement and subordinated notes in June 2019, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 11, Debt, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further details on the extinguishment.


(3)	Other expenses consist of the following (in millions):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Severance and related employee benefits	$	1.3		$	1.0		$	1.7		$	2.0
Facility-exit charges	(0.1		)	(0.1		)	(0.2		)	0.1
Strategic initiatives (1)	3.9			4.6			15.0			16.5
Transitioned employees restructuring expense (2)	0.9			1.3			3.8			3.8
Digital Transformation Office	1.3			—			5.7			—
Other	0.1			0.5			0.9			0.5
Total other expenses	$	7.4		$	7.3		$	26.9		$	22.9

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Revenue

Revenue increased by $50.8 million from $250.4 million for the three months ended September 30, 2018 to $301.2 million for the three months ended September 30, 2019. The increase was primarily driven by a $30.1 million increase in net operating fees as a result of new customers onboarded in the last 12 months, as well as organic growth across our customer base.

Cost of Services

Cost of services increased by $22.6 million, or 10.3%, from $219.3 million for the three months ended September 30, 2018, to $241.9 million for the three months ended September 30, 2019. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last 12 months partially offset by cost productivity in our fully onboarded customer contracts.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $1.3 million, or 4.4%, from $29.6 million for the three months ended September 30, 2018 to $28.3 million for the three months ended September 30, 2019. The decrease was driven by, among other things, lower depreciation and amortization expense associated with the Acquisition, partially offset by investments in corporate IT infrastructure, sales and marketing, as the Company increased its efforts to pursue new business opportunities, as well as additional finance and human resources personnel spend to support scaling business operations.

Other Expenses

Other expenses increased by $0.1 million, or 1.4%, from $7.3 million, for the three months ended September 30, 2018, to $7.4 million for the three months ended September 30, 2019. This increase was primarily driven by the DTO efforts offset by a decrease in Acquisition related costs.

Income Taxes

Income tax benefit decreased by $11.8 million from a $2.4 million income tax benefit for the three months ended September 30, 2018 to a $9.4 million income tax expense for the three months ended September 30, 2019, primarily due to pre-tax income in the three months ended September 30, 2019 compared to pre-tax loss in the three months ended September 30, 2018, the geographical distribution of income/(loss), and changes related to the Tax Act. Our effective tax rate (including discrete items) was approximately 51% and 15% for the three months ended September 30, 2019 and 2018, 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.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Revenue

Revenue increased by $266.5 million from $605.6 million for the nine months ended September 30, 2018, to $872.1 million for the nine months ended September 30, 2019. The increase was primarily driven by a $147.8 million increase in net operating fees as a result of new customers onboarded since the beginning of 2019. In addition, we realized year-over-year growth of $66.0 million as a result of the Acquisition.

Cost of Services

Cost of services increased by $177.3 million, or 32.4%, from $547.9 million for the nine months ended September 30, 2018, to $725.2 million for the nine months ended September 30, 2019. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last 12 months, including new customers acquired through the Acquisition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $7.5 million, or 10.9%, from $69.1 million for the nine months ended September 30, 2018, to $76.6 million for the nine months ended September 30, 2019. The increase was primarily driven by investments in corporate IT infrastructure, sales and marketing, as the Company increased its efforts to pursue new business opportunities, as well as additional finance and human resources personnel spend to support scaling business operations.

Other Expenses

Other expenses increased by $4.0 million, or 17.5%, from $22.9 million for the nine months ended September 30, 2018, to $26.9 million for the nine months ended September 30, 2019. This increase was primarily driven by $5.7 million in DTO expenses, partially offset by a decrease in Acquisition related costs.

Income Taxes

Income tax benefit decreased by $5.6 million from a $10.3 million income tax benefit for the nine months ended September 30, 2018 to a $4.7 million income tax benefit for the nine months ended September 30, 2019, primarily due to the geographical distribution of income/(loss) and changes related to the Tax Act. Our effective tax rate (including discrete items) was approximately 940% and 21% for the nine months ended September 30, 2019 and 2018, 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.

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 Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates" of our 2018 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2018 Form 10-K other than the impact of adopting new accounting standards. See Note 7, Leases, in the notes to the consolidated financial statements for a discussion of the impact of the adoption of this standard on the Company's policy for leasing.

