UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
OR
☐ |
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 001-38961
Change Healthcare Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 82-2152098 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
3055 Lebanon Pike, Suite 1000 Nashville, TN | 37214 | |
(Address of Principal Executive Offices) | (Zip Code) |
(615) 932-3000
(Registrants 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 $.001 per share | CHNG | The Nasdaq Stock Market LLC | ||
6.00% Tangible Equity Units | CHNGU | The Nasdaq Stock Market LLC |
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 ☒ 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 ☒ 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 | ☐ | 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 ☒
Number of shares of common stock outstanding on August 4, 2020: 304,297,254
Item 1. |
3 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
27 | ||||
Item 3. |
35 | |||||
Item 4. |
36 | |||||
Item 1. |
36 | |||||
Item 1A. |
36 | |||||
Item 2. |
36 | |||||
Item 3. |
36 | |||||
Item 4. |
36 | |||||
Item 5. |
36 | |||||
Item 6. |
36 | |||||
38 |
2
Change Healthcare Inc.
Consolidated Statements of Operations
(unaudited and amounts in thousands, except share and per share amounts)
Three Months Ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
Revenue |
||||||||
Solutions revenue |
$ | 648,412 | $ | | ||||
Postage revenue |
45,772 | | ||||||
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Total revenue |
694,184 | | ||||||
Operating expenses |
||||||||
Cost of operations (exclusive of depreciation and amortization below) |
318,542 | | ||||||
Sales, marketing, general and administrative |
165,474 | 251 | ||||||
Research and development |
55,734 | | ||||||
Customer postage |
45,772 | | ||||||
Depreciation and amortization |
138,541 | | ||||||
Accretion and changes in estimate with related parties, net |
5,895 | | ||||||
Gain on sale of businesses |
(28,095 | ) | | |||||
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Total operating expenses |
701,863 | 251 | ||||||
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Operating income (loss) |
(7,679 | ) | (251 | ) | ||||
Non-operating (income) expense |
||||||||
Interest expense, net |
62,667 | | ||||||
Contingent consideration |
(2,450 | ) | | |||||
Loss from Equity Method Investment in the Joint Venture |
| 39,554 | ||||||
Management fee income |
| (104 | ) | |||||
Other, net |
4,259 | | ||||||
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Total non-operating (income) expense |
64,476 | 39,450 | ||||||
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Income (loss) before income tax provision (benefit) |
(72,155 | ) | (39,701 | ) | ||||
Income tax provision (benefit) |
(13,461 | ) | (2,184 | ) | ||||
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Net income (loss) |
$ | (58,694 | ) | $ | (37,517 | ) | ||
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Net income (loss) per share: |
||||||||
Basic and diluted |
$ | (0.18 | ) | $ | (0.50 | ) | ||
Weighted average common shares outstanding: |
||||||||
Basic and diluted |
320,052,943 | 75,474,654 |
See accompanying notes to consolidated financial statements.
3
Change Healthcare Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited and amounts in thousands)
Three Months Ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
Net income (loss) |
$ | (58,694 | ) | $ | (37,517 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
6,353 | 226 | ||||||
Changes in fair value of interest rate caps, net of taxes |
(4,184 | ) | (5,431 | ) | ||||
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Other comprehensive income (loss) |
2,169 | (5,205 | ) | |||||
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Total comprehensive income (loss) |
$ | (56,525 | ) | $ | (42,722 | ) | ||
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See accompanying notes to consolidated financial statements.
4
Change Healthcare Inc.
Consolidated Balance Sheets
(unaudited and amounts in thousands, except share and per share amounts)
June 30, | March 31, | |||||||
2020 | 2020 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash & cash equivalents |
$ | 178,351 | $ | 410,405 | ||||
Accounts receivable, net |
627,305 | 740,105 | ||||||
Contract assets, net |
122,707 | 132,704 | ||||||
Prepaid expenses and other current assets |
129,309 | 117,495 | ||||||
Income taxes receivable |
472 | 472 | ||||||
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Total current assets |
1,058,144 | 1,401,181 | ||||||
Property and equipment, net |
203,695 | 206,196 | ||||||
Operating lease right-of-use assets, net |
115,184 | | ||||||
Goodwill |
4,112,880 | 3,795,325 | ||||||
Intangible assets, net |
4,508,247 | 4,365,806 | ||||||
Investment in business purchase option |
| 146,500 | ||||||
Other noncurrent assets, net |
265,944 | 192,372 | ||||||
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Total assets |
$ | 10,264,094 | $ | 10,107,380 | ||||
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Liabilities |
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Current liabilities: |
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Accounts payable |
$ | 59,706 | $ | 68,169 | ||||
Accrued expenses |
387,741 | 390,294 | ||||||
Deferred revenues |
314,600 | 302,313 | ||||||
Due to related parties, net |
22,506 | 20,234 | ||||||
Current portion of long-term debt |
28,986 | 278,779 | ||||||
Current portion of operating lease liabilities |
32,753 | | ||||||
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Total current liabilities |
846,292 | 1,059,789 | ||||||
Long-term debt, excluding current portion |
5,027,868 | 4,710,294 | ||||||
Long-term operating lease liabilities |
95,514 | | ||||||
Deferred income tax liabilities |
642,102 | 615,904 | ||||||
Tax receivable agreement obligations due to related parties |
160,870 | 177,826 | ||||||
Tax receivable agreement obligation |
164,505 | 164,633 | ||||||
Other long-term liabilities |
87,589 | 93,487 | ||||||
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Total liabilities |
7,024,740 | 6,821,933 | ||||||
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Commitments and contingencies |
||||||||
Stockholders Equity |
||||||||
Common Stock (par value, $.001), 9,000,000,000 and 9,000,000,000 shares authorized and 303,769,372 and 303,428,142 shares issued and outstanding at June 30, 2020 and March 31, 2020, respectively |
304 | 303 | ||||||
Preferred stock (par value, $.001), 900,000,000 and 900,000,000 shares authorized and no shares issued and outstanding at June 30, 2020 and March 31, 2020, respectively |
| | ||||||
Additional paid-in capital |
4,233,428 | 4,222,580 | ||||||
Accumulated other comprehensive income (loss) |
(5,203 | ) | (7,372 | ) | ||||
Accumulated deficit |
(989,175 | ) | (930,064 | ) | ||||
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Total stockholders equity |
3,239,354 | 3,285,447 | ||||||
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Total liabilities and stockholders equity |
$ | 10,264,094 | $ | 10,107,380 | ||||
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See accompanying notes to consolidated financial statements.
5
Change Healthcare Inc.
Consolidated Statements of Stockholders Equity
(unaudited and amounts in thousands, except share and per share amounts)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||
Balance at March 31, 2019 |
75,474,654 | $ | 75 | $ | 1,153,509 | $ | (17,841 | ) | $ | (3,256 | ) | $ | 1,132,487 | |||||||||||
Cumulative effect of accounting change of the Joint Venture-ASC 606 |
| | | 35,797 | | 35,797 | ||||||||||||||||||
Cumulative effect of accounting change of the Joint Venture-ASU 2018-02 |
| | | (422 | ) | 422 | | |||||||||||||||||
Equity compensation expense |
| | 5,862 | | | 5,862 | ||||||||||||||||||
Net income (loss) |
| | | (37,517 | ) | | (37,517 | ) | ||||||||||||||||
Foreign currency translation adjustment of the Joint Venture |
| | | | 226 | 226 | ||||||||||||||||||
Change in fair value of interest rate caps of the Joint Venture, net of taxes |
| | | | (5,431 | ) | (5,431 | ) | ||||||||||||||||
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Balance at June 30, 2019 |
75,474,654 | $ | 75 | $ | 1,159,371 | $ | (19,983 | ) | $ | (8,039 | ) | $ | 1,131,424 | |||||||||||
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Balance at March 31, 2020 |
303,428,142 | $ | 303 | $ | 4,222,580 | $ | (930,064 | ) | $ | (7,372 | ) | $ | 3,285,447 | |||||||||||
Cumulative effect of accounting change-ASU 2016-13 |
| | | (417 | ) | | (417 | ) | ||||||||||||||||
Equity compensation expense |
| | 8,780 | | | 8,780 | ||||||||||||||||||
Issuance of common stock under equity compensation plans |
341,230 | 1 | 2,143 | | | 2,144 | ||||||||||||||||||
Net income (loss) |
| | | (58,694 | ) | | (58,694 | ) | ||||||||||||||||
Foreign currency translation adjustment |
| | | | 6,353 | 6,353 | ||||||||||||||||||
Change in fair value of interest rate caps, net of taxes |
| | | | (4,184 | ) | (4,184 | ) | ||||||||||||||||
Other |
| | (75 | ) | | | (75 | ) | ||||||||||||||||
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Balance at June 30, 2020 |
303,769,372 | $ | 304 | $ | 4,233,428 | $ | (989,175 | ) | $ | (5,203 | ) | $ | 3,239,354 | |||||||||||
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See accompanying notes to consolidated financial statements.
6
Change Healthcare Inc.
Consolidated Statements of Cash Flows
(unaudited and amounts in thousands)
Three Months Ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (58,694 | ) | $ | (37,517 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Loss from Equity Method Investment in the Joint Venture |
| 39,554 | ||||||
Depreciation and amortization |
138,541 | | ||||||
Amortization of capitalized software developed for sale |
78 | | ||||||
Accretion and changes in estimate with related parties, net |
5,895 | | ||||||
Equity compensation |
9,583 | | ||||||
Deferred income tax expense (benefit) |
(13,845 | ) | (2,184 | ) | ||||
Amortization of debt discount and issuance costs |
8,047 | | ||||||
Contingent consideration |
(2,450 | ) | | |||||
Gain on Sale of Businesses |
(28,095 | ) | | |||||
Other, net |
14,618 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
113,470 | | ||||||
Contract assets, net |
10,013 | | ||||||
Prepaid expenses and other |
(24,632 | ) | | |||||
Accounts payable |
(19,244 | ) | | |||||
Accrued expenses and other liabilities |
(4,852 | ) | 168 | |||||
Deferred revenue |
20,667 | | ||||||
Due from the Joint Venture |
| (201 | ) | |||||
Income taxes receivable |
| 180 | ||||||
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Net cash provided by (used in) operating activities |
169,100 | | ||||||
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Cash flows from investing activities: |
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Acquisitions, net of cash acquired |
(398,651 | ) | | |||||
Capitalized expenditures |
(66,770 | ) | | |||||
Proceeds from sale of businesses |
28,553 | | ||||||
Other, net |
1,039 | | ||||||
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Net cash provided by (used in) investing activities |
(435,829 | ) | | |||||
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Cash flows from financing activities: |
||||||||
Payments on Revolving Facility |
(250,000 | ) | | |||||
Proceeds from issuance of Senior Notes |
325,000 | | ||||||
Payment of loan costs |
(5,364 | ) | | |||||
Payments under tax receivable agreements with related parties |
(20,691 | ) | | |||||
Receipts (payments) on derivative instruments |
(7,364 | ) | | |||||
Payments on deferred financing obligations |
(5,788 | ) | | |||||
Repayment of senior amortizing notes |
(4,028 | ) | | |||||
Proceeds from exercise of equity awards |
2,143 | | ||||||
Payments on finance leases |
(179 | ) | | |||||
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Net cash provided by (used in) financing activities |
33,729 | | ||||||
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Effect of exchange rate changes on cash and cash equivalents |
946 | | ||||||
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Net increase (decrease) in cash and cash equivalents |
(232,054 | ) | | |||||
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Cash and cash equivalents at beginning of period |
410,405 | 3,409 | ||||||
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Cash and cash equivalents at end of period |
$ | 178,351 | $ | 3,409 | ||||
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See accompanying notes to consolidated financial statements.
7
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
1. Nature of Business and Organization
Change Healthcare Inc. (the Company, our or we) is an independent healthcare technology company, focused on accelerating the transformation of the healthcare system through the power of our Healthcare Platform. We provide data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. Our platform and comprehensive suite of software, analytics, technology-enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.
We are a Delaware corporation originally formed on June 22, 2016, to initially hold an equity investment in Change Healthcare LLC (the Joint Venture), a joint venture between the Company and McKesson Corporation (McKesson).
Amendment of Certificate of Incorporation
Effective June 26, 2019 and in contemplation of our initial public offering of common stock, we amended the certificate of incorporation to effect a 126.4 for 1 stock split for all previously issued shares of common stock, to increase the authorized number of common stock, and to authorize shares of preferred stock. Following this amendment, the authorized shares include 9,000,000,000 shares of common stock (par value $.001 per share), one share of Class X stock (par value $.001 per share), and 900,000,000 shares of preferred stock (par value $.001 per share). As a result of the Merger (defined below), the Class X Stock is no longer available for issuance.
Initial Public Offering
Effective July 1, 2019, we completed our initial public offering of 49,285,713 shares of common stock and a concurrent offering of 5,750,000 tangible equity units (TEUs) for net proceeds of $608,679 and $278,875, respectively.
McKesson Exit
On March 10, 2020, McKesson completed a split-off of its interest in the Joint Venture through an exchange offer of its common stock for shares of PF2 SpinCo, Inc, a Delaware corporation and wholly owned subsidiary of McKesson (SpinCo). Immediately following consummation of the exchange offer, SpinCo was merged with and into Change Healthcare Inc. (the Merger). As a result, McKesson no longer owns any voting or economic interest in the Joint Venture. Prior to the Merger, we accounted for our investment in the Joint Venture under the equity method of accounting. Subsequent to the Merger, we own 100% of Change Healthcare LLC, and as a result, consolidate the financial statements of Change Healthcare LLC.
COVID-19 Considerations
On March 11, 2020, the World Health Organization declared the current coronavirus (COVID-19) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the U.S., federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have led to weakened conditions in many sectors of the economy, including a decline in healthcare transaction volumes that are integral to our business.
