Change Healthcare (CHNG) 10-Q 2020 Q2 Quarterly report

Exhibit 99.1

Financial Information of Significant Equity Method Investee

Change Healthcare LLC

Index to Condensed Consolidated Financial Statements

Explanatory Note	2
Condensed Consolidated Statements of Operations	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Balance Sheets	5
Condensed Consolidated Statements of Members’ Equity (Deficit)	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8

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EXPLANATORY NOTE

Unconsolidated Significant Subsidiary

Change Healthcare Inc.’s (“the Company”) primary asset is its interest in the Joint Venture which is accounted for using the equity method. As the Company’s investment in the Joint Venture is considered to be significant, the Joint Venture’s annual financial statements are required to be included as an exhibit to each Company Annual Report on Form10-K in accordance with SEC Rule3-09 of RegulationS-X. Given the significance of this investment to the financial position and results of operations of the Company, however, we have elected to include financial information of the Joint Venture in this Quarterly Report on Form10-Q.

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Change Healthcare LLC

Condensed Consolidated Statements of Operations

(unaudited and amounts in thousands, except unit and per unit data)

	Three Months Ended September 30,						Six Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Solutions revenue	$	738,701		$	737,786		$	1,535,773		$	1,495,491
Postage revenue		57,110			62,404			115,594			127,962
Total revenue		795,811			800,190			1,651,367			1,623,453
Operating expenses:
Cost of operations (exclusive of depreciation and amortization below)		331,234			327,563			658,181			664,993
Research and development		51,783			51,243			101,122			106,567
Sales, marketing, general and administrative		190,039			207,105			383,312			414,019
Customer postage		57,110			62,404			115,594			127,962
Depreciation and amortization		77,448			69,258			148,764			137,785
Accretion and changes in estimate with related parties, net		3,214			5,932			7,094			9,756
Gain on Sale of the Extended Care Business		—			(111,392	)		—			(111,392	)
Total operating expenses		710,828			612,113			1,414,067			1,349,690
Operating income (loss)		84,983			188,077			237,300			273,763
Non-operating (income) and expense
Interest expense, net		69,901			80,677			153,307			159,226
Loss on extinguishment of debt		16,900			—			16,900			—
Contingent consideration		1,700			(72	)		909			200
Other, net		(4,386	)		(3,849	)		(8,164	)		(9,381	)
Totalnon-operating (income) and expense		84,115			76,756			162,952			150,045
Income (loss) before income tax provision (benefit)		868			111,321			74,348			123,718
Income tax provision (benefit)		998			(2,119	)		2,563			(2,228	)
Net income (loss)	$	(130	)	$	113,440		$	71,785		$	125,946
Net income (loss) per common unit:
Basic	$	—		$	0.45		$	0.25		$	0.50
Diluted	$	—		$	0.45		$	0.25		$	0.50
Weighted average common units outstanding:
Basic		318,219,028			251,501,744			285,107,046			251,550,892
Diluted		323,970,033			253,333,940			288,809,850			253,390,770

See accompanying notes to condensed consolidated financial statements.

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Change Healthcare LLC

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited and amounts in thousands)

	Three Months Ended					Six Months Ended
	September 30, 2019			September 30, 2018		September 30, 2019			September 30, 2018
Net income (loss)	$	(130)		$	113,440	$	71,785		$	125,946
Other comprehensive income (loss):
Foreign currency translation adjustment		3,812			1,886		4,568			(6,752	)
Changes in fair value of interest rate cap, net of taxes		(3,156	)		4,925		(21,254	)		7,529
Other comprehensive income (loss)		656			6,811		(16,686	)		777
Total comprehensive income (loss)	$	526		$	120,251	$	55,099		$	126,723

See accompanying notes to condensed consolidated financial statements.

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Change Healthcare LLC

Condensed Consolidated Balance Sheets

(unaudited and amounts in thousands)

	September 30, 2019		March 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	72,992	$	47,718
Restricted cash		—		1,176
Accounts receivable, net of allowance for doubtful accounts		675,306		759,502
Contract assets		139,111		—
Prepaid expenses and other current assets		155,019		172,067
Assets held for sale (see Note 14)		29,562		—
Total current assets		1,071,990		980,463
Property and equipment, net		160,305		197,263
Goodwill		3,295,381		3,284,266
Intangible assets, net		1,261,290		1,320,161
Other noncurrent assets, net		500,627		421,985
Total assets	$	6,289,593	$	6,204,138
Liabilities and members’ equity
Current liabilities:
Drafts and accounts payable	$	64,010	$	98,550
Accrued expenses		315,419		316,179
Deferred revenues		337,371		437,636
Due to related parties, net		23,230		34,629
Current portion of long-term debt		26,644		2,789
Total current liabilities		766,674		889,783
Long-term debt, excluding current portion		4,944,395		5,787,150
Deferred income tax liabilities		110,016		106,099
Tax receivable agreement obligations to related parties		199,876		212,698
Other long-term liabilities		112,812		113,194
Commitments and contingencies (see Note 6)
Members’ equity (deficit)		155,820		(904,786	)
Total liabilities and members’ equity	$	6,289,593	$	6,204,138

See accompanying notes to condensed consolidated financial statements.

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Change Healthcare LLC

Condensed Consolidated Statements of Members’ Equity (Deficit)

(unaudited and amounts in thousands)

	2019			2018
Balance at March 31	$	(904,786	)	$	(1,066,180	)
Cumulative effect of a change in accounting principle-revenue recognition		159,877			—
Advances to Member		—			(208	)
Repurchase of equity awards		—			(4,838	)
Capital contribution from Member from exercise of equity awards		—			205
Equity compensation expense		5,862			5,300
Net income (loss)		71,915			12,506
Foreign currency translation adjustment		756			(8,638	)
Change in fair value of interest rate cap agreements, net of taxes		(18,098	)		2,604
Other		(409	)		456
Balance at June 30	$	(684,883	)	$	(1,058,793	)
Advances to Members, net		—			2,844
Repurchase of equity awards		—			(2,249	)
Capital contribution from Member from exercise of equity awards		1,139			—
Issuance of LLC units for IPO proceeds		601,429			—
Issuance of tangible equity units		230,154			—
Equity compensation expense		8,565			2,969
Net income (loss)		(130	)		113,440
Foreign currency translation adjustment		3,812			1,886
Change in fair value of interest rate cap agreements, net of taxes		(3,156	)		4,925
Other		(1,110	)		(192	)
Balance at September 30	$	155,820		$	(935,170	)

See accompanying notes to condensed consolidated financial statements.

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Change Healthcare LLC

Condensed Consolidated Statements of Cash Flows

(unaudited and amounts in thousands)

	Six Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	71,785		$	125,946
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		148,764			137,785
Amortization of capitalized software developed for sale		6,698			7,378
Accretion and changes in estimate, net		7,094			9,756
Equity compensation		15,207			8,269
Deferred income tax expense (benefit)		1,473			(3,013	)
Amortization of debt discount and issuance costs		9,941			10,964
Contingent consideration		909			200
Gain on Sale of the Extended Care Business		—			(111,392	)
Loss on extinguishment of debt		16,900			—
Other		(111	)		538
Changes in operating assets and liabilities:
Accounts receivable		54,240			6,730
Contract assets		12,688			—
Prepaid expenses and other		(8,583	)		(16,373	)
Accounts payable		(15,209	)		(32,035	)
Accrued expenses and other liabilities		(16,311	)		142,707
Deferred revenue		(69,471	)		(75,074	)
Due to related party, net		(12,150	)		15,482
Net cash provided by (used in) operating activities		223,864			227,868
Cash flows from investing activities:
Capitalized expenditures		(129,847	)		(124,631	)
Proceeds from Sale of the Extended Care Business		—			160,244
Investments in businesses		(18,946	)		—
Net cash provided by (used in) investing activities		(148,793	)		35,613
Cash flows from financing activities:
Payments of third party initial public offering and loan costs		(8,554	)		—
Payments under tax receivable agreements with related parties		(27,227	)		(25,096	)
Payments on Term Loan Facility		(902,750	)		(76,500	)
Receipts (payments) on derivative instruments		3,109			2,090
Payments of deferred financing obligations		—			(3,432	)
Capital contribution from Members from exercise of equity awards		1,139			205
Repurchase of equity awards		—			(5,305	)
Proceeds from Change Healthcare Inc. initial public offering		608,679			—
Proceeds from debt issued to Change Healthcare Inc.		47,367			—
Proceeds from forward purchase contract with Change Healthcare Inc.		232,929			—
Advances to and refunds from Change Healthcare Inc.		(2,590	)		2,636
Payment of debt issued to Change Healthcare Inc.		(3,621	)		—
Other		247			598
Net cash provided by (used in) financing activities		(51,272	)		(104,804	)
Effect of exchange rate changes on cash and cash equivalents		299			(672	)
Net increase (decrease) in cash, cash equivalents and restricted cash		24,098			158,005
Cash, cash equivalents and restricted cash at beginning of period		48,894			50,011
Cash, cash equivalents and restricted cash at end of period	$	72,992		$	208,016

See accompanying notes to condensed consolidated financial statements.