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 statements of cash flows, are summarized in the following table:



	Nine Months Ended September 30,
	2019			2018
	(In millions)
Net cash provided by (used in) operating activities	$	43.3		$	(6.0	)
Net cash (used in) investing activities	$	(43.1	)	$	(482.9	)
Net cash (used in) provided by financing activities	$	(8.9	)	$	378.1

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Operating Activities

Cash provided by operating activities improved by $49.3 million, from cash used of $6.0 million for the nine months ended September 30, 2018, to cash provided of $43.3 million for the nine months ended September 30, 2019. Cash provided by operating activities improved primarily due to improved operating results after adjusting for non-cash items, including adjustments for depreciation expense and loss on debt extinguishment, offset by changes in operating assets and liabilities.

Investing Activities

Cash used in investing activities decreased by $439.8 million from $482.9 million for the nine months ended September 30, 2018, to $43.1 million for the nine months ended September 30, 2019. Cash used in investing activities included the acquisition of Intermedix in 2018. The decrease was slightly offset by an increase in purchases of property, equipment and software in 2019.

Financing Activities

Cash provided by financing activities fell by $387.0 million from $378.1 million for the nine months ended September 30, 2018, to cash used of $8.9 million for the nine months ended September 30, 2019. This change was primarily due to obtaining new debt in 2018, whereas the new debt in 2019 was offset by the extinguishment of old debt.

Future Capital Needs

In June 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. We continue to invest capital in order to achieve our strategic 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 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.

New business development remains a priority as we plan to continue to boost our sales and marketing efforts. We plan to continue to add experienced personnel to our sales organization, develop more disciplined sales processes and create an integrated marketing capability. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers.

We believe that our available cash balances, 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. No assurance can be given, however, that this will be the case.

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”). In conjunction with entering into the Credit Agreement, we repaid in full the credit agreement dated May 8, 2018, the subordinated notes issued under the Subordinated Note Purchase Agreement dated May 8, 2018, and terminated all commitments and discharged all guarantees related to those agreements. We evaluated separately the previous credit agreement, subordinated notes, and revolver for debt modification and extinguishment guidance as indicated in ASC 470. We deemed the refinancing to be an extinguishment of the old debt, leading to a write-off of the prior issuance costs and recognition of new issuance costs, with the exception of a portion of the revolver which remained with the same lender. We recognized a loss on debt extinguishment of $18.8 million.

The Senior Term Loan and Senior Revolver both have a five-year maturity. The Credit Agreement provides that we may make one or more offers to the lenders, and consummate transactions with individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate class of term loans or revolving commitments.

All of our obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the “Subsidiary Guarantors”). Pursuant to (1) the Security Agreement, dated as of June 26, 2019 (the “Security Agreement”), among us, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, and (2) the Guaranty, dated as of June 26, 2019 (the “Guaranty”), among us, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, subject to certain exceptions, the obligations under the Senior Secured Credit Facilities are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by us and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of each Subsidiary Guarantor.

will reduce the amount available under the revolving credit facility. As of September 30, 2019, we had $50.0 million in borrowings, no letters of credit outstanding, and $50.0 million of availability under the Senior Revolver.

At our option, we may add one or more new term loan facilities or increase the commitments under the Senior Revolver (collectively, the “Incremental Borrowings”) in an aggregate amount of up to $115.0 million plus any additional amounts so long as certain conditions, including a consolidated first lien leverage ratio (as defined in the Credit Agreement) of not more than 3.25 to 1.00 (on a pari passu basis) or compliance with the applicable financial covenants for such period (on a junior or unsecured basis), in each case on a pro forma basis, are satisfied.

Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at: (i) an Alternate Base Rate ("ABR") equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on 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 September 30, 2019 was 4.79%. 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.

The Credit Agreement requires us to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year 2020, 50% (which percentage will be reduced upon our achievement of certain total net leverage ratios) of our annual excess cash flow; (ii) 100% of net cash proceeds of all non-ordinary course assets sales or other dispositions of property or casualty events, subject to certain exceptions and thresholds; and (iii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Credit Agreement. Commencing September 30, 2019, we are required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of $4.1 million through June 30, 2021, $6.1 million through June 30, 2023, and $8.1 million through March 31, 2024, with the balance payable at maturity.