We experienced, and expect to continue to experience, an adverse impact on our financial results as a result of COVID-19. However, we are not presently aware of events or circumstances arising from COVID-19 that would require us to revise the carrying value of our assets or liabilities, nor do we expect the impact of COVID-19 to cause us to be unable to comply with our debt covenants or meet our contractual obligations.
2. Significant Accounting Policies
Basis of Presentation
The unaudited 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 Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC) Guidelines, Rules and Regulations 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 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 consolidated financial statements.
8
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Business Combinations
We recognize the consideration transferred (i.e., purchase price) in a business combination, as well as the acquired business identifiable assets, liabilities and noncontrolling interests at their acquisition date fair value. The excess of the consideration transferred over the fair value of the identifiable assets, liabilities and noncontrolling interest, if any, is recorded as goodwill. Any excess of the fair value of the identifiable assets acquired and liabilities assumed over the consideration transferred, if any, is generally recognized within earnings as of the acquisition date.
The fair value of the consideration transferred, assets, liabilities and noncontrolling interests is estimated based on one or a combination of income, cost or market approaches as determined based on the nature of the asset or liability and the level of inputs available (i.e., quoted prices in an active market, other observable inputs or unobservable inputs). To the extent our initial accounting for a business combination is incomplete at the end of a reporting period, provisional amounts are reported for those items which are incomplete.
In conjunction with business combinations, we generally recognize goodwill attributable to the assembled workforce and expected synergies among the operations of the acquired entities and our existing operations. Goodwill is generally deductible for federal income tax purposes when a business combination is treated as an asset purchase and is generally not deductible for federal income tax purposes when a business combination is treated as a stock purchase. See Note 4, Business Combinations.
Allowance for Credit Losses
The allowance for credit losses of $29,174 and $22,360 at June 30, 2020 and March 31, 2020, respectively, were primarily based on historical credit loss experience, current conditions and adjustments for certain asset-specific risk characteristics. The following table summarizes activity related to the allowance for credit losses:
Three Months Ended | Three Months Ended | |||||||
June 30, 2020 | June 30, 2019 | |||||||
Balance at beginning of period |
$ | 22,360 | $ | | ||||
Cumulative effect of accounting change-ASU 2016-13 |
417 | | ||||||
Acquisitions and Dispositions (1) |
(1,654 | ) | | |||||
Provisions |
10,381 | | ||||||
Write-offs |
(2,330 | ) | | |||||
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Balance at end of period |
$ | 29,174 | $ | | ||||
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(1) |
Amount relates to the acquisitions of eRx and PDX and sale of Connected Analytics. See Note 4, Business Combinations and Note 5, Dispositions. |
Leases
We determine whether an arrangement contains a lease based on the conveyed rights and obligations at the inception date. If an agreement contains an operating or finance lease, at the commencement date, we record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments.
As most of our leases do not provide an implicit borrowing rate, to determine the present value of lease payments, we use the portfolio approach and determine our hypothetical secured borrowing rate based on information available at lease commencement. Further, we make certain estimates and judgements regarding the lease term and lease payments, noted below.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods and exclude termination periods from our lease term if, at commencement, we are reasonably certain to exercise the option.
Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation. For example, some of our equipment leases include a component which varies based on the assets use.
Additionally, we have lease agreements that include lease and non-lease components, such as equipment leases, which are generally accounted for as a single lease component. For these leases, lease payments include all fixed payments stated within the contract. For other leases, such as office space, lease and non-lease components are accounted for separately. Our lease agreements do not contain any material residual value guarantees that would impact our lease payments.
9
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Recently Adopted Accounting Pronouncements
Financial Instruments: Credit Losses
In April 2020, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, as amended by ASU No. 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. The guidance also requires us to pool assets with similar risk characteristics and consider current economic conditions when estimating losses. We adopted this standard using the modified retrospective approach and recorded a cumulative effect to retained earnings of $417 as of April 1, 2020.
Fair Value Measurements
In April 2020, we adopted FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. See Note 10, Fair Value Measurements.
Hosting Arrangement Implementation Costs
In April 2020, we adopted FASB ASU No. 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 obtain internal-use software. This update also requires that the effects of such capitalized costs be classified in the same respective caption in the statement of operations, balance sheet and cash flows as the underlying hosting arrangement. We adopted this standard prospectively beginning April 1, 2020. This adoption did not have a material impact on our financial statements for the three months ended June 30, 2020.
Leases
In April 2020, we adopted FASB ASU No. 2016-02, which created Topic 842 Leases (ASC 842). The standard generally requires that all lease obligations be recognized on the balance sheet at the present value of the remaining lease payments with a corresponding right-of-use asset. In July 2018, the FASB issued ASU No. 2018-11 which provides companies with the option to apply this cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.
Upon adoption, we elected the transition practical expedients permitting us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. Additionally, we elected the practical expedient to not separate lease and non-lease components for equipment lease agreements.
We adopted ASC 842 using the modified retrospective approach and recorded right-of-use assets of $111,815 and lease liabilities of $125,331, primarily related to operating leases. The recognition of the right-of-use assets in combination with our previously recorded prepaid rent balances resulted in no requirement to adjust the opening balance of retained earnings. Our accounting for finance leases remains substantially unchanged. Adoption of ASC 842 did not materially impact our consolidated statement of operations and had no impact on our consolidated statement of cash flows. See Note 8, Leases, for additional information.
London Interbank Offered Rate (LIBOR) Reform
In March 2020, the FASB issued ASU No. 2020-04, which created Topic 848 Reference Rate Reform. ASU No. 2020-04 contains optional practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts which may be elected over time as activities occur. Among other things, the ASU intends to ease the transition from LIBOR to an alternative reference rate. During the first quarter of fiscal year 2021, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impacts of ASU No. 2020-04 and may apply other elections as reference rate reform activities progress.
Accounting Pronouncements Not Yet Adopted
None that are expected to have a material impact on our financial statements.
10
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
3. Revenue Recognition
We generate most of our solutions revenue by using technology solutions (generally Software as a Service (SaaS)) to provide services to our 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.
We recognize revenue when the customer obtains control of the good or service through satisfying a performance obligation by transferring the promised good or service to the customer.
Principal Revenue Generating Products and Services
Hosted solutions and SaaS - We enter into arrangements whereby we provide the customer access to a Company-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 after set-up and implementation are complete. For per-transaction fee arrangements, revenue is recognized as transactions are processed beginning on the service start date. Revenue for hosted solutions and SaaS, which is included in solutions revenue, is generated by the Software and Analytics, Network Solutions, and Technology-Enabled Services segments.
Transaction processing services - We provide 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. Revenue related to these services is recognized over time as transactions are processed and the revenue is recognized over the individual days in which the services are performed. Revenue is recognized as solutions revenue in the Software and Analytics, Network Solutions, and Technology-Enabled Services segments, with the exception of revenue related to postage that is generated through the delivery of certain of these services. Postage revenue is discussed below and is separately presented on the consolidated statement of operations. Any fixed annual fees and implementation fees are recognized ratably over the contract period.
Contingent fee services - We provide services to customers in which the transaction price is contingent on future occurrences, such as savings generated or amounts collected on behalf of our customers through the delivery of services. In some cases, we perform services in advance of invoicing the customer, thereby creating a contract asset. Revenue in these arrangements is estimated and constrained until we determine that it is probable a significant revenue reversal will not occur, and variable consideration is allocated to the performance obligation for which we earn a contingent fee. We use the expected value method when estimating variable consideration, as we have a large number of contracts with similar characteristics and consider a portfolio of data from other similar contracts to form our estimate of expected value. Revenue for contingent fee services, which is included in solutions revenue, is generated by the Software and Analytics and Technology-Enabled Services segments.
Content license subscriptions and time-based software - Our 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 allows the customer to 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, we allocate the transaction price to the license and ongoing support performance obligations based on standalone selling price, 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 the point-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 softwares 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. Revenue for content license subscriptions and time-based software, which is included in solutions revenue, is generated by the Software and Analytics segment.
Perpetual software licenses - Our 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. License, implementation, hardware and maintenance revenue for these arrangements, which is included in solutions revenue, is generated by the Software and Analytics and Network Solutions segments.
11
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Professional services - We provide training and consulting services to our 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 and are recognized as solutions revenue in the Software and Analytics and Technology-Enabled Services segments. Training services are usually provided as an optional service to enhance the customers 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. We treat training services as a distinct performance obligation, and those services are satisfied at a point of time and recognized as solutions revenue in the Software and Analytics and Technology-Enabled Services segments.
Postage Revenues
Postage revenues are the result of providing delivery services to customers in our payment and communication solutions. Postage revenues are generally billed as a pass-through cost to our 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. We present Postage Revenue separately from Solutions Revenue on the consolidated statements of operations as doing so 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.
Contract Balances
We generally recognize 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 we will recognize a receivable.
We did not recognize any impairment loss on accounts receivable or contract assets during the three months ended June 30, 2020. Change Healthcare Inc. did not have accounts receivable prior to the Merger.
We record deferred revenues when billings or payments are received from customers in advance of our 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, invoice duration and fair value adjustments as a result of the Merger. As of June 30, 2020, we expect 94% of the deferred revenue balance to be recognized in one year or less, and approximately $113,032 of the beginning period balance was recognized during the three months ended June 30, 2020.
Costs to Obtain or Fulfill a Contract
At June 30, 2020, we had capitalized costs to obtain a contract of $3,922 in prepaid and other current assets and $5,769 in other noncurrent assets. At June 30, 2020, we had capitalized costs to fulfill a contract of $3,209 in prepaid and other current assets and $5,511 in other noncurrent assets. Amortization of such capitalized costs to obtain and to fulfill were immaterial for the three months ended June 30, 2020. Change Healthcare Inc. did not have costs to obtain or fulfill a contract prior to the Merger.
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 from non-cancellable contracts. As of June 30, 2020, the total remaining performance obligations approximated $1,481,330, of which approximately 49% is expected to be recognized over the next twelve months, and the remaining 51% thereafter.
In this balance, we do not include the value of unsatisfied performance obligations related to those contracts for which we recognize revenue at the amount for which we have 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.
12
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Disaggregated Revenue
We disaggregate the revenue from contracts with customers by operating segment as we believe doing so best depicts how the nature, amount, timing and uncertainty of revenues are affected by economic factors. See Note 19, Segment Reporting, for the total revenue disaggregated by operating segment for the three months ended June 30, 2020.
In addition to disaggregating revenue by operating segment, we disaggregate revenue between revenue that is recognized over time and revenue that is recognized at a point in time. Approximately 92% of revenue was recognized over time and approximately 8% of revenue was recognized at a point in time for the three months ended June 30, 2020.
4. Business Combinations
Fiscal Year 2021 Transactions
eRx Network Holdings, Inc.
On May 1, 2020, we exercised our option to purchase and completed the acquisition of 100% of the ownership interest in eRx Network Holdings, Inc. (eRx), a leading provider in comprehensive, innovative and secure data-driven solutions for pharmacies. At the time of the acquisition, all outstanding eRx equity awards were canceled and holders of eRx stock options and vested eRx stock appreciation rights were able to elect to receive consideration in the form of a cash payment or vested stock appreciation rights of the Company. See Note 17, Incentive Compensation Plans, for additional information.
Prior to the acquisition, we held an option to purchase eRx which we accounted for as an equity investment. Therefore, our acquisition of eRx was accounted for as a business combination achieved in stages under the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations (ASC 805). Accordingly, we remeasured our business purchase option to fair value and recognized a loss of $6,000 which is recorded within Other, net on our consolidated statement of operations.
The following table summarizes information related to this acquisition as of the acquisition date. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the eRx acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement.
eRx | ||||
Cash paid at closing |
$ | 249,359 | ||
Fair value of eRx purchase option |
140,500 | |||
Fair value of vested stock appreciation rights |
5,097 | |||
Cash paid for canceled eRx equity awards |
5,891 | |||
|
|
|||
Total Consideration Fair Value at Acquisition Date |
$ | 400,847 | ||
|
|
|||
Allocation of the Consideration Transferred: |
||||
Cash |
$ | 54,108 | ||
Accounts receivable, net of allowance of $326 |
12,747 | |||
Prepaid expenses and other current assets |
609 | |||
Goodwill |
225,807 | |||
Identifiable intangible assets: |
||||
Customer relationships (life 15 years) |
106,000 | |||
Internally developed technology (life 8 years) |
53,000 | |||
Other noncurrent assets |
20 | |||
Accounts payable |
(2,543 | ) | ||
Accrued expenses and other current liabilities |
(10,462 | ) | ||
Deferred income tax liabilities |
(38,439 | ) | ||
|
|
|||
Total consideration transferred |
$ | 400,847 | ||
|
|
The goodwill recognized, all of which is assigned to the Network Solutions segment, is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries. The goodwill is not expected to be deductible for tax purposes. See Note 6, Goodwill.
Acquisition costs related to the purchase of eRx were not material.
13
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
PDX, Inc.
On June 1, 2020, we completed the purchase of 100% of the ownership interest in PDX, Inc. (PDX), a company focused on delivering patient centric and innovative technologies for pharmacies and health systems. We accounted for this transaction as a business combination using the acquisition method.
The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the PDX acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement. After customary working capital adjustments, transaction fees and other adjustments, the total consideration fair value at the acquisition date was $198,472. The following table summarizes the allocation of consideration transferred:
PDX | ||||
Cash |
$ | 962 | ||
Accounts receivable, net of allowance of $1,092 |
5,739 | |||
Prepaid expenses and other current assets |
2,125 | |||
Property and equipment |
840 | |||
Goodwill |
109,267 | |||
Identifiable intangible assets: |
||||
Tradenames (life 20 years) |
2,000 | |||
Customer relationships (life 15 years) |
63,000 | |||
Technology-based intangible assets (life 8 years) |
31,000 | |||
Other noncurrent assets |
1,041 | |||
Accounts payable |
(4,242 | ) | ||
Deferred revenue, current |
(8,629 | ) | ||
Accrued expenses and other current liabilities |
(4,409 | ) | ||
Other noncurrent liabilities |
(222 | ) | ||
|
|
|||
Total consideration transferred |
$ | 198,472 | ||
|
|
The goodwill recognized, all of which is assigned to the Network Solutions segment, is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries. The goodwill is expected to be deductible for tax purposes. See Note 6, Goodwill.