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1. Nature of Business and Organization

Nature of Business

Change Healthcare LLC (the “Joint Venture”), is a leading independent healthcare technology platform that provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. The Joint Venture offers a comprehensive suite of software, analytics, technology enabled solutions that drive improved results in the complex workflows of healthcare system payers and providers.

Organization

In June 2016, Change Healthcare Inc., the Joint Venture, Change Healthcare Holdings, LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Performance, Inc. (“Legacy CHC”) and its stockholders—including affiliates of The Blackstone Group, L.P. (“Blackstone”) and Hellman & Friedman LLC (“Hellman & Friedman”)—entered into an Agreement of Contribution and Sale (the “Contribution Agreement”) with McKesson Corporation (“McKesson”, together with Change Healthcare Inc., the “Members”). Under the terms of the Contribution Agreement, the parties agreed to form the Joint Venture, a joint venture that combined the majority of the McKesson Technology Solutions businesses, excluding McKesson’s Enterprise Information Solutions business and RelayHealth Pharmacy Network (such contributed businesses, “Core MTS”) with substantially all of the assets and operations of Legacy CHC, but excluding Legacy CHC’s pharmacy claims switching and prescription routing businesses (such excluded businesses, the “eRx Network” and the businesses contributed by Legacy CHC, together with Core MTS, the “Contributed Businesses”). The creation of the Joint Venture, including the contribution of the Contributed Businesses and related transactions, is collectively referred to as the “Transactions”. The Transactions closed on March 1, 2017.

Basis of Accounting

Due to the existence of shared control among the Members over all major financial and operating decisions of the Joint Venture and its consolidated subsidiaries, the assets and liabilities contributed to the Joint Venture were recognized in the accompanying condensed consolidated financial statements at their historical carrying values (i.e., joint venture accounting).

Change Healthcare Inc. Initial Public Offering

Effective July 1, 2019, Change Healthcare Inc. completed its initial public offering of 49,285,713 of common stock and a concurrent offering of 5,750,000 of tangible equity units (“TEUs”). The proceeds of the offering of common stock were subsequently contributed to the Joint Venture in exchange for an additional 49,285,713 units of the Joint Venture (“LLC Units”), which together with the Company’s existing holdings represents an approximately 41% interest in the Joint Venture. The proceeds of the offering of TEUs were used to acquire instruments of the Joint Venture that, in economic terms, substantially mirror the terms of the TEUs included in Change Healthcare Inc.’s offering. The net proceeds received from Change Healthcare Inc. from the offering of common stock and the offering of TEUs were $603,787 and $276,633, respectively, and the Joint Venture, in turn, used the proceeds to repay $805,000 of its indebtedness under the Term Loan Facility without penalty in July 2019. The Joint Venture repaid an additional $85,000 of its indebtedness under the Term Loan Facility without penalty during the three months ended September 30, 2019 for a total paydown of $890,000. However, due to the presence of unamortized discounts and debt issuance costs, the Joint Venture recognized a loss on extinguishment of debt of approximately $15,791 during the three and six months ended September 30, 2019.

Amendment of Revolving Credit Facility

Additionally, in July 2019, the Joint Venture amended its Revolving Credit Facility, the primary effects of which were to increase the maximum amount that can be borrowed from $500,000 to $785,000 and to extend the maturity date until July 3, 2024. In the event that the outstanding balance under the Term Loan Facility exceeds $1,100,000 on December 1, 2023, however, amounts due, if any, under the Revolving Facility become due and payable on December 1, 2023. In connection with this amendment, a portion of the debt was deemed extinguished, and the Joint Venture recognized a loss on extinguishment of $1,109 during the three and six months ended September 30, 2019.

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2. Basis of Presentation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form10-Q andRule 10-01 ofRegulation S-X of the Securities and Exchange Commission (“SEC”) Guidelines, Rules and Regulations (“RegulationS-X”) and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. All intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements.

Tangible Equity Units

In connection with the initial public offering of Change Healthcare Inc., the Joint Venture completed an offering of TEUs that were issued to Change Healthcare Inc. Each TEU comprises an amortizing note and purchase contract, both of which are freestanding instruments and separate units of account. The amortizing notes were issued at par and are classified as debt on the accompanying condensed consolidated balance sheet, with scheduled principal payments over the next twelve months reflected in current maturities of long-term debt. The purchase contracts are accounted for as prepaid forward contracts and classified as equity. The TEU proceeds and issuance costs were allocated to the amortizing notes and purchase contracts on a relative fair value basis, consistent with the methodology utilized by Change Healthcare Inc. See Note 12 for further discussion.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Joint Venture bases its estimates on historical experience, current business factors and various other assumptions that the Joint Venture believes are necessary to consider in order to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses and disclosure of contingent assets and liabilities. The Joint Venture is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Joint Venture’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Joint Venture’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Joint Venture’s operating environment changes. Such changes in estimates and refinements in estimation methodologies are reflected in the reported results of operations, and, if material, the effects of changes in estimates are disclosed in the notes to the condensed consolidated financial statements. Estimates and assumptions by management affect: the allowance for doubtful accounts; the fair value assigned to assets acquired and liabilities assumed in business combinations; tax receivable agreement obligations; the fair value of interest rate cap agreement obligations; contingent consideration; loss accruals; the carrying value of long-lived assets (including goodwill and intangible assets); the classification and measurement of assets held for sale; the measurement of the components of tangible equity units; the amortization period of long-lived assets (excluding goodwill); the carrying value, capitalization and amortization of software development costs; the provision and benefit for income taxes and related deferred tax accounts; certain accrued expenses; revenue recognition; contingencies; and the value attributed to equity awards.

Allowance for Doubtful Accounts

The allowance for doubtful accounts of $21,796 and $20,438 at September 30, 2019 and March 31, 2019, respectively, reflects the Joint Venture’s best estimate of losses inherent in the Joint Venture’s receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.

Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2016-02, which generally requires that all lease obligations be recognized on the balance sheet at the present value of the remaining lease payments with a corresponding lease asset. As originally issued, the standard required that companies adopt the standard using the modified retrospective transition method and report a cumulative effect adjustment to the opening balance of retained earnings in the earliest comparative period presented. In July 2018, the FASB issued ASUNo. 2018-11 which provides companies with the

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option to apply this cumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of the earliest comparative period presented. This update is scheduled to be effective for the Joint Venture beginning April 1, 2020, with early adoption permitted. The Joint Venture is currently assessing both the method of adoption and the potential effects this update may have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASUNo. 2016-13, as amended by ASUNo. 2018-19, which requires that a financial asset (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This update is scheduled to be effective for the Joint Venture beginning April 1, 2021, with early adoption permitted beginning April 1, 2019. The Joint Venture is currently assessing the potential effects this update may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASUNo. 2018-13, which modifies the disclosure requirements related to fair value measurements based on the FASB Concepts Statements. This update eliminates certain disclosures, modifies others and, in certain cases, requires additional disclosures. This update is effective for the Joint Venture beginning April 1, 2020, with earlier adoption permitted. The Joint Venture is currently assessing the potential effects this update may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASUNo. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software. This update also requires that the effects of such capitalized costs be classified in the same respective caption of the statement of operations, balance sheet and cash flows as the underlying hosting arrangement. Upon adoption, a company may elect to either retrospectively restate each prior reporting period or apply the update prospectively to all implementation costs incurred after the effective date. This update is scheduled to be effective for the Joint Venture beginning April 1, 2020, with early adoption permitted. The Joint Venture is currently assessing both the method of adoption and the potential effects this update may have on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In April 2019, the Joint Venture adopted FASB ASUNo. 2018-16, which adds the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a benchmark interest rate for hedging purposes. As the adoption of this update applies only to qualifying new or redesignated hedging relationships entered into following the date of adoption, its adoption has no immediate effect on the Joint Venture’s condensed consolidated financial statements.