The Credit Agreement contains two financial covenants. (1) We are required to maintain at the end of each fiscal quarter, commencing with the quarter ended September 30, 2019, a consolidated total net leverage ratio of not more than 4.75 to 1.00. This consolidated ratio will step down in increments to 4.50 to 1.00 commencing with the fiscal quarter ending June 30, 2020, 4.25 to 1.00 commencing with the fiscal quarter ending June 30, 2021, and 3.50 to 1.00 commencing with the fiscal quarter ending June 30, 2022. (2) We are required to maintain at the end of each such fiscal quarter, commencing with the quarter ended September 30, 2019, a consolidated interest coverage ratio of not less than 2.50 to 1.00. This consolidated ratio will step up in increments to 2.75 to 1.00 commencing with the fiscal quarter ending June 30, 2020, 3.00 to 1.00 commencing with the fiscal quarter ending June 30, 2021, and 3.25 to 1.00 commencing with the fiscal quarter ending June 30, 2022.

The Credit Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and our 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. We were in compliance with all of the covenants in the Credit Agreement as of September 30, 2019.

CONTRACTUAL OBLIGATIONS

The following table presents a summary of our contractual obligations as of September 30, 2019 (in millions):



	2019		2020		2021		2022		2023		2024		Thereafter		Total
Operating leases	$	4.8	$	18.0	$	16.7	$	15.1	$	14.7	$	14.4	$	48.2	$	131.9
Purchase and finance lease obligations (1)	$	6.7	$	9.8	$	4.1	$	4.3	$	4.0	$	—	$	—	$	28.9
Debt obligations	$	4.0	$	16.3	$	20.3	$	24.4	$	28.4	$	277.5	$	—	$	370.9
Interest on debt	$	4.4	$	17.1	$	16.2	$	15.3	$	14.6	$	6.5	$	—	$	74.1
Total	$	19.9	$	61.2	$	57.3	$	59.1	$	61.7	$	298.4	$	48.2	$	605.8

(1) Includes obligations associated with IT software and service costs.

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



Item 3.	Qualitative and Quantitative Disclosures about Market Risk

Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of September 30, 2019, we have hedged $100.0 million of our $370.9 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. The remaining $270.9 million is subject to an average variable rate of 4.79%.

As of September 30, 2019, approximately $270.9 million aggregate principal amount of our debt bears interest at floating rates. 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 $2.7 million.

Our interest income is primarily generated from variable rate interest earned on operating cash accounts.

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 subsidiaries in India and Lithuania, and are denominated in Indian rupees and Euros, respectively. We do not generate significant revenues outside of the United States. For the nine months ended September 30, 2019 and 2018, 7% and 6% of our expenses were denominated in foreign currencies, respectively. As of September 30, 2019 and 2018, we had net assets of $42.6 million and $33.8 million in foreign entities, respectively. The reduction in earnings from a 10% change in foreign currency spot rates would be $6.8 million and $4.6 million at September 30, 2019 and 2018, 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 September 30, 2019, it was anticipated that approximately $0.3 million of gains, 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 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 $2.7 million as of September 30, 2019.



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, 2019. Our Chief Executive Officer and interim Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II



Item 1.	Legal Proceedings

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

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, 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 (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 Third Amended Complaint 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, and the U.S. Attorney declined to intervene. We believe that we have meritorious defenses to all claims in the case and intend to vigorously defend the Company against these claims. The outcome is not presently determinable.



Item 1A.	Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2018 10-K. The risk factors disclosed in Part I, Item 1A of our 2018 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, could materially affect our business, financial condition, or results. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.



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:



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)
July 1, 2019 through July 31, 2019	880	$	12.90	—	$	49.0
August 1, 2019 through August 31, 2019	868	$	12.53	—	$	49.0
September 1, 2019 through September 30, 2019	303	$	11.28	—	$	49.0



(1)	Includes the surrender of shares of our common stock related to employees’ tax withholding upon vesting of restricted stock. See Note 12, Share-Based Compensation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
(2)	On November 13, 2013, the Board authorized, subject to the completion of the 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 Repurchase 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.



Item 6.	Exhibits

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

(a)



Exhibit Number	Exhibit Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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 Taxonomy Extension Schema Document
101.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)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	R1 RCM INC.

By:	/s/ Joseph Flanagan
	Joseph Flanagan
	President and Chief Executive Officer

By:	/s/ Richard B. Evans, Jr.
	Richard B. Evans, Jr.
	Interim Chief Financial Officer

Date: November 5, 2019

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R1 RCM 10-Q2019 Q3 Quarterly report

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