Acquisition costs related to the purchase of PDX were not material.
Fiscal Year 2020 Transactions
The Merger
On March 10, 2020 (the Merger Effective Date), the Company combined with SpinCo in a two-step all-stock Reverse Morris Trust transaction that involved a separation of SpinCo from McKesson followed by the merger of SpinCo with and into the Company, with the Company as the surviving company. As a result of the Merger, the Joint Venture became a wholly owned subsidiary of the Company.
McKesson accepted 15,426,537 shares of its own common stock, par value $0.01 in exchange for all 175,995,192 issued and outstanding shares of SpinCo common stock, par value $0.001 per share (the SpinCo Common Stock). All shares of SpinCo Common Stock were then converted into an equal number of shares of common stock of the Company, par value $0.001, which the Company issued to the former holders of SpinCo Common Stock, together with cash in lieu of any fractional shares.
Prior to the Merger, we accounted for our investment in the Joint Venture under the equity method of accounting. Therefore, the acquisition of control of the Joint Venture was accounted for as a business combination achieved in stages under the acquisition method in accordance with ASC 805. Accordingly, we remeasured our previously held equity interest in the Joint Venture to fair value by reference to the publicly traded price of the common shares issued to SpinCo shareholders in exchange for the remaining 58% equity interest in the Joint Venture. Upon remeasurement, we recognized a loss on investment of $230,229. The loss represents the amount by which the carrying value of our investment in the Joint Venture exceeded the fair value of our 42% interest immediately prior to the Merger.
The fair values of the assets acquired and the liabilities assumed were determined based on information available to the Company. Additional information is being gathered to finalize the provisional measurements with respect to deferred taxes. Accordingly, the measurement of the deferred tax assets acquired and deferred tax liabilities assumed may change upon finalization of the Companys valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. During the first quarter of fiscal year 2021, we increased the estimated fair value of our deferred tax liability by $1,604 which also impacted goodwill. There was no impact to the consolidated statement of operations as a result of the adjustment. We consider our accounting for the other assets acquired and liabilities assumed in the Merger to be complete.
14
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
The following table summarizes information related to this acquisition as of the acquisition date:
Net Assets acquired |
||||
Cash |
$ | 330,665 | ||
Accounts receivable, net of allowance of $22,059 |
718,895 | |||
Contract assets |
132,704 | |||
Prepaid and other current assets |
115,265 | |||
Investment in business purchase option |
146,500 | |||
Property and equipment, net |
206,751 | |||
Goodwill |
4,362,252 | |||
Other noncurrent assets |
169,539 | |||
Identified intangible assets: |
||||
Customer relationships (life 12-16 years) |
3,056,000 | |||
Tradenames (life 18 years) |
146,000 | |||
Technology-based intangible assets (life 6-12 years) |
1,188,000 | |||
Drafts and accounts payable |
(60,637 | ) | ||
Accrued expenses |
(559,456 | ) | ||
Deferred revenues, current |
(292,528 | ) | ||
Current portion of long-term debt |
(28,969 | ) | ||
Other current liabilities |
(22,732 | ) | ||
Long-term debt, excluding current portion |
(4,713,565 | ) | ||
Deferred income tax liabilities |
(579,680 | ) | ||
Tax receivable agreement obligations with related parties |
(176,586 | ) | ||
Other long-term liabilities |
(102,675 | ) | ||
|
|
|||
Net Assets acquired |
$ | 4,035,743 | ||
|
|
|||
Summary of purchase consideration: |
||||
Fair value of shares issued to SpinCo shareholders |
||||
(175,995,192 shares at $12.47 per share): |
||||
Common Stock, $0.001 par value |
$ | 176 | ||
Additional paid-in capital |
2,194,484 | |||
Fair value of Joint Venture equity interest previously held |
1,589,040 | |||
Fair value of Joint Venture equity interest previously held through TEUs |
216,764 | |||
Settlement of dividend receivable |
42,778 | |||
Repayment of advances to member |
(7,499 | ) | ||
|
|
|||
Purchase consideration |
$ | 4,035,743 | ||
|
|
The goodwill recognized in the Merger is primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries in which we operate. The majority of the goodwill is not expected to be deductible for tax purposes.
Acquisition costs related to the Merger were not material.
5. Dispositions
On May 1, 2020, we completed the sale of our Connected Analytics business, which was included in our Software and Analytics segment, for total consideration of $55,000, subject to a customary working capital adjustment, including a $25,000 note receivable from the buyer which is recorded within Other noncurrent assets, net on the consolidated balance sheet. The net book value of the Connected Analytics business prior to the sale was $23,093 which includes primarily net accounts receivable of $16,575, goodwill of $21,705 and deferred revenues of $17,133. In connection with this transaction, we recognized a pre-tax gain on disposal of $24,462 which is included within Gain on sale of businesses on the consolidated statement of operations. In July 2020, we received $25,000 plus interest from the buyer on the outstanding note receivable.
15
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
6. Goodwill
The following table presents the changes in the carrying amount of goodwill:
Software and
Analytics |
Network Solutions |
Technology-Enabled
Services |
Total | |||||||||||||
Balance at March 31, 2020 |
$ | 1,770,118 | $ | 1,645,831 | $ | 379,376 | $ | 3,795,325 | ||||||||
Acquisitions (1) |
850 | 335,635 | 192 | 336,677 | ||||||||||||
Dispositions |
(24,073 | ) | | | (24,073 | ) | ||||||||||
Effects of foreign currency |
4,931 | | | 4,931 | ||||||||||||
Reclassification |
20 | | | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at June 30, 2020 |
$ | 1,751,845 | $ | 1,981,466 | $ | 379,568 | $ | 4,112,880 | ||||||||
|
|
|
|
|
|
|
|
(1) |
Amounts relate primarily to the acquisitions of eRx and PDX. See Note 4, Business Combinations. |
7. Equity Method Investment in Change Healthcare LLC
Prior to the Merger, the Company accounted for its investment in the Joint Venture using the equity method of accounting. During the three months ended June 30, 2019, the Company recorded a proportionate share of the loss from this investment of $39,554, which included transaction and integration expenses incurred by the Joint Venture and basis adjustments, including amortization expenses, associated with equity method intangible assets. These amounts are in Loss from Equity Method Investment in the Joint Venture in the consolidated statements of operations.
Following completion of the Merger, we consolidate the Joint Venture and no longer account for our ownership interest as an equity method investment. Summarized statement of operations information of the Joint Venture prior to the Merger is as follows:
Three Months Ended | ||||
June 30, 2019 | ||||
Total revenue |
$ | 855,556 | ||
Cost of operations (exclusive of depreciation and amortization) |
$ | 326,947 | ||
Customer postage |
$ | 58,484 | ||
Net income (loss) |
$ | 71,915 |
8. Leases
We lease office space, other facilities, office equipment for internal use, vehicles and bulk invoice pricing and mailing related equipment for customer solutions. Our lease portfolio includes both operating and finance leases with original terms ranging from one to 15 years.
Statement of Operations Information
The components of lease cost are as follows:
Three Months Ended | ||||||
Statement of Operations Location |
June 30, 2020 | |||||
Operating lease cost |
(1) | $ | 10,472 | |||
Finance lease cost |
||||||
Amortization expense |
Depreciation and amortization |
79 | ||||
Interest expense |
Interest expense, net |
33 | ||||
Short-term lease cost |
(1) | 242 | ||||
Variable lease cost |
(1) | 1,842 | ||||
Sublease income |
Other, net |
(307 | ) | |||
|
|
|||||
Total lease cost |
$ | 12,361 | ||||
|
|
(1) |
Cost classification varies depending on the leased asset. Costs are primarily included within sales, marketing, general and administrative and cost of operations. |
16
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Balance Sheet Information
Right-of-use assets and lease liabilities are as follows:
Balance Sheet Location |
June 30, 2020 | |||||
Right-of-use assets |
||||||
Operating leases |
Operating lease right-of-use assets, net |
$ | 115,184 | |||
Finance leases |
Property and equipment, net |
2,207 | ||||
|
|
|||||
Total right-of-use assets |
$ | 117,391 | ||||
|
|
|||||
Lease liabilities |
||||||
Current liabilities |
||||||
Operating leases |
Current portion of operating lease liabilities |
$ | 32,753 | |||
Finance leases |
Current portion of long-term debt |
592 | ||||
Noncurrent liabilities |
||||||
Operating leases |
Long-term operating lease liabilities |
95,514 | ||||
Finance leases |
Long-term debt, excluding current portion |
1,640 | ||||
|
|
|||||
Total lease liabilities |
$ | 130,499 | ||||
|
|
Cash Flow Information
Supplemental cash flow information is as follows:
Three Months Ended June 30, 2020 | ||||||||
Operating Leases | Finance Leases | |||||||
Cash paid for amounts included in the measurement of lease liabilities |
||||||||
Operating cash flows |
$ | 10,260 | $ | 33 | ||||
Financing cash flows |
$ | | $ | 179 | ||||
Non-cash activities |
||||||||
Right-of-use assets obtained in exchange for lease liabilities (1) |
$ | 11,377 | $ | 363 |
(1) |
Amounts exclude the impact of adopting ASC 842. See Note 2, Significant Accounting Policies. |
Maturity of Lease Liabilities
Maturities of lease liabilities by fiscal year as of June 30, 2020 are as follows:
Operating Leases | Finance Leases | Total | ||||||||||
Remainder of 2021 |
$ | 30,941 | $ | 529 | $ | 31,470 | ||||||
2022 |
36,708 | 664 | 37,372 | |||||||||
2023 |
27,558 | 485 | 28,043 | |||||||||
2024 |
19,027 | 468 | 19,495 | |||||||||
2025 |
13,959 | 390 | 14,349 | |||||||||
2026 and thereafter |
25,477 | | 25,477 | |||||||||
|
|
|
|
|
|
|||||||
Total lease liabilities, undiscounted |
153,670 | 2,536 | 156,206 | |||||||||
Less: Imputed interest |
25,403 | 304 | 25,707 | |||||||||
|
|
|
|
|
|
|||||||
Total lease liabilities |
$ | 128,267 | $ | 2,232 | $ | 130,499 | ||||||
|
|
|
|
|
|
Maturities of lease liabilities by fiscal year as of March 31, 2020 were as follows:
Operating Leases | Finance Leases | Total | ||||||||||
2021 |
$ | 40,476 | $ | 468 | $ | 40,944 | ||||||
2022 |
34,750 | 468 | 35,218 | |||||||||
2023 |
23,761 | 468 | 24,229 | |||||||||
2024 |
15,393 | 468 | 15,861 | |||||||||
2025 |
10,780 | 390 | 11,170 | |||||||||
2026 and thereafter |
15,850 | | 15,850 | |||||||||
|
|
|
|
|
|
|||||||
Total lease liabilities, undiscounted |
$ | 141,010 | $ | 2,262 | $ | 143,272 | ||||||
|
|
|
|
|
|
17
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Other Information
Other information related to our leases as of June 30, 2020 is as follows:
Operating Leases | Finance Leases | |||||||
Weighted-average remaining lease term |
5.01 years | 4.09 years | ||||||
Weighted-average discount rate |
7.40 | % | 6.56 | % |
9. Interest Rate Cap Agreements
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage exposures to a wide variety of business and operational risks through management of core business activities. We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage differences in the amount, timing and duration of known or expected cash receipts and known or expected cash payments principally related to existing borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate cap agreements as part of our interest rate risk management strategy. Payments and receipts related to interest rate cap agreements are included in cash flows from financing activities in the consolidated statements of cash flows.
In August 2018, the Joint Venture executed annuitized interest rate cap agreements with notional amounts of $500,000, accreting to $1,500,000 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 interest rate cap agreements became effective August 31, 2018, accreted to $1,500,000 in March 2020 and expire December 31, 2021. Upon completion of the Merger, these agreements were redesignated as cash flow hedges of the Company.
In March 2020, we executed additional annuitized interest rate cap agreements with notional amounts totaling $1,000,000 to limit the exposure of the variable component of the interest rates under the Term Loan Facility or future variable rate indebtedness to a maximum of 1.0%. Each interest rate cap agreement became effective March 31, 2020 and expires March 31, 2024.
At June 30, 2020, each of our outstanding interest rate cap agreements were designated as cash flow hedges of interest rate risk and were determined to be highly effective.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $1,341 will be reclassified as an increase to interest expense within one year.
Fair Value
The fair value of derivative instruments at June 30, 2020 and March 31, 2020 is as follows:
Fair Values of Derivative Financial Instruments | ||||||||||
Asset (Liability) |
||||||||||
Derivative financial instruments designated as
hedging instruments: |
Balance Sheet Location |
June 30, 2020 | March 31, 2020 | |||||||
Interest rate cap agreements |
Prepaid and other current assets | $ | | $ | | |||||
Interest rate cap agreements |
Accrued expenses | (28,675 | ) | (28,131 | ) | |||||
Interest rate cap agreements |
Other long-term liabilities | (15,828 | ) | (19,277 | ) | |||||
|
|
|
|
|||||||
$ | (44,503 | ) | $ | (47,408 | ) | |||||
|
|
|
|
See Note 10, Fair Value Measurements, for additional information.
18
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Effect of Derivative Instruments on the Statement of Operations
The effect of the derivative instruments on the consolidated statements of operations for the three months ended June 30, 2020 and 2019 is as follows:
Three Months Ended | Three Months Ended | |||||||
June 30, 2020 | June 30, 2019 | |||||||
Derivative financial instruments in cash flow hedging relationships: |
||||||||
Gain/(loss) related to derivative financial instruments recognized in other comprehensive income (loss) |
$ | (4,459 | ) | $ | | |||
|
|
|
|
|||||
Gain/(loss) related to portion of derivative financial instruments reclassified from accumulated other comprehensive income (loss) to interest expense |
$ | 275 | $ | | ||||
|
|
|
|
Credit Risk-Related Contingent Features
We have agreements with each of our derivative counterparties providing that if we default on any of our indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then we also could be declared in default on our derivative obligations.