In April 2019, the Joint Venture adopted FASB ASUNo. 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”). Because the Joint Venture’s financial statements do not separately classify the components of members’ deficit, the effect of the adoption of this update was limited to the separate disclosure in Note 10 related to the reclassification of such stranded costs from accumulated comprehensive income (loss) to accumulated deficit.

In April 2019, the Joint Venture adopted FASB ASUNo. 2018-07, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Among other provisions, the measurement date for awards to nonemployees changed from the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which performance is complete under the previous guidance to the grant date under this update. Because the Joint Venture’s equity-based compensation was previously subject to remeasurement at fair value each quarter under the previous authoritative literature, the effect of the adoption of this update had no material effect on the Joint Venture’s condensed consolidated financial statements.

In April 2019, the Joint Venture adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which replaced most prior general and industry specific revenue recognition guidance with a principles-based comprehensive revenue recognition framework. Under this revised framework, a company recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. All of the Joint Venture’s revenue is accounted for under ASC 606.

The Joint Venture adopted ASC 606 using the modified retrospective transition method applied only to contracts that were not completed as of the date of initial application. The Joint Venture has also elected the contract modification transition practical expedient, and as a result, will treat all contract modifications entered into prior to adoption date as if they were part of the original

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contract. The adoption of the new revenue standard utilizing these transition methods resulted in a cumulative effect adjustment that reduced members’ equity (deficit) as of April 1, 2019 by $159,877. After assessing all potential impacts of adopting the new standard on its consolidated financial statements, related disclosures, and necessary control and process changes, the Joint Venture has noted the following to be the most notable impacts of adopting the new standard:

• Revenue for certain contingent fee service arrangements will be accelerated as revenue for these arrangements is recognized as the services are performed.

• Revenue related to certain time-based software and content license agreements will be accelerated. The license component for certain time-based software will be recognized upon delivery to the customer (“point in time”), or in the case of software that requires significant production, modification or customization, recognized as the implementation work is performed. Anon-license component (e.g., technical support) will be recognized over the respective contract terms (“over time”).

• Incremental costs to obtain contracts and qualifying costs to fulfill will be capitalized and amortized over the period of benefit. The net result of this change was an increase to capitalized contract costs on the balance sheet; these capitalized costs will be amortized and recognized as expense over an incrementally longer period of time.

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The following tables represent the impact of the new standard on the Joint Venture’s unaudited financial statements as of and for the three and six months ended September 30, 2019:

	Three Months Ended September 30,												Six Months Ended September 30,
	2019									2018			2019									2018
	As Reported			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)			As Reported			Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Revenue:
Solutions revenue	$	738,701		$	9,945		$	748,646		$	737,786		$	1,535,773		$	(31,586	)	$	1,504,187		$	1,495,491
Postage revenue		57,110			—			57,110			62,404			115,594			—			115,594			127,962
Total revenue		795,811			9,945			805,756			800,190			1,651,367			(31,586	)		1,619,781			1,623,453
Operating expenses:
Cost of operations (exclusive of depreciation and amortization below)		331,234			996			332,230			327,563			658,181			1,804			659,985			664,993
Research and development		51,783			—			51,783			51,243			101,122			—			101,122			106,567
Sales, marketing, general and administrative		190,039			4,595			194,634			207,105			383,312			9,764			393,076			414,019
Customer postage		57,110			—			57,110			62,404			115,594			—			115,594			127,962
Depreciation and amortization		77,448			—			77,448			69,258			148,764			—			148,764			137,785
Accretion and changes in estimate with related parties, net		3,214			—			3,214			5,932			7,094			—			7,094			9,756
Gain on Sale of the Extended Care Business		—			—			—			(111,392	)		—			—			—			(111,392	)
Impairment of long-lived assets and related costs		—			—			—			—			—			—			—			—
Total operating expenses		710,828			5,591			716,419			612,113			1,414,067			11,568			1,425,635			1,349,690
Operating income (loss)		84,983			4,354			89,337			188,077			237,300			(43,154	)		194,146			273,763
Non-operating (income) and expense
Interest expense, net		69,901			—			69,901			80,677			153,307			—			153,307			159,226
Loss on extinguishment of debt		16,900			—			16,900			—			16,900			—			16,900			—
Contingent consideration		1,700			—			1,700			(72	)		909			—			909			200
Other, net		(4,386	)		—			(4,386	)		(3,849	)		(8,164	)		—			(8,164	)		(9,381	)
Totalnon-operating (income) and expense		84,115			—			84,115			76,756			162,952			—			162,952			150,045
Income (loss) before income tax provision (benefit)		868			4,354			5,222			111,321			74,348			(43,154	)		31,194			123,718
Income tax provision (benefit)		998			(32	)		966			(2,119	)		2,563			(2,283	)		280			(2,228	)
Net income (loss)	$	(130)		$	4,386		$	4,256		$	113,440		$	71,785		$	(40,871	)	$	30,914		$	125,946
Net income (loss) per common unit:
Basic	$	—		$	0.01		$	0.01		$	0.45		$	0.25		$	(0.14	)	$	0.11		$	0.50
Diluted	$	—		$	0.01		$	0.01		$	0.45		$	0.25		$	(0.14	)	$	0.11		$	0.50

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	September 30, 2019								March 31, 2019
	As Reported		Impacts from Adoption			Without Adoption (ASC 605)			As Reported (ASC 605)
Assets
Current assets:
Cash and cash equivalents	$	72,992	$	—		$	72,992		$	47,718
Restricted cash		—		—			—			1,176
Accounts receivable, net of allowance for doubtful accounts		675,306		15,814			691,120			759,502
Contract assets		139,111		(139,111	)		—			—
Prepaid expenses and other current assets		155,019		20,914			175,933			172,067
Assets held for sale		29,562		—			29,562			—
Total current assets		1,071,990		(102,383	)		969,607			980,463
Property and equipment, net		160,305		—			160,305			197,263
Goodwill		3,295,381		—			3,295,381			3,284,266
Intangible assets, net		1,261,290		—			1,261,290			1,320,161
Other noncurrent assets, net		500,627		(40,520	)		460,107			421,985
Total assets	$	6,289,593	$	(142,903	)	$	6,146,690		$	6,204,138
Liabilities and members’ equity
Current liabilities:
Drafts and accounts payable	$	64,010	$	—		$	64,010		$	98,550
Accrued expenses		315,419		—			315,419			316,179
Deferred revenues		337,371		57,881			395,252			437,636
Due to related parties, net		23,230		—			23,230			34,629
Current portion of long-term debt		26,644		—			26,644			2,789
Total current liabilities		766,674		57,881			824,555			889,783
Long-term debt, excluding current portion		4,944,395		—			4,944,395			5,787,150
Deferred income tax liabilities		110,016		—			110,016			106,099
Tax receivable agreement obligations to related parties		199,876		—			199,876			212,698
Other long-term liabilities		112,812		—			112,812			113,194
Commitments and contingencies
Members’ equity (deficit)		155,820		(200,784	)		(44,964	)		(904,786	)
Total liabilities and members’ equity	$	6,289,593	$	(142,903	)	$	6,146,690		$	6,204,138

The adoption of the new standard had an immaterial impact on the Joint Venture’s unaudited statement of cash flows for the three and six months ended September 30, 2019. See Note 3,Revenue Recognition for more information.

3. Revenue Recognition

The Joint Venture generates most of its solutions revenue by using technology solutions (generally Software as a Service (“SaaS”)) to provide services to its customers that automate and simplify business and administrative functions for payers, providers, pharmacies, and channel partners and through the licensing of software, software systems (consisting of software, hardware and maintenance support) and content.

The Joint Venture recognizes revenue when the customer obtains control of the good or service through the Joint Venture satisfying a performance obligation by transferring the promised good or service to the customer.