As of June 30, 2020, the termination value of derivative financial instruments in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was $45,823. If we had breached any of these provisions at June 30, 2020, we could have been required to settle our obligations under the agreements at this termination value. We do not offset any derivative financial instruments and the derivative financial instruments are not subject to collateral posting requirements.
10. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis consist of derivative financial instruments and contingent consideration obligations. The following table summarizes these items, aggregated by the level in the fair value hierarchy within which those measurements fall, as of June 30, 2020 and March 31, 2020:
Quoted in | Significant Other | Significant | ||||||||||||||
Balance at | Identical Markets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description |
June 30, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate cap agreements |
$ | (44,503 | ) | $ | | $ | (44,503 | ) | $ | | ||||||
Contingent consideration obligation |
(550 | ) | | | (550 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (45,053 | ) | $ | | $ | (44,503 | ) | $ | (550 | ) | |||||
|
|
|
|
|
|
|
|
Quoted in | Significant Other | Significant | ||||||||||||||
Balance at | Identical Markets | Observable Inputs | Unobservable Inputs | |||||||||||||
Description |
March 31, 2020 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate cap agreements |
$ | (47,408 | ) | $ | | $ | (47,408 | ) | $ | | ||||||
Contingent consideration obligation |
(3,000 | ) | | | (3,000 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (50,408 | ) | $ | | $ | (47,408 | ) | $ | (3,000 | ) | |||||
|
|
|
|
|
|
|
|
Derivative Financial Instruments
The valuation of our derivative financial instruments is determined using widely accepted valuation techniques, including a 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.
19
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we considered the impact of netting and any applicable credit enhancements and measured the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs to evaluate the likelihood of both our own default and counterparty default. As of June 30, 2020, we determined that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the derivative valuations are classified in Level 2 of the fair value hierarchy.
Contingent Consideration
The valuation of our contingent consideration obligations was determined using a discounted cash flow method that involved a Monte Carlo simulation. This analysis reflects the contractual terms of the purchase agreements (i.e., minimum and maximum payments, length of earn-out periods, manner of calculating amounts due, etc.) and utilizes assumptions with regard to future cash flows that were determined using a Monte Carlo simulation which were then discounted to present value using an appropriate discount rate. Significant increases with respect to assumptions as to 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 | Three Months Ended | |||||||
June 30, 2020 | June 30, 2019 | |||||||
Balance at beginning of period |
$ | (3,000 | ) | $ | | |||
Gain/(loss) included in contingent consideration |
2,450 | | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | (550 | ) | $ | | |||
|
|
|
|
Assets and Liabilities Measured at Fair Value upon Initial Recognition
The carrying amounts and fair values of financial instruments held as of June 30, 2020 and March 31, 2020 were as follows:
June 30, 2020 | March 31, 2020 | |||||||||||||||
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value | |||||||||||||
Cash and cash equivalents |
$ | 178,351 | $ | 178,351 | $ | 410,405 | $ | 410,405 | ||||||||
Accounts receivable |
$ | 627,305 | $ | 627,305 | $ | 740,105 | $ | 740,105 | ||||||||
Investment in business purchase option |
$ | | $ | | $ | 146,500 | $ | 146,500 | ||||||||
Senior Credit Facilities (Level 2) |
$ | 3,689,853 | $ | 3,674,961 | $ | 3,682,457 | $ | 3,452,687 | ||||||||
Senior Notes (Level 2) |
$ | 1,316,928 | $ | 1,318,375 | $ | 997,772 | $ | 950,000 | ||||||||
Debt component of tangible equity units (Level 2) |
$ | 32,008 | $ | 31,966 | $ | 35,431 | $ | 34,806 |
Additionally, the assets acquired and liabilities assumed as part of the acquisitions of eRx and PDX were recorded at fair value upon initial recognition. See Note 4, Business Combinations, for additional information.
11. Long-Term Debt
Our long-term indebtedness is comprised of a senior secured term loan facility (the Term Loan Facility), a revolving credit facility (the Revolving Facility; together with the Term Loan Facility, the Senior Credit Facilities), and 5.75% senior notes due 2025 (the Senior Notes).
20
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Long-term debt as of June 30, 2020 and March 31, 2020, consisted of the following:
June 30, 2020 | March 31, 2020 | |||||||
Senior Credit Facilities |
||||||||
$5,100,000 Term Loan Facility, due March 1, 2024, net of unamortized discount of $118,397 and $125,793 at June 30, 2020 and March 31, 2020, respectively (effective interest rate of 4.42% and 4.42%, respectively) |
$ | 3,689,853 | $ | 3,682,457 | ||||
$785,000 Revolving Facility, expiring July 3, 2024, and bearing interest at a variable interest rate (1) |
| 250,000 | ||||||
Senior Notes |
||||||||
$1,325,000 5.75% Senior Notes due March 1, 2025, net of unamortized discount of $8,072 and $2,228 at June 30, 2020 and March 31, 2020, respectively (effective interest rate of 5.90% and 5.80%, respectively) |
1,316,928 | 997,772 | ||||||
Tangible Equity Unit Senior Amortizing Note |
||||||||
$47,367 Senior Amortizing Notes due June 30, 2022, net of unamortized discount of $451 and $842 at June 30, 2020 and March 31, 2020, respectively (effective interest rate of 7.44% and 7.44%, respectively) |
32,008 | 35,431 | ||||||
Other |
18,065 | 23,413 | ||||||
Less current portion |
(28,986 | ) | (278,779 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 5,027,868 | $ | 4,710,294 | ||||
|
|
|
|
(1) |
The weighted average interest rate at March 31, 2020 was 3.25%. |
Senior Credit Facilities
In June 2020, we repaid our outstanding Revolving Facility balance of $250,000. The Revolving Facility has a total borrowing capacity of $785,000 less outstanding letters of credit which totaled $5,016 and $5,118 at June 30, 2020 and March 31, 2020, respectively, leaving $779,984 and $529,882 available for borrowing, respectively.
Senior Notes Issuance
On April 21, 2020, we issued an additional $325,000 aggregate principal amount of 5.75% Senior Notes due 2025 (the Notes) and incurred issuance costs of $5,364. The Notes were issued as part of the same series as the $1,000,000 Senior Notes issued in February 2017.
12. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock:
Three Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (58,694 | ) | $ | (37,517 | ) | ||
Denominator: |
||||||||
Weighted average common shares outstanding |
303,587,239 | 75,474,654 | ||||||
Minimum shares issuable under purchase contracts |
16,465,704 | | ||||||
|
|
|
|
|||||
320,052,943 | 75,474,654 | |||||||
|
|
|
|
|||||
Basic and diluted net income (loss) per share |
$ | (0.18 | ) | $ | (0.50 | ) | ||
|
|
|
|
Due to their antidilutive effect, the following securities have been excluded from diluted net income (loss) per share:
Three Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Dilutive shares issuable under purchase contracts |
3,293,038 | | ||||||
Time-Vesting Options |
573,157 | 1,654,632 | ||||||
Deferred Stock Units |
1,575 | |
13. Tax Receivable Agreements
Upon the consummation of the Merger, we assumed obligations related to certain tax receivable agreements (collectively, the tax receivable agreements) entered into by the Joint Venture with its current and former owners. Depending on whether the respective tax receivable agreements were assumed as part of the Merger or became effective after the Merger, the liabilities related to the tax receivable agreements are subject to differing accounting models as explained below.
21
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
2009 - 2011 Tax Receivable Agreements
Under the 2009 - 2011 Tax Receivable Agreements assumed in connection with the Merger, we are obligated to make payments to certain former 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 creation of the Joint Venture, payments we make under the 2009 - 2011 Tax Receivable Agreements are required to be calculated using certain valuation assumptions, including that we will have sufficient taxable income to use the applicable tax attributes and that certain of such tax attributes will be used on a pro rata basis from the date of the creation of the Joint Venture (or in certain cases from the date of certain previous transactions) through the expiration of the applicable tax attribute. The 2009 - 2011 Tax Receivable Agreements were measured at their fair value as part of the Merger and are recognized at their initial fair value plus recognized accretion to date on the consolidated balance sheet.
2017 Tax Receivable Agreement
The 2017 Tax Receivable Agreement generally provides for the payment by Change Healthcare Performance, Inc., a subsidiary of the Company, to affiliates of The Blackstone Group, L.P. (Blackstone) and Hellman & Friedman LLC (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 creation of the Joint Venture as a result of certain net operating losses and certain other tax attributes of Change Healthcare Performance, Inc. as of the date of the creation of the Joint Venture. The 2017 Tax Receivable Agreement was measured at its fair value as part of the Merger and is recognized at its initial fair value plus recognized accretion to date on the consolidated balance sheet.
Based on facts and circumstances at June 30, 2020, estimated aggregate payments due under these tax receivable agreements in future fiscal years are to be as follows:
2009 - 2011 Tax
Receivable Agreements |
2017 Tax
Receivable Agreement |
Total | ||||||||||
Remainder of 2021 |
$ | | $ | | $ | | ||||||
2022 |
20,113 | 2,281 | 22,394 | |||||||||
2023 |
20,084 | 47,384 | 67,468 | |||||||||
2024 |
19,358 | 26,551 | 45,909 | |||||||||
2025 |
17,917 | 8,441 | 26,358 | |||||||||
Thereafter |
102,941 | 29,479 | 132,420 | |||||||||
|
|
|
|
|
|
|||||||
Gross expected payments |
180,413 | 114,136 | 294,549 | |||||||||
Less: Amounts representing discount |
(53,572 | ) | (57,713 | ) | (111,285 | ) | ||||||
|
|
|
|
|
|
|||||||
Total tax receivable agreement obligations due to related parties |
126,841 | 56,423 | 183,264 | |||||||||
Less: Current portion due (included in due to related parties, net) |
(20,113 | ) | (2,281 | ) | (22,394 | ) | ||||||
|
|
|
|
|
|
|||||||
Tax receivable agreement long-term obligations due to related parties |
$ | 106,728 | $ | 54,142 | $ | 160,870 | ||||||
|
|
|
|
|
|
McKesson Tax Receivable Agreement
In connection with the closing of the Transactions, we along with the Joint Venture, the subsidiaries of McKesson that serve as members of the Joint Venture (McK Members), and McKesson entered into a tax receivable agreement (the McKesson Tax Receivable Agreement). The McKesson Tax Receivable Agreement generally requires payment to affiliates of McKesson of 85% of certain cash tax savings realized (or, in certain circumstances, deemed to be realized) 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 the Joint Venture at the Contribution Agreement Closing and (ii) imputed interest deductions and certain other tax attributes arising from payments under the McKesson Tax Receivable Agreement. Following the McKesson exit and based on anticipated amortization allocations, we recorded an obligation for the McKesson Tax Receivable estimated payments, which represents a loss contingency under ASC 450 and is included in the other long-term liabilities on the consolidated balance sheet. Future changes in this value will be reflected within pretax income or loss.
22
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Based on facts and circumstances at June 30, 2020, we estimate the aggregate payments due under the McKesson Tax Receivable Agreement in future fiscal years to be as follows:
McKesson
Tax Receivable Agreement |
||||
Remainder of 2021 |
$ | | ||
2022 |
128 | |||
2023 |
18,306 | |||
2024 |
19,905 | |||
2025 |
23,150 | |||
Thereafter |
103,144 | |||
|
|
|||
Gross expected payments |
164,633 | |||
Less: Amounts representing discount |
| |||
|
|
|||
Total tax receivable agreement obligation |
164,633 | |||
Less: Current portion due (included in accrued expenses) |
(128 | ) | ||
|
|
|||
Tax receivable agreement long-term obligation |
$ | 164,505 | ||
|
|
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.
14. Income Taxes
The income tax benefit for the three months ended June 30, 2020 and 2019 was $13,461 and $2,184, respectively, which represents an effective tax rate of 18.7% and 5.5%, respectively.
Fluctuations in our reported income tax rates from the statutory rate are primarily due to the impacts of our acquisition and divestiture activity in the three months ended June 30, 2020. For the three months ended June 30, 2019, fluctuations in our reported income tax rates from the statutory rate are primarily due to benefits recognized as a result of certain incentive tax credits resulting from research and experimental expenditures and discrete items recognized in the quarters.
15. Legal Proceedings
We are subject to various claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulators and other matters arising out of the normal conduct of our business.
Government Subpoenas and Investigations
From time to time, we receive subpoenas or requests for information from various government agencies. We generally respond 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. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal proceedings against us and other members of the health care industry, as well as to settlements.
Other Matters
In the ordinary course of business, we are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, we do not believe that it is reasonably possible that their outcomes will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
16. Accumulated Other Comprehensive Income (Loss)
The following is a summary of the accumulated other comprehensive income (loss) activity for the three months ended June 30, 2020 and 2019. Prior to the Merger, the activity in accumulated other comprehensive income (loss) reflects the proportionate share of the Joint Ventures accumulated other comprehensive income (loss), net of taxes.
23
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Foreign Currency
Translation Adjustment |
Cash Flow Hedge |
Accumulated Other
Comprehensive Income (Loss) |
||||||||||
Balance at March 31, 2019 |
$ | (1,565 | ) | $ | (1,691 | ) | $ | (3,256 | ) | |||
Cumulative effect of accounting change of the Joint Venture-ASU 2018-02 |
| 422 | 422 | |||||||||
Change associated with foreign currency translation |
226 | | 226 | |||||||||
Change associated with current period hedging |
| (5,117 | ) | (5,117 | ) | |||||||
Reclassification into earnings |
| (314 | ) | (314 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2019 |
$ | (1,339 | ) | $ | (6,700 | ) | $ | (8,039 | ) | |||
|
|
|
|
|
|
|||||||
Balance at March 31, 2020 |
$ | (7,084 | ) | $ | (288 | ) | $ | (7,372 | ) | |||
Change associated with foreign currency translation |
6,353 | | 6,353 | |||||||||
Change associated with current period hedging |
| (4,459 | ) | (4,459 | ) | |||||||
Reclassification into earnings |
| 275 | 275 | |||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, 2020 |
$ | (731 | ) | $ | (4,472 | ) | $ | (5,203 | ) | |||
|
|
|
|
|
|
Effective April 1, 2019, the Joint Venture adopted FASB ASU No. 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. The adoption of this update resulted in a reclassification between accumulative other comprehensive income (loss) and accumulated earnings (deficit).
17. Incentive Compensation Plans
Long Term Incentive Plan Awards
In connection with the Omnibus Incentive Plan, during the three months ended June 30, 2020, we granted to our employees and directors one or a combination of time-vesting restricted stock units and cash settled restricted stock units under vesting terms that generally vary from one to four years from the date of grant.
Restricted Stock Units (RSUs) We granted 5,417,316 RSUs during the three months ended June 30, 2020. The RSUs are subject to either a graded vesting schedule over four years or a one-year cliff vesting schedule, depending on the terms of the specific award. Upon vesting, the RSUs are exchanged for shares of common stock.
Cash Settled Restricted Stock Units (CSRSUs) We granted 172,524 CSRSUs during the three months ended June 30, 2020. The CSRSUs vest 100% upon the one-year anniversary of the date of grant. Upon vesting, we are required to pay cash in settlement of such CSRSUs based on their fair value at the date such CSRSUs vest.
We recognized compensation expense related to these awards granted during the three months ended June 30, 2020 of $818. At June 30, 2020, aggregate unrecognized compensation expense related to these awards was $65,522.
eRx Awards
Upon completion of the eRx acquisition all outstanding eRx equity awards were canceled. Holders of eRx stock options and vested eRx stock appreciation rights were able to elect to receive consideration in the form of a cash payment or vested stock appreciation rights of the Company. For those individuals with unvested eRx equity awards, we elected to issue replacement awards with vesting and exercisability terms generally identical to the existing eRx awards which were replaced. These replacement awards granted under the Omnibus Incentive Plan consisted of unvested restricted share units (eRx RSUs) and unvested stock appreciation rights (eRx SARs) with terms identical to the original eRx awards. The awards vest subject to the employees continued employment through the date when Blackstone has sold at least 25% of the maximum number of shares held by it (i.e., a liquidity event) and achieved specified rates of return that vary by award. Upon vesting, we are required to pay cash in settlement of such eRx awards based on their fair value at the date of such vesting. During the three months ended June 30, 2020, we recognized compensation expense related to eRx awards granted under the Omnibus Incentive Plan of $68. At June 30, 2020, aggregate unrecognized compensation expense related to these awards was $687.
18. Related Party Transactions
eRx Option Agreement
Prior to the creation of the Joint Venture, we entered into an option agreement to acquire eRx (the Option Agreement). Under the terms of the Option Agreement, the option to acquire eRx would only become exercisable at any such time that McKesson owns (directly or indirectly), in the aggregate, less than 5% of the outstanding units of the Joint Venture. Subsequent to the Merger, the Option became exercisable and was exercised on May 1, 2020. See Note 4, Business Combinations, for additional information.
24
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Transition Services Agreements
In connection with the creation of the Joint Venture, we entered into transition services agreements with eRx. Under the agreements, we provided certain transition services eRx in exchange for specified fees. Prior to the acquisition of eRx, we recognized $283 and $0 in transition fee income during the three months ended June 30, 2020 and 2019, respectively. The amounts received are included in Other, net in the consolidated statement of operations.
Employer Healthcare Program Agreement with Equity Healthcare
Effective January 1, 2014, we entered into an employer health program agreement with Equity Healthcare LLC (Equity Healthcare), an affiliate of Blackstone, whereby Equity Healthcare provides certain negotiating, monitoring and other services in connection with our health benefit plans. In consideration for Equity Healthcares services, we pay a fee of $1.00 per participating employee per month.
Term Loans Held by Related Party
During the period from June 17, 2016 (inception) to March 31, 2017, certain investment funds managed by GSO Capital Partners LP (the GSO-managed funds) held a portion of the term loans under our Senior Credit Facilities. GSO Advisor Holdings LLC (GSO Advisor) is the general partner of GSO Capital Partners LP and Blackstone, indirectly through its subsidiaries, holds all of the issued and outstanding equity interests of GSO Advisor. As of June 30, 2020 and March 31, 2020, the GSO-managed funds held $161,367 and $151,301, respectively, in principal amount of the Senior Credit Facilities (none of which is classified within current portion of long-term debt).
Transactions with Blackstone Portfolio Companies
We provide various services to, and purchase services from, certain Blackstone portfolio companies under contracts that were executed in the normal course of business. We recognized revenue of approximately $1,043 and $0 related to services provided to Blackstone portfolio companies during the three months ended June 30, 2020 and 2019, respectively. We paid Blackstone portfolio companies approximately $5,292 and $0 related to services provided during the three months ended June 30, 2020 and 2019, respectively.
19. Segment Reporting
Management views the operating results based on three reportable segments: (a) Software and Analytics, (b) Network Solutions and (c) Technology-Enabled Services.
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, clinical and pharmacy 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.
Postage and Eliminations
Inter-segment revenue and expenses primarily represent claims management and payment and communication solutions provided between segments. Postage and eliminations includes pass-through postage costs, 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.
25
Change Healthcare Inc.
Notes to Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)
Segment Results for the three months ended June 30, 2020
Listed below are the revenues and adjusted EBITDA for each of the reportable segments for the three months ended June 30, 2020. 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. 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.
Three Months Ended
June 30, 2020 |
||||
Segment Revenue |
||||
Software and Analytics |
$ | 391,589 | ||
Network Solutions |
142,826 | |||
Technology-Enabled Services |
187,706 | |||
Postage and Eliminations (1) |
27,063 | |||
Purchase Accounting Adjustment (2) |
(55,000 | ) | ||
|
|
|||
Net Revenue |
$ | 694,184 | ||
|
|
|||
Segment Adjusted EBITDA |
||||
Software and Analytics |
$ | 143,932 | ||
Network Solutions |
70,503 | |||
Technology-Enabled Services |
(17,579 | ) | ||
|
|
|||
Adjusted EBITDA |
$ | 196,856 | ||
|
|
|||
Equity compensation |
9,583 | |||
Acquisition accounting adjustments |
48,540 | |||
Acquisition and divestiture-related costs |
5,120 | |||
Integration and related costs |
10,358 | |||
Strategic initiatives, duplicative and transition costs |
5,080 | |||
Severance costs |
4,704 | |||
Accretion and changes in estimate with related parties, net |
5,895 | |||
Impairment of long-lived assets and other |
6,313 | |||
Gain on sale of businesses |
(28,095 | ) | ||
Contingent consideration |
(2,450 | ) | ||
Other non-routine, net |
2,677 | |||
|
|
|||
EBITDA Adjustments |
67,725 | |||
|
|
|||
EBITDA |
129,131 | |||
Interest expense |
62,667 | |||
Depreciation and amortization |
138,541 | |||
Amortization of capitalized software developed for sale |
78 | |||
|
|
|||
Income (loss) before income tax provision (benefit) |
$ | (72,155 | ) | |
|
|
(1) |
Revenue for the Postage and Eliminations segment includes postage revenue of $45,772 for the three months ended June 30, 2020. |
(2) |
Amount reflects the impact to deferred revenue resulting from the Merger which reduced revenue recognized during the period. |
Prior to the Merger, the Company had minimal operations outside of the investment in the Joint Venture and the Companys standalone operating results were not utilized by management to make operating decisions, assess performance, or allocate resources. As such, the Company reported its results as a single reportable segment for the three months ended June 30, 2019.
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended March 31, 2020, as well as the unaudited consolidated financial statements and the related notes presented in Item 1 of this Quarterly Report for the quarter ended June 30, 2020 (Quarterly Report).
In addition to historical data, the discussion contains forward-looking statements about the business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed below in Cautionary Notice Regarding Forward-Looking Statements and Part II, Item 1A, Risk Factors.
Overview
We are a leading independent healthcare technology company, focused on accelerating the transformation of the healthcare system through the power of our Healthcare Platform. We provide data and analytics-driven solutions to improve clinical, financial, administrative, and patient engagement outcomes in the U.S. healthcare system.
Our platform and comprehensive suite of software, analytics, technology enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.
Our Healthcare Platform supports one of the largest clinical and financial healthcare networks in the U.S. With insights gained from our pervasive network, extensive applications and analytics portfolio and our services operations, we have designed analytics solutions that include industry-leading and trusted franchises supported by extensive intellectual property and regularly updated content.
Recent Developments
Senior Notes Issuance
On April 21, 2020, we issued $325.0 million aggregate principal amount of 5.75% Senior Notes due 2025 (the Notes). The Notes were issued as part of the same series as the $1,000.0 million Senior Notes issued in February 2017. See Note 11, Long-Term Debt, for additional information.
eRx Network Holdings, Inc.
On May 1, 2020, we exercised our option to purchase and completed the acquisition of eRx Network Holdings, Inc. (eRx), a leading provider in comprehensive, innovative and secure data-driven solutions for pharmacies. We acquired 100% of the ownership interest for $212.9 million plus cash on the balance sheet and accounted for this transaction as a business combination. See Note 4, Business Combinations for additional information.
PDX, Inc.
On June 1, 2020, we completed the purchase of PDX, Inc. (PDX), a company focused on delivering patient centric and innovative technologies for pharmacies and health systems. We acquired 100% of the ownership interest for a purchase price of $208.0 million and accounted for this transaction as a business combination. See Note 4, Business Combinations for additional information.
Connected Analytics
On May 1, 2020, we completed the sale of our Connected Analytics business, which was included in our Software and Analytics segment, for total consideration of $55.0 million, subject to a customary working capital adjustment, including a $25.0 million note receivable from the buyer. In connection with this transaction, we recognized a gain on disposal of $24.5 million. See Note 5, Dispositions for additional information.
Key Components of Our Results of Operations
Prior to the Merger described below, the Company had minimal operations outside of the investment in the Joint Venture, and the Companys standalone operating results were not utilized by management to make operating decisions, assess performance, or allocate resources. As such, the prior period did not include meaningful operating results and only a single reportable segment for the three months ended June 30, 2019. Joint Venture results for the three months ended June 30, 2019, for which there were operational and segment results, have been included in Exhibit 99.1.
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Qualified McKesson Exit
Prior to the Merger, we accounted for our investment in the Joint Venture using the equity method of accounting. Subsequent to the Merger, we own 100% of the Joint Venture and its results of operations. As a result, our consolidated results in periods prior to the Merger are not comparable to our results following the Merger.
Change Healthcare Inc. accounted for the Merger as a business combination achieved in stages in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations.
As a result of the accounting for these transactions and the change in basis of accounting, our consolidated results in periods following the Merger are not comparable to the consolidated results of the Joint Venture in periods prior to the Merger. The following are certain of the more significant changes resulting from the Merger that affect the comparability of financial results and operations:
|
Increased tangible and intangible assets resulting from adjusting the basis of the assets to their fair value, which also results in increased depreciation and amortization expense. |
|
Decrease in long-term debt as a result of adjustments to state the long-term debt at its fair value. |
|
Decreased deferred revenue as a result of recognizing deferred revenue only to the extent that contractual obligations remain to be fulfilled. These decreases result in decreased solutions revenue. |
|
Income previously attributable to the Joint Venture and not subject to U.S. federal income taxes and most state and local income taxes is now subject to such taxes, resulting in an increase in Change Healthcare Inc.s effective tax rate compared with the historical effective tax rate of the Joint Venture. |
Segments
We report our financial results in the following three reportable segments: Software and Analytics, Network Solutions and Technology-Enabled Services.
|
Software and Analytics provides software and analytics solutions for financial performance, payment accuracy, clinical decision management, value-based payment, provider and consumer engagement and imaging and clinical workflow. |
|
Network Solutions enables financial, administrative and clinical transactions, electronic business-to-business and consumer-to-business payments and aggregation and analytics of clinical and financial data. |
|
Technology-Enabled Services provides solutions for financial and administrative management, value-based care, communication and payment, pharmacy benefits administration and healthcare consulting. |
During the first quarter of fiscal year 2021, management decided to allocate all administrative and certain other corporate expenses to the respective reportable segments. Prior to the Merger, the Company had minimal operations outside of the investment in the Joint Venture, and the Companys standalone operating results were not utilized by management to make operating decisions, assess performance, or allocate resources. As such, the Company reported its results as a single reportable segment for the three months ended June 30, 2019. For reference, the financial results of the Joint Ventures reportable segments for fiscal years 2019 and 2020 have been included in Exhibit 99.1.
Factors Affecting Results of Operations
The following are certain key factors that affect, will affect, or have recently affected, our results of operations:
Macroeconomic and Industry Trends
The spread of COVID-19, both globally and in the U.S., has driven lower healthcare utilization as a result of the significant reduction in, or in some cases elimination of, elective medical procedures and healthcare visits, without a corresponding increase in COVID-19 related transactions. A portion of our business is tied to overall volume of activity in the healthcare system, and therefore, we have been adversely impacted by this industry trend. Further, weakened economic conditions or a recession could reduce the amounts patients are willing or able to spend on healthcare services. As a result, patients may elect to delay or forgo seeking healthcare services. Additionally, higher unemployment rates compared to the fourth quarter of fiscal year 2020 are likely to cause commercial payer membership to decline, which could further reduce healthcare utilization and transaction volumes. While we began to see the impact of COVID-19 on our business and financial results late in fiscal year 2020, we experienced a much more significant impact in the first quarter of fiscal year 2021.