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Principal Revenue Generating Products and Services

Content license subscriptions and time-based software—The Joint Venture’s content license subscriptions and time-based software arrangements provide a license to use a software for a specified period of time. At the end of the contractual period, the customer either renews the license for an additional term or ceases to use the software. Software licenses are typically delivered to the customer with functionality that the customer can benefit from the software on its own or together with readily available resources. As contracts for these solutions generally do not price individual components separately, the Joint Venture allocates the transaction price to the license and ongoing support performance obligations based on standalone selling price (“SSP”), primarily determined by historical value relationships between licenses and ongoing support and updates. Revenue allocated to content license subscriptions and time-based software license agreements is generally recognized at thepoint-in-time of delivery of the license or the content update upon transfer of control of the underlying license to the customer. Generally, software implementation fees are recognized over the implementation period through an input measure of progress method. Revenue allocated to maintenance and support is recognized ratably over the period covered by the agreements, as passage of time represents a faithful depiction of the transfer of these services. In some cases, software arrangements provide licenses to several software applications that are highly integrated with the implementation services and software updates and cannot function separately. The bundle is a single performance obligation since the individually promised goods and services are not distinct in the context of the contract because the related implementation services significantly modify and customize the software and the updates provided to the integrated software solution are critical to the software’s utility. The related revenue is recognized on a straight-line basis, ratably over the contractual term due to the frequency and criticality of the updates throughout the license period.

Contingent fee services—The Joint Venture provides services to customers in which the transaction price is contingent on future occurrences, such as savings generated or amounts collected on behalf of its customers through the delivery of its services. In some cases, the Joint Venture performs services in advance of invoicing the customer, thereby creating a contract asset. Revenue in these arrangements is estimated and constrained until the Joint Venture determines that it is probable a significant revenue reversal will not occur, and variable consideration is allocated to the performance obligation for which the Joint Venture earns a contingent fee.

Perpetual software licenses—The Joint Venture’s perpetual software arrangements provide a license for a customer to use software in perpetuity. Software licenses are typically delivered to the customer with functionality from which the customer can benefit from the license on its own or together with readily available resources. Perpetual software arrangements are recognized at the time of delivery or through an input measure of progress method over the installation period if the arrangements require significant production or modification or customization of the software. Contracts accounted for through an input measure of progress method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hours to be incurred. Software implementation fees are recognized as the work is performed or under the input method for perpetual software. Hardware revenues are generally recognized upon delivery. Maintenance is recognized ratably over the term of the agreement as passage of time represents a faithful depiction of the transfer of these services.

Professional services—The Joint Venture provides training and consulting services to its customers, and the services may be fixed fee or time and materials based. Consulting services that fall outside of the standard implementation services vary depending on the scope and complexity of the service requested by the customer. Consulting services are deemed to be capable of being distinct from other products and services, and the services are satisfied either at a point of time or over time based on delivery. Training services are usually provided as an optional service to enhance the customer’s experience with a software product or provides additional education surrounding the general topic of the solution. Training services are capable of being distinct from other products and services. The Joint Venture treats training services as a distinct performance obligation, and they are satisfied at a point of time.

Transaction processing services—The Joint Venture provides transaction processing (such as claims processing) services to hospitals, pharmacies and health systems via a cloud-based (SaaS) platform. The promised service is to stand ready to process transactions for our customers over the contractual period on an as needed basis. The revenue related to these services is recognized over time as the transactions are processed, and the revenue is recognized over the individual days in which the services are performed. Any fixed annual fees and implementation fees are recognized ratably over the contract period.

Hosted solutions and software as a service (“SaaS”)—The Joint Venture enters into arrangements whereby the Joint Venture provides the customer access to a Joint Venture-owned software solution, which are generally marketed under annual and multi-year arrangements. The customer is only provided “access” (not a license) to the software application. In these arrangements, the customer does not purchase equipment nor does the customer take physical possession of the software. The related revenue is recognized ratably over the contracted term. For fixed fee arrangements, revenue recognition begins afterset-up and implementation are complete. Forper-transaction fee arrangements, revenue is recognized as transactions are processed beginning on the service start date.

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Contract Balances

The Joint Venture’s payment terms vary by customer and product type. For certain products or services, the Joint Venture requires upfront payments before control of the product or service has transferred to the customer. For other products and services, the Joint Venture invoices the customer in arrears after providing the products or services. In addition, for certain contingent fee services, customers are billed in arrears, typically based upon a percentage of collections the Joint Venture makes on the customer’s behalf.

Under the new revenue standard, the Joint Venture generally recognizes a contract asset when revenue is recognized in advance of invoicing on a customer contract, unless the right to payment for that revenue is unconditional (i.e. requiring no further performance and only the passage of time). If a right to payment is determined to meet the criteria to be considered ‘unconditional’, then the Joint Venture will recognize a receivable.

There were no impairment losses recognized on accounts receivable or contract assets during the three and six months ended September 30, 2019.

The Joint Venture records deferred revenues when billings or payments are received from customers in advance of its performance. Deferred revenue is generally recognized when transfer of control to customers occurs. The deferred revenue balance is driven by multiple factors, including the frequency of renewals, invoice timing, and invoice duration. As of September 30, 2019, the Joint Venture expects 94% of the deferred revenue balance to be recognized in one year or less, and approximately $328,000 of the beginning period balance was recognized during the first six months of fiscal 2020.

Costs to Obtain or Fulfill a Contract

Sales commissions and certain other incentive payments (e.g., bonuses that are contingent solely on obtaining a contract or a pool of contracts) earned by the Joint Venture’s sales organization are capitalized as incremental costs to obtain a contract. The Joint Venture typically does not offer commissions on contract renewals. Decremented commissions upon renewal (i.e.,non-commensurate with initial commissions) are offered to the Joint Venture’s sales associates for certain customers and are not material. Under ASC 606, all commissions and other qualifying incentive payments capitalized are amortized over an expected period of benefit defined as the initial contract term plus anticipated renewals. In contrast, under ASC 605 these capitalized costs were amortized over the specific revenue contract terms, which are typically 12 to 60 months. In making the significant judgment in determining the appropriate period of benefit, the Joint Venture evaluated both qualitative and quantitative factors such as the expected customer relationship period and technology obsolescence. In addition, prior to solutiongo-live, the Joint Venture incurs certain contract fulfillment costs primarily related to SaaS setup for our clients. These costs are capitalized to the extent they are directly related to a contract, are recoverable, and create a resource used to deliver the Joint Venture’s SaaS services. Capitalized costs to fulfill a contract are amortized over the expected period of benefit.

At September 30, 2019, the Joint Venture had capitalized costs to obtain a contract of $12,407 in prepaid and other current assets and $67,426 in other noncurrent assets. During the three and six months ended September 30, 2019, the Joint Venture recognized $5,098 and $9,207 of amortization expense related to such capitalized costs, respectively, which is included in the total operating expenses. At September 30, 2019, the Joint Venture had capitalized costs to fulfill a contract of $1,383 in prepaid and other current assets and $8,571 in other noncurrent assets. During the three and six months ended September 30, 2019, the Joint Venture recognized $313 and $609 of amortization expense, respectively, related to such capitalized costs, which is included in cost of operations.

Postage Revenues

Postage revenues are the result of providing delivery services to customers in the Joint Venture’s payment and communication solutions. Postage revenues are generally billed as a pass-through cost to the Joint Venture’s customers. The service is part of a combined performance obligation with the printing and handling services provided to the customer because the postage services are not distinct within the context of the contract. The Joint Venture presents Postage Revenue separately from Solutions Revenue on the consolidated statements of operation as it makes the financial statements more informative for the users. The revenue related to the combined performance obligation of the postage, printing, and handling service is recognized as the transactions are processed, and the revenue is recognized over the individual days in which the services are performed.

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Arrangements with Multiple Performance Obligations

The Joint Venture engages in customer arrangements which may include multiple performance obligations, such as any combination of software, hardware, implementation, SaaS-based offerings, consulting services, or maintenance services. For such arrangements, the Joint Venture allocates revenues to each performance obligation on a relative standalone selling price basis. A performance obligation’s standalone selling price is determined based on the directly observable prices charged to customers, when available or estimated using other methods such as the adjusted market assessment approach, the expected cost plus a margin approach, or other approaches in cases where distinct performance obligations are not sold separately but instead sold at a bundled price. For performance obligations with historical pricing that is highly variable, the residual approach is used. Such instances primarily relate to the Joint Venture’s perpetual software arrangements in which the Joint Venture sells the same products to different customers for a broad range of amounts.