In response to COVID-19, we initiated a number of actions with our employees health being our first priority. We also focused on serving our customers and introducing new products and services to address their previously unexpected but now urgent needs related to COVID-19. To ensure our business continuity and the safety and welfare of our team members, we moved the majority of our employees to work from home, shifted to a virtual meeting environment, suspended all non-critical business travel, and expanded telehealth and COVID-19 related PTO coverage to all employees. We also completed a comprehensive review of our cost structure to balance costs with interim variability in our revenue and have actively aligned our staffing level, primarily in our Technology-Enabled Services segment to address lower interim volume. Starting in March 2020, we initiated hiring freezes, began contractor reductions and made other staffing reductions, primarily in the form of furloughs to provide us with greater flexibility to scale back up as volumes recover. These actions somewhat offset the negative impacts of COVID-19 described above in the first quarter of fiscal year 2021, and we expect to continue to see the impact of these actions in the second quarter.
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While lower healthcare utilization will impact our results negatively this year, we cannot predict the length of time it may take for normal healthcare volumes to return and the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by COVID-19. However, we continue to assess its impact on our business and are actively managing our response as the pandemic evolves. We believe the solutions we provide our customers will be as important, if not more, post-COVID-19.
Acquisitions and Divestitures
We actively evaluate opportunities to improve and expand our business through targeted acquisitions that are consistent with our strategy. On occasion, we also may dispose of certain components of our business that no longer fit within our overall strategy. Because of the acquisition and divestiture activity as well as the shifting revenue mix of our business due to this activity, our results of operations may not be directly comparable among periods. See Note 4, Business Combinations, and Note 5, Dispositions, for details of recent activity.
Results of Operations
Three Months Ended June 30, 2020
(amounts in millions) (1) |
Three Months Ended
June 30, 2020 |
|||
Revenue |
||||
Solutions revenue |
$ | 648.4 | ||
Postage revenue |
45.8 | |||
|
|
|||
Total revenue |
694.2 | |||
Operating expenses |
||||
Costs of operations (exclusive of depreciation and amortization below) |
$ | 318.5 | ||
Sales, marketing, general and administrative |
165.5 | |||
Research and development |
55.7 | |||
Customer postage |
45.8 | |||
Depreciation and amortization |
138.5 | |||
Accretion and changes in estimate with related parties, net |
5.9 | |||
Gain on sale of businesses |
(28.1 | ) | ||
|
|
|||
Total operating expenses |
$ | 701.9 | ||
|
|
|||
Operating income (loss) |
$ | (7.7 | ) | |
Non-operating (income) expense |
||||
Interest expense |
62.7 | |||
Contingent consideration |
(2.5 | ) | ||
Other, net |
4.3 | |||
|
|
|||
Total non-operating (income) expense |
$ | 64.5 | ||
Income (loss) before income tax provision (benefit) |
(72.2 | ) | ||
Income tax provision (benefit) |
(13.5 | ) | ||
|
|
|||
Net income (loss) |
$ | (58.7 | ) | |
|
|
(1) |
As a result of displaying amounts in millions, rounding differences may exist in the table above. |
Revenue
Solutions Revenue
Solutions revenue was $648.4 million for the three months ended June 30, 2020. Factors affecting solutions revenue are described in the various segment discussions below.
Postage Revenue
Postage revenue was $45.8 million for the three months ended June 30, 2020. See Customer Postage below for additional information.
Expenses
Costs of Operations (exclusive of depreciation and amortization)
Costs of operations were $318.5 million for the three months ended June 30, 2020. Cost of operations reflects cost synergies associated with network efficiencies and reduction or elimination of duplicative roles, among other factors.
29
Sales, Marketing, General and Administrative Expense
Sales, marketing, general and administrative expense was $165.5 million for the three months ended June 30, 2020. Sales, marketing, general and administrative expense was impacted by COVID-19 and reflects significant integration related costs, including professional and consulting fees related to rationalizations of information technology, business process re-engineering, implementation of human resource and finance information technology systems, severance and other costs.
Research and Development
Research and development expense was $55.7 million for the three months ended June 30, 2020. Research and development expense reflects recent acquisitions partially offset by continued synergies associated with reduction or elimination of duplicative roles.
Customer Postage
Customer postage was $45.8 million for the three months ended June 30, 2020. Customer postage is affected by the declines in print volumes within communication and payment solutions driven by a general decline in healthcare utilization. Because customer postage is a pass-through cost to our customers, changes in volume of customer postage generally have no effect on operating income.
Depreciation and Amortization
Depreciation and amortization expense was $138.5 million for the three months ended June 30, 2020. Depreciation and amortization were generally affected by routine amortization of tangible and intangible assets existing at March 31, 2020 which was impacted by fair value adjustments resulting from the Merger, as well as the routine amortization and depreciation of additions to property, equipment, software and intangible assets since that date.
Accretion and changes in estimate with related parties, net
Accretion and changes in estimate with related parties, net was $5.9 million for the three months ended June 30, 2020. Accretion is routinely affected by changes in the expected timing or amount of cash flows which may result from various factors, including changes in tax rates.
Gain on sale of businesses
Gain on sale of businesses was $28.1 million for the three months ended June 30, 2020. Gain on sale of businesses primarily represents the gain recorded as a result of the sale of Connected Analytics in May 2020.
Non-Operating Income and Expense
Interest expense
Interest expense was $62.7 million for the three months ended June 30, 2020. While we have interest rate cap agreements in place to limit our exposure to rising interest rates, such agreements together with our fixed rate notes, effectively fixed interest rates for approximately 75% of our total indebtedness at June 30, 2020.
Contingent consideration
Contingent consideration reflects changes in the fair value of our earnout obligation to the former owners of an acquired business. Such amounts may increase or decrease in the future based on changes in the expected amount, timing, and probability of making such payments in the future.
Other, net
Other, net primarily reflects the $6.0 million loss recognized upon remeasuring our business purchase option prior to the eRx acquisition in May 2020.
Solutions Revenue and Adjusted EBITDA
(amounts in millions) (1) |
Three Months Ended
June 30, 2020 |
|||
Solutions revenue (2) |
||||
Software and Analytics |
$ | 391.6 | ||
Network Solutions |
$ | 142.8 | ||
Technology-Enabled Services |
$ | 187.7 | ||
Adjusted EBITDA |
||||
Software and Analytics |
$ | 143.9 | ||
Network Solutions |
$ | 70.5 | ||
Technology-Enabled Services |
$ | (17.6 | ) |
(1) |
As a result of displaying amounts in millions, rounding differences may exist in the table above. |
(2) |
Includes inter-segment revenue and excludes deferred revenue purchase accounting adjustments. |
30
Software and Analytics
Software and Analytics revenue for the three months ended June 30, 2020 reflects the negative impact of COVID-19 and the impact of the Connected Analytics divestiture of $11.4 million, partially offset by new sales and organic revenue growth. Software and Analytics adjusted EBITDA for the three months ended June 30, 2020 was impacted by the same factors that impacted revenue.
Network Solutions
Network Solutions revenue for the three months ended June 30, 2020 reflects low utilization due to COVID-19, partially offset by new sales and the inclusion of the acquisitions of eRx and PDX which had a combined impact of $17.0 million. Network Solutions adjusted EBITDA for the three months ended June 30, 2020 reflects low utilization due to COVID-19 as well as investments to support new product launches and market expansion opportunities in the core network, data solutions, and business to business payments, partially offset by the acquisitions of eRx and PDX which had a combined impact of $6.0 million.
Technology-Enabled Services
Technology-Enabled Services revenue for the three months ended June 30, 2020 reflects low volume, driven by the impact of COVID-19, and customer attrition, partially offset by new sales and organic revenue growth. Technology-Enabled Services adjusted EBITDA for the three months ended June 30, 2020 was impacted by the same factors that impacted revenue. During the three months ended June 30, 2020, we implemented a cost reduction initiative of approximately $14.7 million to align employee levels with the revenue impact of COVID-19. The impact will benefit future quarters due to the lag between the revenue decline and implementation of the cost reduction initiative.
Income Taxes
Our effective tax rate for the three months ended June 30, 2020 was 18.7%. Fluctuations in our reported income tax rates from the statutory rate are primarily due to the impacts of our acquisition and divestiture activity in the three months ended June 30, 2020.
Three Months Ended June 30, 2019
(amounts in millions) (1) |
Three Months Ended
June 30, 2019 |
|||
Total revenue |
$ | | ||
Operating expenses |
||||
Sales, marketing, general and administrative |
$ | 0.3 | ||
|
|
|||
Total operating expenses |
$ | 0.3 | ||
|
|
|||
Operating income (loss) |
$ | (0.3 | ) | |
Non-operating (income) expense |
||||
Loss from Equity Method Investment in the Joint Venture |
39.6 | |||
Management fee income |
(0.1 | ) | ||
|
|
|||
Total non-operating (income) and expense |
$ | 39.5 | ||
Income (loss) before income tax provision (benefit) |
(39.7 | ) | ||
Income tax provision (benefit) |
(2.2 | ) | ||
|
|
|||
Net income (loss) |
$ | (37.5 | ) | |
|
|
(1) |
As a result of displaying amounts in millions, rounding differences may exist in the table above. |
Non-Operating Income and Expense
Loss from Equity Method Investment in the Joint Venture
Prior to the Merger, loss from equity method investment in the Joint Venture generally represented our proportionate share of the income or loss from our investment in the Joint Venture, including basis adjustments related to amortization expense associated with equity method intangible assets, property and equipment, deferred revenue and other items.
Loss from equity method investment in the Joint Venture was $39.6 million for the three months ended June 30, 2019. The loss was discretely affected by the Joint Ventures adoption of ASC 606 which drove $13.6 million of income and Change Healthcare Inc.s adoption of ASU 2018-07, which resulted in $32.5 million of loss upon changes in the fair value of its dividend receivable.
31
Income Taxes
Our effective tax rate for the three months ended June 30, 2019 was 5.5%. Fluctuations in our reported income tax rates from the statutory rate are primarily due to benefits recognized as a result of certain incentive tax credits resulting from research and experimental expenditures and discrete items recognized in the quarters.
Significant Changes in Assets and Liabilities
During first quarter of fiscal year 2021, we completed a debt offering of $325.0 million and repaid $250.0 million that was outstanding on our Revolving Facility. Further, we adopted ASC 842 establishing operating lease right-of-use assets and operating liabilities. As a result of the eRx acquisition, our investment in business purchase option was eliminated decreasing our total assets. Finally, goodwill increased primarily as a result of the acquisitions of eRx and PDX.
Within our Network Solutions segment, we regularly receive funds from certain pharmaceutical industry participants in advance of its obligation to remit these funds to participating retail pharmacies. Such funds are not restricted; however, these funds are generally paid out in satisfaction of the processing obligations within three business days of their receipt. At the time of receipt, we record a corresponding liability within accrued expenses on our consolidated balance sheets. At June 30, 2020, we reported $15.4 million of such pass-through payment obligations which were subsequently paid in the first week of July 2020. At March 31, 2020, we reported $29.1 million of such pass-through payment obligations.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash flows provided by operating activities, cash and cash equivalents on hand, and our Revolving Facility. Our principal uses of liquidity are working capital, capital expenditures, debt service, business acquisitions and other general corporate purposes. We anticipate our cash on hand, cash generated from operations, and funds available under the Revolving Facility will be sufficient to fund our planned capital expenditures, debt service obligations, business acquisitions and operating needs. We may, however, elect to raise funds through debt or equity financing in the future to fund significant investments or acquisitions that are consistent with our growth strategy. Further, we may be required to make additional principal payments on the Term Loan Facility based on excess cash flows of the prior year, as defined in the credit agreement governing the Term Loan Facility.
Cash and cash equivalents totaled $178.4 million and $410.4 million at June 30, 2020 and March 31, 2020, respectively, of which $25.9 million and $22.2 million was held outside the U.S., respectively. As of June 30, 2020, no amounts had been drawn under the Revolving Facility and $5.0 million had been issued in letters of credit against the Revolving Facility, leaving $780.0 million available for borrowing. We also have the ability to borrow up to an additional $1,224.7 million, or such amount that the senior secured net leverage ratio does not exceed 4.9 to 1.0, whichever is greater, under the Term Loan Facility, subject to certain additional conditions and commitments by existing or new lenders to fund any additional borrowings.
Cash Flows
The following table summarizes the net cash flow from operating, investing and financing activities:
(amounts in millions) (1) |
Three Months Ended
June 30, 2020 |
|||
Cash provided by (used in) operating activities |
$ | 169.1 | ||
Cash provided by (used in) investing activities |
(435.8 | ) | ||
Cash provided by (used in) financing activities |
33.7 | |||
Effects of exchange rate changes on cash and cash equivalents |
0.9 | |||
|
|
|||
Net change in cash and cash equivalents |
$ | (232.1 | ) | |
|
|
(1) |
As a result of displaying amounts in millions, rounding differences may exist in the tables above. |
Cash flow activity for the three months ended June 30, 2019 is not meaningful.
Operating Activities
Cash provided by operating activities is primarily affected by operating income, including the impact of debt service payments, integration related costs and the timing of collections and related disbursements. Cash provided by operating activities includes $13.7 million as a use of cash related to pass-through funds for the three months ended June 30, 2020.
Investing Activities
Cash used in investing activities reflects the eRx and PDX acquisitions offset by the sale of the Connected Analytics business that occurred during the three months ended June 30, 2020. Cash used in investing activities also reflects routine capital expenditures related to purchase of property and equipment and the development of software as well as expenditures related to significant software development efforts necessary to integrate the contributed businesses.
32
Financing Activities
Cash used in financing activities reflects the repayment of the Revolving Facility offset by the issuance additional Senior Notes during the three months ended June 30, 2020. Additional cash used in financing activities reflects payments under tax receivable agreements, interest rate cap agreements, deferred financing obligations and TEU agreements.
Capital Expenditures
We incur capital expenditures to grow our business by developing new and enhanced capabilities, to increase the effectiveness and efficiency of the organization and to reduce risks. Additionally, we incur capital expenditures for product development, disaster recovery, security enhancements, regulatory compliance and the replacement and upgrade of existing equipment at the end of its useful life.
Debt
Senior Credit Facilities and Senior Notes
In March 2017, the Joint Venture entered into a $5,100.0 million term loan facility (the Term Loan Facility), and a $500.0 million revolving credit facility (the Revolving Facility, together with the Term Loan Facility, the Senior Credit Facilities). Additionally, the Joint Venture issued $1,000.0 million of 5.75% senior notes due 2025 (the Senior Notes).
In July 2019, the Joint Venture amended the Revolving Facility, the primary effects of which were to increase the maximum amount that can be borrowed from $500.0 million to $785.0 million and to extend the maturity date until July 2024. In the event the outstanding balance under the Term Loan Facility exceeds $1,100.0 million on December 1, 2023, amounts due, if any, under the Revolving Facility become due and payable on December 1, 2023.
On April 21, 2020, we issued $325.0 million aggregate principal amount of 5.75% Senior Notes due 2025 (the Notes). The Senior Notes were issued as part of the same series as the $1,000.0 million Senior Notes issued in February 2017.
Tangible Equity Units
In connection with our initial public offering in July 2019, we completed an offering of 5,750,000 TEUs. Each TEU, which has a stated amount of $50.00, is comprised of a stock purchase contract and a senior amortizing note due June 30, 2022. Each senior amortizing note has an initial principal amount of $8.2378 and bears interest at 5.5% per year. On each March 30, June 30, September 30 and December 30, we pay equal quarterly cash installments of $0.7500 per amortizing note with an aggregate principal amount of $47.4 million. Each installment constitutes a payment of interest and partial payment of principal. Unless settled earlier, each purchase contract will automatically settle on June 30, 2022.
Hedges
From time to time, we execute interest rate cap agreements with various counterparties that effectively cap our LIBOR exposure on a portion of our existing Term Loan Facility or similar replacement debt. The following table summarizes the terms of our interest rate cap agreements at June 30, 2020.
Effective Date |
Expiration Date |
Notional Amount |
Receive LIBOR
Exceeding(1) |
Pay
Fixed Rate |
||||||||||
August 31, 2018 |
December 31, 2021 | $ | 600,000,000 | 1.00 | % | 1.82 | % | |||||||
August 31, 2018 |
December 31, 2021 | $ | 900,000,000 | 1.00 | % | 1.82 | % | |||||||
March 31, 2020 |
March 31, 2024 | $ | 250,000,000 | 1.00 | % | 0.18 | % | |||||||
March 31, 2020 |
March 31, 2024 | $ | 250,000,000 | 1.00 | % | 0.18 | % | |||||||
March 31, 2020 |
March 31, 2024 | $ | 250,000,000 | 1.00 | % | 0.18 | % | |||||||
March 31, 2020 |
March 31, 2024 | $ | 250,000,000 | 1.00 | % | 0.19 | % |
(1) |
All based on 1-month LIBOR. |
The interest rate caps are recorded on the balance sheet at fair value. Changes in the fair value of the interest rate cap agreements are recorded in other comprehensive income. The fair value of the interest rate caps is reclassified from other comprehensive income to interest expense in the same period the interest expense on the underlying hedged debt impacts earnings. Any payments we receive to the extent LIBOR exceeds the specified cap rate is also reclassified from other comprehensive income to interest expense in the period received.
LIBOR Transition
LIBOR is a commonly used indicative measure of the average interest rate at which major global banks could borrow from one another. In July 2017, the Financial Conduct Authority (the authority that governs LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (ARRC) has proposed that the Secured Overnight Financing Rate (SOFR) is the rate that represents best practice as the alternative to USD-
33
LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. The ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.
Effect of Certain Debt Covenants
A breach of any of the covenants under the agreements governing existing debt could limit our ability to borrow funds under the Term Loan Facility and could result in a default under the Term Loan Facility. Upon the occurrence of an event of default under the Term Loan Facility, the lenders could elect to declare all amounts then outstanding to be immediately due and payable, and the lenders could terminate all commitments to extend further credit. If we were unable to repay the amounts declared due, the lenders could proceed against any collateral granted to them to secure that indebtedness.
With certain exceptions, the Term Loan Facility obligations are secured by a first-priority security interest in substantially all of our assets, including our investment in subsidiaries. The Term Loan Facility contains various restrictions and nonfinancial covenants, along with a senior secured net leverage ratio test. The nonfinancial covenants include restrictions on dividends, investments, dispositions, future borrowings and other specified payments, as well as additional reporting and disclosure requirements. The senior secured net leverage test must be met as a condition to incur additional indebtedness, but otherwise is applicable only to the extent that amounts drawn exceed 35% of the Revolving Facility at the end of any fiscal quarter. As of June 30, 2020, we were in compliance with all debt covenants.
Our ability to meet liquidity needs depends on our subsidiaries earnings and cash flows, the terms of our indebtedness along with our subsidiaries indebtedness, and other contractual restrictions.
Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of federal securities laws. Any statements made in this Quarterly Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as anticipate, expect, suggest, plan, believe, intend, estimate, target, project, should, could, would, may, will, forecast, outlook, potential, continues, seeks, predicts, and the negatives of these words and other similar expressions.
Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that factors affecting our actual financial results could cause actual results to differ materially from those expressed in the forward-looking statements. Factors that could materially affect our financial results or such forward-looking statements include, among others, the following factors:
|
our ability to retain or renew existing customers and attract new customers; |
|
macroeconomic and industry trends and adverse developments in the debt, consumer credit and financial services markets; |
|
uncertainty and risks related to the impact of the COVID-19 pandemic on the national and global economy, our business, suppliers, customers, and employees; |
|
our ability to connect a large number of payers and providers; |
|
our ability to provide competitive services and prices while maintaining our margins; |
|
further consolidation in our end-customer markets; |
|
our ability to effectively manage our costs; |
|
our ability to effectively develop and maintain relationships with our channel partners; |
|
a decline in transaction volume in the U.S. healthcare industry; |
|
our ability to timely develop new services and the markets willingness to adopt our new services; |
|
our ability to maintain our access to data sources; |
|
our ability to maintain the security and integrity of our data; |
|
our ability to deliver services timely without interruption; |
|
our ability to make acquisitions and integrate the operations of acquired businesses; |
|
government regulation and changes in the regulatory environment; |
|
economic and political instability in the U.S. and international markets where we operate; |
|
risks related to our international operations; |
|
the ability of our outside service providers and key vendors to fulfill their obligations to us; |
|
litigation or regulatory proceedings; |
|
our ability to protect and enforce our intellectual property, trade secrets and other forms of unpatented intellectual property; |
|
our ability to defend our intellectual property from infringement claims by third parties; |
|
changes in local, state, federal and international laws and regulations, including related to taxation; |
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our reliance on key management personnel; |
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our ability to manage and expand our operations and keep up with rapidly changing technologies; |
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our adoption of new, or amendments to existing, accounting standards; |
34
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losses against which we do not insure; |
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our ability to make timely payments of principal and interest on our indebtedness; |
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our ability to satisfy covenants in the agreements governing our indebtedness; |
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our ability to maintain our liquidity; |
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the potential dilutive effect of future issuances of our common stock; and |
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the impact of anti-takeover provisions in our organizational documents and under Delaware law, which may discourage or delay acquisition attempts. |
There may be other factors, many of which are beyond our control, that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 in the section entitled Risk Factors and in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations in this report. You should evaluate all forward-looking statements made in this report and the other public statements we may make from time to time in the context of these risks and uncertainties.
Our forward-looking statements made herein speak only as of the date on which made. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of business.
Interest Rate Risk
We have interest rate risk primarily related to borrowings under our Senior Credit Facilities. Borrowings under the Senior Credit Facilities bear interest at a rate equal to either (i) LIBOR for the relevant interest period, adjusted for statutory reserve requirements (the Term Loan Facility, is subject to a floor of 1.00% per annum and the Revolving Facility is subject to a floor of 0.00% per annum), plus an applicable margin or (ii) a base rate equal to the highest of (a) the rate of interest in effect as publicly announced by the administrative agent as its prime rate, (b) the federal funds effective rate plus 0.50% and (c) adjusted LIBOR for an interest period of one month plus 1.00% (the Term Loan Facility may be subject to a floor of 2.00% per annum), in each case, plus an applicable margin.
As of June 30, 2020, we had Term Loan borrowings of $3,808.3 million (before unamortized debt discount) and no Revolving Facility borrowings under the Senior Credit Facilities. As of June 30, 2020, the LIBOR-based interest rate on the Term Loan Facility was LIBOR plus 2.5%.
We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into interest rate cap agreements to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our interest rate cap agreements are used to manage differences in the amount, timing and duration of our known or expected cash receipts and our known or expected cash payments principally related to our borrowings. As of June 30, 2020, our outstanding interest rate cap agreements were designated as cash flow hedges of interest rate risk and were determined to be highly effective.
A change in interest rates on variable rate debt may impact our pretax earnings and cash flows. Based on the outstanding debt as of June 30, 2020, and assuming that our mix of debt instruments, derivative financial instruments and other variables remain the same, the annualized effect of a one percentage point change in variable interest rates would have an annualized pretax impact on the earnings and cash flows of approximately $13.1 million.
In the future, in order to manage our interest rate risk, we may refinance existing debt, enter into additional interest rate cap agreements, modify our existing interest rate cap agreements or make changes that may impact our ability to treat our interest rate cap agreements as a cash flow hedge. However, we do not intend or expect to enter into derivative or interest rate cap agreement transactions for speculative purposes.
35
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. The term disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosures.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving their desired control objectives. Based on the evaluation of managements disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the quarter covered by this report, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
We are involved in various legal proceedings in the ordinary course of business. We believe that the ultimate disposition of such proceedings will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. See Note 15, Legal Proceedings, in Part I, Item 1 of this Quarterly Report.
In addition to the other information included in this report, you should carefully consider the factors discussed in the section entitled Risk Factors included in the most recent Annual Report, as well as the factors identified under Cautionary Statement Regarding Forward-Looking Statements at the end of Part I, Item 2 of this Quarterly Report, which could materially affect the business, financial condition or future results. The risks described in the Annual Report and this Quarterly Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report.
36
Exhibit Index
* |
Filed herewith. |
|
Indicates management contract or compensatory plan. |
37
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Change Healthcare Inc. | ||||||||
August 6, 2020 | By: |
/s/ Neil E. de Crescenzo |
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Neil E. de Crescenzo Chief Executive Officer and Director |
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(Principal Executive Officer) | ||||||||
August 6, 2020 | By: |
/s/ Fredrik Eliasson |
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Fredrik Eliasson | ||||||||
Executive Vice President, Chief Financial Officer | ||||||||
(Principal Financial Officer) |
Exhibit 10.1
Change Healthcare Inc.