Remaining Performance Obligations

The aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts includes deferred revenue and other revenue yet to be recognized fromnon-cancellable contracts. As of September 30, 2019, the Joint Venture’s total remaining performance obligations approximated $1,347,000, of which approximately 52% is expected to be recognized over the next twelve months, and the remaining 48% thereafter.

In this balance, the Joint Venture does not include the value of unsatisfied performance obligations related to those contracts for which it recognizes revenue at the amount for which it has the right to invoice for services performed.    Additionally, this balance does not include revenue related to performance obligations that are part of a contract with an original expected duration of one year or less. Lastly, this balance does not include variable consideration allocated to the individual goods or services in a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Examples includes variable fees associated with transaction processing and contingent fee services.

Disaggregated Revenue

The Joint Venture disaggregates the revenue from contracts with customers by operating segment as it believes doing so best depicts how the nature, amount, timing and uncertainty of the Joint Venture’s revenue are affected by economic factors. See Note 9,Segment Reporting for the total revenue disaggregated by operating segment for the three and six months ended September 30, 2019 and 2018.

The Joint Venture’s total revenue by disaggregated revenue source was generally consistent for each reportable segment for the three and six months ended September 30, 2019 and 2018.

Customer Incentives

Certain customers, which include the Joint Venture’s channel partners, may receive cash-based incentives or rebates based on actual sales and achievement of a cumulative level of sales, which are accounted for as variable consideration. The Joint Venture considers these amounts to be consideration payable to the customer, and therefore, the Joint Venture estimates these amounts based on the expected amount to be provided to customers and reduces the transaction price accordingly.

Practical Expedients and Exemptions

The Joint Venture has elected to utilize either the right to invoice practical expedient or the series-based variable consideration allocation framework for most transaction processing services not subject to contingencies. The Joint Venture also has elected to exclude sales taxes and other similar taxes from the measurement of the transaction price in contracts with customers. Therefore, revenue is recognized net of such taxes.

In certain customer arrangements with customers, the Joint Venture determined there are certain promised goods or services which are immaterial in the context of the contract from both a quantitative and qualitative perspective, and therefore, the goods and services are disregarded when assessing the performance obligations in the customer arrangement.

The Joint Venture has elected to apply the significant financing practical expedient, and as a result, the Joint Venture will not adjust the promised amount of consideration in a customer contract for the effects of a significant financing component when the period of time between when the Joint Venture transfers a promised good or service to a customer and when the customer pays for the good or service will be one year or less.

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4. Interest Rate Cap Agreements

Risk Management Objective of Using Derivatives

The Joint Venture is exposed to certain risks arising from both its business operations and economic conditions. The Joint Venture principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Joint Venture manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Joint Venture enters into derivative financial instruments to manage differences in the amount, timing and duration of the Joint Venture’s known or expected cash receipts and its known or expected cash payments principally related to the Joint Venture’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Joint Venture’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Joint Venture primarily uses interest rate cap agreements as part of its interest rate risk management strategy.

In March 2016 and 2017, Legacy CHC and the Joint Venture, respectively, executed annuitized interest rate cap agreements with a combined notional amount of $650,000 and $750,000, respectively, to limit the exposure of the variable component of interest rates under the then existing term loan facility or future variable rate indebtedness, each beginning in March 2017 and expiring in March 2020.

In August 2018, the Joint Venture executed additional annuitized interest rate cap agreements with notional amounts of $500,000 and $1,500,000, respectively, to limit the exposure of the variable component of interest rates under the term loan facility or future variable rate indebtedness to a maximum of 1.0%. The $500,000 interest rate cap agreement began effective August 31, 2018 and expires March 31, 2020. The $1,500,000 interest rate cap agreement begins effective March 31, 2020 and expires December 31, 2021.

As of September 30, 2019, each of the Joint Venture’s outstanding interest rate cap agreements was designated as a cash flow hedge of interest rate risk and was determined to be highly effective.

Following the adoption of ASU2017-12, all changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Joint Venture’s variable-rate debt. During the twelve months subsequent to September 30, 2019, the Joint Venture estimates that $16,009 will be reclassified as an increase to interest expense.

The following table summarizes the fair value of the Joint Venture’s derivative instruments at September 30, 2019 and March 31, 2019:

	Fair Values of Derivative Financial Instruments
	Asset (Liability)
Derivative financial instruments designated as hedging instruments:	Balance Sheet Location		September 30, 2019			March 31, 2019
Interest rate cap agreements		Prepaid and other current assets	$	731		$	8,766
Interest rate cap agreements		Accrued expenses		(11,629	)		(2,160	)
Interest rate cap agreements		Other long-term liabilities		(23,066	)		(16,846	)
			$	(33,964	)	$	(10,240	)

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Tabular Disclosure of the Effect of Derivative Instruments on the Statement of Operations

The effect of the derivative instruments on the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2019 and 2018 is summarized in the following table:

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018		Six Months Ended September 30, 2019			Six Months Ended September 30, 2018
Derivative financial instruments in cash flow hedging relationships:
Gain/ (loss) related to effective portion of derivative financial instruments recognized in other comprehensive income (loss)	$	(3,635	)	$	6,218	$	(20,686	)	$	11,868
Gain/ (loss) related to portion of derivative financial instruments reclassified from accumulated other comprehensive income (loss) to interest expense	$	479		$	1,293	$	(568	)	$	2,705

Credit Risk-related Contingent Features

The Joint Venture has agreements with each of its derivative counterparties providing that if the Joint Venture defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Joint Venture also could be declared in default on its derivative obligations.

As of September 30, 2019, the termination value of derivative financial instruments in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was $35,207. If the Joint Venture had breached any of these provisions at September 30, 2019, the Joint Venture could have been required to settle its obligations under the agreements at this termination value. The Joint Venture does not offset any derivative financial instruments, and the derivative financial instruments are not subject to collateral posting requirements.

5. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Joint Venture’s assets and liabilities that are measured at fair value on a recurring basis consist of the Joint Venture’s derivative financial instruments and contingent consideration obligations. The tables below summarize these items as of September 30, 2019 and March 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.

Description	Balance at September 30, 2019			Quoted in Markets Identical (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate cap agreements	$	(33,964	)	$	—	$	(33,964	)	$	—
Contingent consideration obligations		(4,000	)		—		—			(4,000	)
Total	$	(37,964	)	$	—	$	(33,964	)	$	(4,000	)
Description	Balance at March 31, 2019			Quoted in Markets Identical (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate cap agreements	$	(10,240	)	$	—	$	(10,240	)	$	—
Contingent consideration obligations		(3,091	)		—		—			(3,091	)
Total	$	(13,331	)	$	—	$	(10,240	)	$	(3,091	)

The valuation of the Joint Venture’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair value of the interest rate cap agreements is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments) using the overnight index swap rate as the discount rate.

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The Joint Venture incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Joint Venture has considered the impact of netting and any applicable credit enhancements and measures the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Although the Joint Venture has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs to evaluate the likelihood of default by itself and by its counterparties. As of September 30, 2019, the Joint Venture determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Joint Venture determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The valuation of the Joint Venture’s contingent consideration obligations was determined using a discounted cash flow method as applied to cash flows determined through a Monte Carlo Simulation. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length ofearn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Significant increases with respect to assumptions as to future revenue and probabilities of achieving such future revenue would have resulted in a higher fair value measurement while an increase in the discount rate would have resulted in a lower fair value measurement.

The table below presents a reconciliation of the fair value of the liabilities that use significant unobservable inputs (Level 3):

	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Six Months Ended September 30, 2019			Six Months Ended September 30, 2018
Balance at beginning of period	$	(2,300	)	$	(4,172	)	$	(3,091	)	$	(4,000	)
Adjustment of provisional amounts		—			—			—			100
Gain/ (loss) included in contingent consideration		(1,700	)		72			(909	)		(200	)
Balance at end of period	$	(4,000	)	$	(4,100	)	$	(4,000	)	$	(4,100	)

Assets and Liabilities Measured at Fair Value upon Initial Recognition

The carrying amount and the estimated fair value of financial instruments held by the Joint Venture at September 30, 2019 and March 31, 2019 were:

	September 30, 2019				March 31, 2019
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	72,992	$	72,992	$	47,718	$	47,718
Accounts receivable	$	675,306	$	675,306	$	759,502	$	759,502
Senior Credit Facilities (Level 2)	$	3,925,509	$	3,973,284	$	4,804,905	$	4,834,800
Senior Notes (Level 2)	$	981,335	$	1,015,000	$	979,905	$	990,000
Debt component of tangible equity units (Level 2)	$	42,069	$	43,896	$	—	$	—

The carrying amounts of cash equivalents and accounts receivable approximate fair value because of their short-term maturities. The fair value of the Senior Credit Facilities and Senior Notes is based upon market quotes and trades by investors in partial interests of these instruments. The fair value of the debt component of tangible equity units is based on a discounted cash flow analysis.

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Investments in Businesses

In December 2018, the Joint Venture purchased $15,000 of preferred shares of a health care company and $500 shares in a related company holding certain intellectual property, each of which is classified within Other noncurrent assets, net on the accompanying condensed consolidated balance sheets. Because this investment has no readily determinable fair value, the Joint Venture measures this investment at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Joint Venture recognized no changes in the value of this investment during the three and six months ended September 30, 2019.

6. Legal Proceedings

The Joint Venture is subject to various claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of its business.

Government Subpoenas and Investigations

From time to time, the Joint Venture receives subpoenas or requests for information from various government agencies. The Joint Venture generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Joint Venture. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Joint Venture and other members of the health care industry, as well as to settlements.

Other Matters

Additionally, in the normal course of business, the Joint Venture is involved in various claims and legal proceedings. While the ultimate resolution of ongoing matters has yet to be determined, the Joint Venture does not believe that their outcomes will have a material adverse effect on the Joint Venture’s consolidated financial position, results of operations or liquidity.

7. Income Taxes

The Joint Venture is treated as a partnership for income tax purposes and is therefore not subject to U.S. federal income taxes and not subject to most state and local income taxes. Legacy CHC and Change Healthcare Practice Management Solutions, Inc., both wholly owned subsidiaries of the Joint Venture, are subject to U.S. federal, state and local, andnon-U.S. corporate income taxes.

The income tax expense for the three months ended September 30, 2019 and income tax benefit for the three months ended September 30, 2018 was $998 and $2,119, respectively, which represents an effective tax rate of 115.0% and (1.9%), respectively. The income tax expense for the six months ended September 30, 2019 and income tax benefit for the six months ended September 30, 2018 was $2,563 and $2,228, respectively, which represents an effective tax rate of 3.4% and (1.8%), respectively.

Fluctuations in the Joint Venture’s reported income tax rates are primarily due to the earnings from partnerships that are passed through to the Members for which the Joint Venture is not subject to tax and benefits recognized as a result of certain incentive tax credits resulting from research and experimental expenditures in both the US and Canada.

8. Tax Receivable Agreement Obligations to Related Parties

Upon the consummation of the Transactions, the Joint Venture assumed obligations related to certain tax receivable agreements (collectively, the “Tax Receivable Agreements”) with its current and former owners. Because the assets and obligations of the predecessor businesses were contributed to the Joint Venture at their historical carrying values, these Tax Receivable Agreements are subject to differing accounting models as explained below.

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2009—2011 Tax Receivable Agreements

Under the 2009—2011 Tax Receivable Agreements assumed by the Joint Venture in connection with the Transactions, the Joint Venture is obligated to make payments to certain of the former Legacy CHC stockholders, equal to 85% of the applicable cash savings that the Joint Venture expects to realize as a result of tax attributes arising from certain previous transactions. As a result of the covered change of control with respect to the Tax Receivable Agreements that occurred in connection with the Transactions, payments the Joint Venture makes under the 2009—2011 Tax Receivable Agreements are required to be calculated using certain valuation assumptions, including that the Joint Venture will have sufficient taxable income to use the applicable tax attributes and that certain of such tax attributes will be used by the Joint Venture on a pro rata basis from the date of the Transactions (or in certain cases from the date of certain previous transactions) through the expiration of the applicable tax attribute. Because the 2009—2011 Tax Receivable Agreements were previously subject to fair value measurement in connection with a prior business combination transaction, it is recognized at its initial fair value plus recognized accretion to date.

2017 Tax Receivable Agreement

The 2017 Tax Receivable Agreement generally provides for the payment by Change Healthcare Performance, Inc. (a wholly owned subsidiary of the Joint Venture) to affiliates of Blackstone, Hellman & Friedman of 85% of the net cash tax savings realized (or, in certain circumstances, deemed to be realized) in periods ending on or after the Transactions as a result of certain net operating losses and certain other tax attributes of Change Healthcare Performance, Inc. as of the date of the Transactions. The 2017 Tax Receivable Agreement is considered a loss contingency under FASB ASC Topic 450 and is reflected on the accompanying condensed consolidated balance sheet at the amount that is both probable and reasonably estimable with future changes in this value being reflected within pretax income or loss.

McKesson Tax Receivable Agreement

The McKesson Tax Receivable Agreement generally requires payment to affiliates of McKesson (the “McKesson TRA Parties”) of 85% of certain cash tax savings realized (or, in certain circumstances, deemed to be realized) by Change Healthcare Performance, Inc. in periods ending on or after the date on which McKesson ceases to own at least 20% of the Joint Venture as a result of (i) certain amortizable tax basis in assets transferred to Joint Venture at the closing of the Transactions and (ii) imputed interest deductions and certain other tax attributes arising from payments under the McKesson Tax Receivable Agreement. Because payments under the McKesson Tax Receivable Agreement are contingent upon McKesson’s ceasing to own at least 20% of the Joint Venture and such an event was not probable at inception of the McKesson Tax Receivable Agreement or as of September 30, 2019, no related obligation has been reflected on the accompanying condensed consolidated balance sheet.

Based on facts and circumstances at September 30, 2019, the Joint Venture estimates the aggregate payments due under these Tax Receivable Agreements to be as follows:

	2009 - 2011 Tax Receivable Agreements			2017 Tax Receivable Agreement			Total
2020 (remainder)	$	—		$	—		$	—
2021		18,703			1,179			19,882
2022		19,756			1,179			20,935
2023		19,826			41,330			61,156
2024		19,096			19,650			38,746
Thereafter		119,498			52,393			171,891
Gross expected payments		196,879			115,731			312,610
Less: Amounts representing discount		(92,852	)		—			(92,852	)
Total tax receivable agreement obligations due to related parties		104,027			115,731			219,758
Less: Current portion due (included in due to related parties, net)		(18,703	)		(1,179	)		(19,882	)
Tax receivable agreement long-term obligations due to related parties	$	85,324		$	114,552		$	199,876

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The timing and/or amount of aggregate payments due may vary based on a number of factors, including the amount of net operating losses and income tax rates.

9. Segment Reporting

Management views the Joint Venture’s operating results based on three reportable segments: (a) Software and Analytics, (b) Network Solutions and (c) Technology-enabled Services. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 2 to the Joint Venture’s audited consolidated financial statements for the year ended March 31, 2019.

In April 2019, the Joint Venture made certain changes in the way that it manages its business and allocates costs. Specifically, the Joint Venture made the following changes during the period:

• Moved its consumer payments solution from the Network Solutions reportable segment to the Technology-enabled Services reportable segment.

• Moved its consumer engagement solutions from the Software and Analytics reportable segment to the Network Solutions reportable segment.

• Made certain changes in the way that costs are assigned to the reportable segments.

The presentation in the tables that follow has been retrospectively adjusted to reflect the above described changes. The retrospective reclassifications resulted in an impact to revenue and Adjusted EBITDA of less than 2% for each reportable segment.

Software and Analytics

The Software and Analytics segment provides solutions for revenue cycle management, provider network management, payment accuracy, value-based payments, clinical decision support, consumer engagement, risk adjustment and quality performance, and imaging and clinical workflow.

Network Solutions

The Network Solutions segment provides solutions for financial, administrative and clinical transactions, electronic payments and aggregation and analytics of clinical and financial data.

Technology-enabled Services

The Technology-enabled Services segment provides solutions for revenue cycle and practice management, value-based care enablement, communications and payments, pharmacy benefits administration and consulting.

Corporate and Eliminations

Inter-segment revenue and expenses primarily represent claims management and payment and communication solutions provided between segments.

Corporate and eliminations includes pass-through postage costs, management, administrative and certain other shared corporate services costs that are not allocated to the respective reportable segments, as well as eliminations to remove inter-segment revenue and expenses and consolidating adjustments to classify certain rebates paid to channel partners as a reduction of revenue. These administrative costs are excluded from the adjusted EBITDA measure for each respective reportable segment.

Listed below are the revenue and adjusted EBITDA for each of the reportable segments for the three and six months ended September 30, 2019 and 2018. This information is reflected in the manner utilized by management to make operating decisions, assess performance and allocate resources. Such amounts include allocations of corporate shared services functions that are essential to the core operations of the reportable segments such as information technology, operations and product development functions. Segment assets and related depreciation expenses are not presented to management for purposes of operational decision making, and therefore are not included in the accompanying tables.

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	Three Months Ended September 30, 2019
	Software and Analytics		Network Solutions		Technology- enabled Services		Corporate and Eliminations			Consolidated
Revenue from external customers:
Solutions revenue	$	375,789	$	124,368	$	243,685	$	(5,141	)	$	738,701
Postage revenue		—		—		—		57,110			57,110
Inter-segment revenue		339		19,908		439		(20,686	)		—
Net revenue	$	376,128	$	144,276	$	244,124	$	31,283		$	795,811
Adjusted EBITDA	$	140,078	$	86,500	$	44,841	$	(53,726	)	$	217,693
Equity compensation											9,345
Acquisition accounting adjustments											553
Acquisition and divestiture-related costs											414
Integration and related costs											19,781
Management fees and related costs											2,413
Strategic initiatives, duplicative and transition costs											6,120
Severance costs											2,929
Accretion and changes in estimate with related parties, net											3,214
Impairment of long-lived assets and other exit related costs											—
Contingent consideration											1,700
Loss on Extinguishment of Debt											16,900
Othernon-routine, net											2,858
EBITDA Adjustments											66,227
EBITDA											151,466
Interest expense											69,901
Depreciation and amortization											77,448
Amortization of capitalized software developed for sale											3,249
Income (loss) before income tax provision (benefit)										$	868

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	Six Months Ended September 30, 2019
	Software and Analytics		Network Solutions		Technology- enabled Services		Corporate and Eliminations			Consolidated
Revenue from external customers:
Solutions revenue	$	812,904	$	246,121	$	487,293	$	(10,545	)	$	1,535,773
Postage revenue		—		—		—		115,594			115,594
Inter-segment revenue		568		39,767		821		(41,156	)		—
Net revenue	$	813,472	$	285,888	$	488,114	$	63,893		$	1,651,367
Adjusted EBITDA	$	342,393	$	171,472	$	89,992	$	(105,108	)	$	498,749
Equity compensation											15,207
Acquisition accounting adjustments											927
Acquisition and divestiture-related costs											1,073
Integration and related costs											45,507
Management fees and related costs											5,060
Strategic initiatives, duplicative and transition costs											9,688
Severance costs											10,099
Accretion and changes in estimate with related parties, net											7,094
Impairment of long-lived assets and other exit related costs											(840	)
Contingent consideration											909
Loss on Extinguishment of Debt											16,900
Othernon-routine, net											4,008
EBITDA Adjustments											115,632
EBITDA											383,117
Interest expense											153,307
Depreciation and amortization											148,764
Amortization of capitalized software developed for sale											6,698
Income (loss) before income tax provision (benefit)										$	74,348

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	Three Months Ended September 30, 2018
	Software and Analytics		Network Solutions		Technology- enabled Services		Corporate and Eliminations			Consolidated
Revenue from external customers:
Solutions revenue	$	379,998	$	121,302	$	242,408	$	(5,922	)	$	737,786
Postage revenue		—		—		—		62,404			62,404
Inter-segment revenue		3,512		15,020		935		(19,467	)		—
Net revenue	$	383,510	$	136,322	$	243,343	$	37,015		$	800,190
Adjusted EBITDA	$	139,419	$	83,612	$	39,181	$	(46,261	)	$	215,951
Equity compensation											2,959
Acquisition accounting adjustments											555
Acquisition and divestiture-related costs											3,319
Integration and related costs											26,291
Strategic initiatives, duplicative and transition costs											8,348
Severance costs											2,339
Costs related to recently issued accounting standards											1,772
Accretion and changes in estimate with related parties, net											5,932
Management fees and related costs											2,607
Impairment of long-lived assets and other exit related costs											2,343
Gain on Sale of extended care business											(111,392	)
Contingent consideration											—
Othernon-routine, net											6,004
EBITDA Adjustments											(48,923	)
EBITDA											264,874
Interest expense											80,677
Depreciation and amortization											69,258
Amortization of capitalized software developed for sale											3,618
Income (loss) before income tax provision (benefit)										$	111,321

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	Six Months Ended September 30, 2018
	Software and Analytics		Network Solutions		Technology- enabled Services		Corporate and Eliminations			Consolidated
Revenue from external customers:
Solutions revenue	$	772,826	$	241,892	$	491,436	$	(10,663	)	$	1,495,491
Postage revenue		—		—		—		127,962			127,962
Inter-segment revenue		7,086		31,033		1,902		(40,021	)		—
Net revenue	$	779,912	$	272,925	$	493,338	$	77,278		$	1,623,453
Adjusted EBITDA	$	282,056	$	165,849	$	89,154	$	(93,318	)	$	443,741
Equity compensation											8,259
Acquisition accounting adjustments											2,540
Acquisition and divestiture-related costs											7,507
Integration and related costs											47,242
Strategic initiatives, duplicative and transition costs											19,122
Severance costs											10,015
Costs related to recently issued accounting standards											5,513
Accretion and changes in estimate with related parties, net											9,756
Management fees and related costs											5,284
Impairment of long-lived assets and other exit related costs											3,360
Gain on Sale of extended care business											(111,392	)
Contingent consideration											272
Othernon-routine, net											8,156
EBITDA Adjustments											15,634
EBITDA											428,107
Interest expense											159,226
Depreciation and amortization											137,785
Amortization of capitalized software developed for sale											7,378
Income (loss) before income tax provision (benefit)										$	123,718

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10. Accumulated Other Comprehensive Income (Loss)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of taxes, and related changes for each of the quarterly periods in the three and six months ended September 30, 2019 and 2018.

	Foreign Currency Translation Adjustment			Cash Flow Hedge			Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2018	$	(14,823	)	$	6,218		$	(8,605	)
Cumulative effect of accounting change		—			1,633			1,633
Change associated with foreign currency translation		(8,638	)		—			(8,638	)
Change associated with current period hedging		—			4,016			4,016
Reclassification into earnings		—			(1,412	)		(1,412	)
Balance at June 30, 2018	$	(23,461	)	$	10,455		$	(13,006	)
Cumulative effect of accounting change		—			—			—
Change associated with foreign currency translation		1,886			—			1,886
Change associated with current period hedging		—			6,218			6,218
Reclassification into earnings		—			(1,293	)		(1,293	)
Balance at September 30, 2018	$	(21,575	)	$	15,380		$	(6,195	)
Balance at March 31, 2019	$	(24,263	)	$	(10,769	)	$	(35,032	)
Reclassification of stranded tax effects as a result of the Tax Legislation		—			(1,406	)		(1,406	)
Change associated with foreign currency translation		756			—			756
Change associated with current period hedging		—			(17,051	)		(17,051	)
Reclassification into earnings		—			(1,047	)		(1,047	)
Balance at June 30, 2019	$	(23,507	)	$	(30,273	)	$	(53,780	)
Change associated with foreign currency translation		3,812			—			3,812
Change associated with current period hedging		—			(3,635	)		(3,635	)
Reclassification into earnings		—			479			479
Balance at September 30, 2019	$	(19,695	)	$	(33,429	)	$	(53,124	)

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11. Equity Based Compensation

Following Change Healthcare Inc.’s initial public offering, Change Healthcare Inc. adopted the Change Healthcare Inc. 2019 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) pursuant to which 25.0 million shares of the Change Healthcare Inc.’s stock have been reserved for issuance to employees, directors and consultants of Change Healthcare Inc., the Joint Venture and its affiliates.

In connection with the Omnibus Incentive Plan, Change Healthcare Inc., during the three months ended September 30, 2019, granted to the Joint Venture’s employees and directors one or a combination of time-vesting restricted stock units (RSUs), time-vesting deferred stock units, performance stock units, and cash settled restricted stock units under vesting terms that generally vary from one to four years from the date of grant. Each of these instruments are described below.

Restricted Stock Units (“RSUs”)—Change Healthcare Inc. granted 4,436,758 RSUs during the three months ended September 30, 2019. The RSUs are subject to either a graded vesting schedule over four years or a one or four year cliff vesting schedule, depending on the terms of the specific award. Upon vesting, the RSUs are exchanged for shares of the Change Healthcare Inc.’s common stock.

Performance Stock Units (“PSUs”)—Change Healthcare Inc. granted 1,079,621 PSUs during the three months ended September 30, 2019. The PSUs consist of two tranches, one for which the quantity of awards expected to vest varies based on the Joint Venture’s compound annual Revenue growth rate over a three year period in comparison to a target percentage and one for which the quantity of awards expected to vest varies based on the Joint Venture’s compound annual Adjusted EBITDA growth rate over a three year period in comparison to a target percentage. The awards earned upon satisfaction of the performance conditions become vested on the fourth anniversary of the vesting commencement date of the award (i.e. continued service is required beyond the satisfaction of the performance condition prior to vesting). The Joint Venture recognizes compensation expense for the PSUs based on the number of awards that are considered probable to vest. Recognition of expense is based on the probability of achievement of performance targets and is periodically reevaluated.

Cash Settled Restricted Stock Units (“CSRSUs”)— Change Healthcare Inc. granted 597,006 CSRSUs during the three months ended September 30, 2019. The CSRSUs are expected to vest ratably over three years. Upon vesting, however, Change Healthcare Inc. is required to pay cash in settlement of such CSRSUs based on their fair value at the date such CSRSUs vest.

Deferred Stock Units (“DSUs”)—Change Healthcare Inc. granted 45,704 DSUs during the three months ended September 30, 2019. The DSUs vest 100% upon theone-year anniversary of the date of grant. Unlike the RSUs, however, the DSUs are exchanged for shares of the Change Healthcare Inc.’s common stock only following the participant’s separation from service.

During the three and six months ended September 30, the Joint Venture recognized compensation expense of $6,096 related to awards granted under the 2019 Plan. At September 30, 2019, aggregate unrecognized compensation expense of the Joint Venture related to awards granted under the 2019 Plan was $87,211.

12. Tangible Equity Units

In July 2019, Change Healthcare Inc. completed its offering of 5,750,000 TEUs. Each TEU, which had a stated amount of $50, was comprised of a prepaid stock purchase contract and a senior amortizing note due June 30, 2022. Change Healthcare Inc. allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of the respective components of each TEU. Change Healthcare Inc. invested the net proceeds of each in a unit purchase contract and a debt instrument of the Joint Venture on terms that substantially mirror the economics of the TEUs, resulting in net proceeds to the Joint Venture of $276,633 after consideration of underwriting discounts and third party costs that were allocated between the unit purchase contract and debt instrument consistent with the allocation utilized by Change Healthcare Inc. Under these mirrored arrangements, the Joint Venture is required to make cash payments or to transfer LLC Units to Change Healthcare Inc. concurrent with any cash payments or issuance of shares by Change Healthcare Inc. pursuant to the terms of its TEUs.

With respect to the mirrored debt arrangement, the Joint Venture agreed to pay Change Healthcare Inc. an aggregate principal amount of $47,367 in quarterly installments of principal and interest (5.5% per year) on March 30, June 30, September 30, and December 30 of each year through June 30, 2022. Such amounts have been classified with debt on the accompanying consolidated balance sheets.

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With respect to the mirrored unit purchase contract, the Joint Venture agreed to issue LLC Units to Change Healthcare Inc. in an amount equal to the number of shares of common stock issued by Change Healthcare Inc. to holders of its purchase contract and at the time of delivery of such common stock to such holders. Such amounts have been classified within Member’s deficit on the accompanying consolidated balance sheets.

Because the economics of the unit purchase contract are intended to mirror the purchase contracts issued by Change Healthcare Inc., the Joint Venture expects to deliver between 18,429,325 LLC Units and 22,115,075 LLC Units, subject to adjustment, based on the Applicable Market Value (as defined below) of Change Healthcare Inc.’s common stock as described below:

• If the Applicable Market Value of Change Healthcare Inc.’s common stock is greater than $15.60 per share, holders will receive 3.2051 shares of common stock per purchase contract and the Joint Venture will issue an identical number of LLC units to Change Healthcare Inc.

• If the Applicable Market Value is less than or equal to $15.60 per share but greater than or equal to $13.00 per share, the holder will receive a number of shares of the Company’s common stock per purchase contract equal to $50, divided by the Applicable Market Value and the Joint Venture will issue an identical number of LLC units to Change Healthcare Inc.; and

• If the Applicable Market Value is less than $13.00 per share, the holder will receive 3.8461 shares of common stock per purchase contract and the Joint Venture will issue an identical number of LLC units to Change Healthcare Inc.

The Applicable Market Value is defined as the arithmetic average of the volume weighted average price per share of the Company’s common stock over the twenty consecutive trading day period immediately preceding the balance sheet date, or June 30, 2022, for settlement of the stock purchase contracts.

The unit purchase contract has a dilutive effect on the Change Healthcare Inc.’s net income (loss) per unit. The 18,429,325 minimum LLC Units to be issued are included in the calculation of basic net income (loss) per unit. The difference between the minimum LLC Units and the maximum LLC Units are potentially dilutive securities, and accordingly, will be included in the Joint Venture’s diluted net income (loss) per unit on a pro rata basis to the extent the Applicable Market Value is higher than $13.00 but is less than $15.60 at period end.

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13. Net Income (Loss) per Common Unit

The following table sets forth the computation of basic and diluted net income (loss) per common unit:

	Three Months Ended September 30,					Six Months Ended September 30,
	2019			2018		2019		2018
Basic net income per common unit:
Numerator:
Net income (loss)	$	(130	)	$	113,440	$	$ 71,785	$	125,946
Denominator:
Weighted average common units outstanding		299,789,703			251,501,744		275,892,383		251,550,892
Minimum units issuable under purchase contracts		18,429,325			—		9,214,663		—
		318,219,028			251,501,744		285,107,046		251,550,892
Basic net income (loss) per common unit	$	—		$	0.45	$	0.25	$	0.50
Diluted net income per common unit:
Numerator:
Net income (loss)	$	(130	)	$	113,440	$	71,785	$	125,946
Denominator:
Number of shares used in basic computation		318,219,028			251,501,744		285,107,046		251,550,892
Weighted average effect of dilutive securities
Add:
Dilutive units issuable under unit purchase contracts		3,685,750			—		1,842,875		—
Reimbursement units issuable to Change Healthcare Inc.		2,065,255			1,832,196		1,859,929		1,839,878
		323,970,033			253,333,940		288,809,850		253,390,770
Diluted net income (loss) per common unit	$	—		$	0.45	$	0.25	$	0.50

14. Asset Held for Sale

During the three months ended September 30, 2019, the Joint Venture committed to a plan to sell its Alpharetta, GA office property in an effort to reduce its real estate footprint. The Joint Venture expects to complete a sale of the property during its fiscal third quarter and recognize an immaterial gain on sale. As of September 30, 2019, the property had a carrying value of $29,562. As a result of this contemplated sale transaction, the Joint Venture has classified the property as an asset held for sale on the accompanying condensed consolidated balance sheet at September 30, 2019.

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15. Subsequent Events

Agreement to Sell Office Building

In October 2019, the Joint Venture executed an agreement for the sale of its Alpharetta, GA office property for proceeds of approximately $31,500. The sale is expected to be completed during the third quarter of the Joint Venture’s fiscal year. The Joint Venture expects to recognize a gain of an immaterial amount as a result of this sale.

The Joint Venture has evaluated subsequent events through November 14, 2019, the date the financial statements were available to be issued.

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