Annual Incentive Plan (AIP)
Amended and Restated as of June 17, 2020
1. |
Purpose. The purpose of the Change Healthcare Inc. Annual Incentive Plan (the Plan) is to provide an incentive to eligible employees of Change Healthcare Inc. and its participating subsidiaries (collectively, the Company) who contribute to the success of the enterprise. The Plan offers eligible employees an opportunity to earn compensation in addition to their base salaries, based upon the performance of the Company (including its Business Units) and their individual performance. |
2. |
Plan Administration. The Compensation Committee of the Board of Directors (the Board) of the Company (the Committee), in consultation with the Chief Executive Officer of the Company (the CEO), shall administer the Plan. The CEO shall oversee and interpret any and all aspects of the Plan (including the amount payable to any individual participant) and may delegate any responsibilities under the Plan to the Chief People Officer (CPO) of the Company. The CEO (other than with respect to himself) shall make final recommendations to the Committee regarding both the amount and the timing of any bonus payments pursuant to the Plan. The Committee shall review and approve the CEOs recommendations. If an employee believes that he/she has been paid incorrectly or denied payment incorrectly under the Plan, the employee must provide written notice to the CPO (the appeal) within thirty (30) days of the date of the incorrect payment or payment refusal. The CEO has the sole unilateral discretion and authority to accept or reject an appeal, whether to modify or make a payment in response to an appeal, to interpret and apply the Plan and any and all language contained in the Plan, and to determine the amount of payment. Any and all decisions made by the CEO are final. |
3. |
Plan Year. The Plan shall be effective from April 1 of each fiscal year of the Company through March 31 of such fiscal year (each, a Plan Year). |
4. |
Participant Eligibility. Employees eligible to participate in the Plan generally include regular full-time employees, unless state, local, province, or territorial laws requires additional employee participation, and an eligible employee selected to participate in the Plan is referred to as a Participant. A Participant must be employed and meet the eligibility criteria before the Participation Deadline to be eligible to participate in the Plan for that year. |
Generally, individuals who are ineligible to participate in the Plan include the following:
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Temporary employees, independent contractors and consultants |
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Employees located in the United States who do not have a signed Company Protection Agreement on file with the Company |
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Anyone not actively employed on the date the Actual Awards are distributed (except as described in this Plan summary) |
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Any other employee that does not meet the eligibility criteria above |
5. |
Annual Incentive Potential. The target bonus potential (Annual Incentive Plan or AIP Target Percentage) is calculated as a percentage of the Participants Annual Base Salary as of the last day of the Plan Year to which the bonus relates. If a Participant no longer participates in the Plan due to a change in job during the Plan Year, the AIP Target Percentage is calculated as a percentage of the Participants Annual Base Salary as of the last day of the Plan Year on which the individual was a Participant in the Plan. If a Participant changes from full-time to part-time or vice versa during the Plan year, then the AIP Target Percentage is calculated based on the different employment percentages applicable during the Plan Year. The guidelines for determining AIP Target Percentage are based on the level of the job the employee is assigned. These guidelines, however, may be adjusted to reflect the significance, scope and level of accountability for a given job. Adjustments (increases or reductions) to the AIP Target Percentage levels may be made at the discretion of the CEO or the CPO of the Company. Additionally, certain AIP Target Percentage levels are set forth in written employment agreements. As such, these written agreements shall be controlling. |
6. |
Performance Targets. The funding and payment of bonuses is based upon performance metrics established by the Committee. Unless and until otherwise specified by the Committee, the three Plan components are the Company Performance Targets, Business Unit Performance Targets and Individual Performance Measures. Calculation of Actual Awards shall be based on the achievement of multiple objectives. Each objective has a threshold, target and a maximum level of performance. For each objective, the bonus payment shall range from zero to a maximum percentage based on the level of performance for that objective. |
a. |
Company Performance Targets. Payments are contingent upon the Company achieving the Company Performance Targets as shall be set by the Committee within the first ninety days of a Plan Year. If, and when, bonuses are declared, financial calculations shall be made to determine the funding level for Participants based upon the Company Performance Targets. |
b. |
Business Unit Performance Targets. For those eligible employees whose job responsibilities are primarily related to a particular Business Unit, payments for a portion of the Participants bonus amount are contingent upon the Business Unit, achieving the applicable Performance Targets as shall be set by the Committee with respect to each Plan Year. If, and when, bonuses are declared, financial calculations shall be made to determine a funding level for each Business Unit. |
c. |
Individual Performance Measures. Each Participant shall have one or more Individual Performance Measures. Individual Performance Measures may be quantitative, qualitative or both. Once the Company and/or the Business Unit have achieved their performance goals, a Participants Individual Performance Measures, taken as a whole with the Company and/or Business Unit performance, shall determine the amount of the Participants Actual Award. Individual bonus potential can be greatly impacted by the level of achievement of Individual Performance Measures as determined by each Participants manager. Actual Awards shall be adjusted, at each Participants managers discretion, to reflect the Participants individual contribution to the achievement of Company Performance Targets and Business Unit Performance Targets and the Participants Individual Performance Measures. A Participants manager shall review and approve, modify or disapprove the Actual Award, if any, to be paid to a Participant for the Plan Year, and reserves the right to reduce or increase or eliminate the individual payments determined according to the above method. |
7. |
Prorations. If an employee, not previously eligible for participation in the Plan, moves to a job and becomes eligible for participation in the Plan, the employees Actual Award shall be calculated as a prorated portion of the annual bonus relevant to that Plan Year based upon the employees first date of eligibility. If a person otherwise eligible for participation in the Plan becomes an employee of the Company during the Plan Year, the employees Actual Award shall be calculated as a prorated portion of the annual bonus for that Plan Year based upon the employees first date of employment. If a Participant is transferred to a new job during the Plan Year with a higher or lower AIP Target Percentage, the determination of the Participants Actual Award shall be calculated based on the two different AIP Target Percentages, prorated for each AIP Target Percentage based on the date of the change in job. If a Participant is transferred to a new job during the Plan Year with a higher or lower Business Unit Performance Target, the determination of the Participants Actual Award shall be calculated based on the different Performance Targets, prorated for each Business Unit Performance Target, based on the date of the change in job within that Plan Year. If a Participant is re-hired during the Plan Year, the employee shall be eligible for a prorated award based on the total period of participation in the Plan. If a Participant no longer participates in the Plan due to a change in job during the Plan Year, the employee shall be eligible to receive a prorated award based on the period of participation in the Plan; provided, that the employee must continue to meet the Conditions For Receiving Payment set forth below. Such prorated award shall be paid at the same time as awards are made to other Participants under the Plan. |
8. |
Payout and Taxation. The Company anticipates any bonus amounts earned under the Plan for each Plan Year shall be paid in a lump sum around June of the year following that Plan Year after completion of audited financial statements for the Plan Year and final executive and Committee approval but in any event, bonus amounts earned under the |
Plan, if any, shall be paid prior to March 15 of the calendar year following the end of the Plan Year to which such bonus amounts relate. Specific provisions regarding distribution are outlined below under the Conditions for Receiving Payment section of the Plan. Payroll taxes shall be withheld from the bonus award, or remitted to tax authorities, subject to and in accordance with law. Actual Awards that Participants receive shall be reported as income in the year in which they are paid, in accordance with applicable law. |
9. |
Conditions for Receiving Payment. No Actual Awards under this Plan shall be paid to any Participant if employment is terminated, whether voluntary or involuntary, prior to the actual payment distribution date, except as described in Section 10 of this Plan summary or to the extent required by applicable law. However, the Company retains the authority to make exceptions to the foregoing policy in unusual or meritorious cases including, but not limited to, the death of a Participant during the Plan Year, termination of employment due to total or partial disability, call to active military service or retirement with the written consent of the Company. For clarity, a Participant is considered an active employee of the Company during any notice period, whether based on a written employment agreement, the applicable local employment or labor laws, or the common or civil law (Notice Period) if the Participant continues working during the Notice Period, regardless of why that Participants employment is terminated. However, if a Participant receives a payment in lieu of notice, instead of working during the Notice Period, the employee will not be considered an active employee during the Notice Period and the last day worked is considered the termination date for purposes of the Plan. |
10. |
Effect of Termination of Employment. Except as expressly set forth in this section, a Participant must be an active employee of the Company on the date the Actual Awards are distributed to Participants to be eligible to receive any payment under the Plan. |
a. |
Death or Long-Term Disability. If a Participants employment is terminated by the Company due to death or Long-Term Disability during the Plan Year, the Participant shall be entitled to receive a prorated portion of the Actual Award, with proration based on the date of termination of employment within the Plan Year. |
b. |
Retirement. If a Participants employment is terminated due to Retirement on or after the Participation Deadline, the Participant shall be entitled to receive a prorated portion of the Actual Award, with proration based on the date of termination of employment within the Plan Year. |
c. |
Other Qualifying Terminations. If a Participants employment is terminated due to a Qualifying Termination on or after the Participation Deadline, the Participant shall be entitled to receive a prorated portion of the Actual Award, with proration based on the date of termination of employment within the Plan Year. |
11. |
Limitations and/or Adjustments. Payment of an Actual Award under the Plan is not an integral part of a Participants compensation package. A Participants base salary compensates them for the expected results of any given job role within the Company. Payment of an Actual Award is at the discretion of the Company. For the avoidance of doubt, the Plan is discretionary by nature, and unless the provincial labor/employment standards legislation applicable in the province of employment where the Participant works requires otherwise in the specific circumstance, awards made under the Plan shall not be deemed a portion of a Participants compensation for any purpose whatsoever, including without limitation, when calculating a Participants entitlements to termination pay, severance pay or other amounts payable upon termination of employment. Participation in a Plan Year does not guarantee payment of an award under the Plan for that Plan Year and Participation in one Plan Year does not guarantee participation in any subsequent Plan Year. The Company reserves the right to review, amend, suspend and/or terminate the Plan, the incentive calculation formulas and all other aspects of the Plan at any time. Plan changes shall be based on a determination of the Companys business needs and do not require prior notification or explanation to Participants. A Participants participation in the Plan shall not be construed as an employment contract or as a promise of continuing employment between the Company and the Participant. Employment with the Company is terminable at will, unless an employment contract or state, local, province, or territorial laws requires otherwise. |
12. |
Active Employment Eligibility. If a Participant takes any type of approved leave of absence for less than (12) consecutive weeks during the Plan Year, this period of time will be included in the calculation of the award. If a Participant takes any type of approved leave of absence for (12) consecutive weeks during the Plan Year or more, the period of time in excess of (12) weeks will not be considered in the Participants Actual Award calculation, unless an employment contract or state, local, province, or territorial laws requires otherwise. |
13. |
Section 409A. The payments made under this Plan to Participants subject to U.S. taxes are intended be exempt from with Section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance issued thereunder (Section 409A). Payments made under this Plan shall be interpreted and construed to be distributed in the short-term deferral period, as defined under Treasury Regulation section 1.409A-1(b)(4). Notwithstanding any provision of this Plan to the contrary, this Plan shall be interpreted and construed consistent with the terms set forth in this Section 13, provided that the Company shall not be required to assume any increased economic burden in connection therewith. Although the Company intends to administer this Plan so that it shall be exempt from the requirements of Section 409A, the Company does not represent or warrant that this Plan shall be exempt from Section 409A or any other provision of federal, state, local, or non-United States law. The Company, or either of its directors, officers, employees or advisers shall not be liable to the Participant (or any other individual claiming a benefit through the Participant) for any tax, interest, or penalties the |
Participant may owe as a result of compensation paid under this Plan, and shall have no obligation to indemnify or otherwise protect the Participant from the obligation to pay any taxes pursuant to Section 409A. |
14. |
Clawback. Any payment made under this Plan shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with (i) any clawback, forfeiture or similar policy adopted by the Company, whether in existence as of the effective date of the Plan or later adopted by the Company) and (ii) any applicable law or government regulation. Further, unless otherwise determined by the Committee, to the extent that the Participant receives any amount in excess of the amount that the Participant should otherwise have received under the terms of the Plan for any reason (including, without limitation, by reason of a financial restatement, mistake in calculations or other administrative error), the Participant shall be required to repay any such excess amount to the Company. The Company will make any determination for clawback, forfeiture or recovery in its sole discretion and in accordance with any applicable law, government regulation or Company policy, as applicable. By participating in this Plan the Participant consents to such deductions being made by the Company. |
15. |
Change in Control. In connection with a Change in Control, the Committee shall have the discretion to make changes to the Plan and awards hereunder as the Committee, in its sole discretion, deems to be equitable and appropriate. |
16. |
Definitions. |
a. |
Actual Award means the finally determined amount payable to a Participant under the Plan for a Plan Year. |
b. |
Affiliate means any Person that directly or indirectly controls, is controlled by, or is under common control with the Company. The term control (including, with correlative meaning, the terms controlled by and under common control with), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting or other securities, by contract, or otherwise. |
c. |
Annual Base Salary means annual rate of pay as of the last day of the Plan year for exempt Participants. For non-exempt Participants, this is the hourly rate of pay annualized for the number of hours worked during the Plan Year. |
d. |
Change in Control means (i) the acquisition (whether by purchase, merger, consolidation, combination, or other similar transaction) by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange |
Act) of more than 50% (on a fully diluted basis) of either (A) the then-outstanding shares of Common Stock, taking into account as outstanding for this purpose such Common Stock issuable upon the exercise of options or warrants, the conversion of convertible stock or debt, the exchange of exchangeable stock or units, and the exercise of any similar right to acquire such Common Stock; or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that for purposes of the Plan, any acquisition by any employee benefit plan sponsored or maintained by the Company or any Affiliate shall not constitute a Change in Control; (ii) during any period of 12 months, individuals who, at the beginning of such period, constitute the Board (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board; provided, that any Person becoming a director subsequent to the effective date of the Plan, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such Person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Exchange Act, with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to be an Incumbent Director; or (iii) the sale, transfer, or other disposition of all or substantially all of the assets of the Company (taken as a whole) to any Person that is not an Affiliate of the Company. |
e. |
Common Stock means the common stock of the Company, par value $0.001 per share (and any stock or other securities into which such Common Stock may be converted or into which it may be exchanged). |
f. |
Exchange Act means the Securities Exchange Act of 1934, as amended, and any successor thereto. Reference in the Plan to any section of (or rule promulgated under) the Exchange Act shall be deemed to include any rules, regulations, or other interpretative guidance under such section or rule, and any amendments or successor provisions to such section, rules, regulations, or guidance. |
g. |
Long-Term Disability shall mean the Company or its affiliates having cause to terminate a Participants employment or service on account of disability, as defined in any written employment agreement then in effect between the Participant and the Company or an affiliate, or in the absence of such an agreement, a condition entitling the Participant to receive benefits under a long-term disability plan of the Company or an affiliate or, in the absence of such a plan, the complete and permanent inability by reason of illness or accident to perform the duties of the occupation at which a Participant was employed or served when such disability commenced or, as determined by the Company based upon medical evidence acceptable to it. |
h. |
Participation Deadline with respect to a Plan Year shall mean January 1 of the Plan Year. |
i. |
Person means any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act). |
j. |
Qualifying Termination means a termination of employment eligible to receive benefits under the Companys Severance Guidelines or Executive Severance Guidelines in accordance with the terms and conditions of such guidelines as may be amended from time to time. |
k. |
Retirement means, unless otherwise set forth in an employment agreement with a Participant or specifically defined under local law for the purposes of payment of compensation for services, termination from the Company with age of at least 65. |
17. |
Governing Law. For employees on U.S. payroll, the laws of the state of Delaware shall govern all questions concerning the construction, validity and interpretation of the Plan, without regard to the state of Delawares conflict of laws rules. |
For International employees, the laws of the country where the Participant permanently resides shall govern all questions concerning the construction, validity and interpretation of the Plan, without regard to the Country of Residences conflict of laws rules.
Exhibit 10.2
Executive Form
RESTRICTED STOCK UNIT GRANT NOTICE
UNDER THE
CHANGE HEALTHCARE INC.
2019 OMNIBUS INCENTIVE PLAN
Cash-Settled
Change Healthcare Inc., a Delaware corporation (the Company), pursuant to its 2019 Omnibus Incentive Plan (the Plan), hereby grants to the Participant set forth below the number of Restricted Stock Units set forth below. The Restricted Stock Units are subject to all of the terms and conditions as set forth herein, in the Restricted Stock Unit Agreement (attached hereto or previously provided to the Participant in connection with a prior grant), and in the Plan, all of which are incorporated herein in their entirety. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan.
Participant: | [Insert Participant Name] | |
Date of Grant: | [Insert Grant Date] | |
Vesting Commencement Date: | [Insert Date] | |
Number of Restricted Stock Units: | [Insert No. of RSUs Granted] | |
Vesting Schedule: |
Provided the Participant has not undergone a Termination at the time of each applicable vesting date (or event):
100% of the Restricted Stock Units will vest on the first anniversary of the Vesting Commencement Date (each such anniversary, a Vesting Date).
Notwithstanding the foregoing, in the event that the Participant undergoes a Termination (i) as a result of the Participants death prior to any Vesting Date, the Participant shall fully vest in the Participants then-unvested Restricted Stock Units; (ii) as a result of the Participants Disability or Retirement, in either case, prior to a Vesting Date, the Participant shall vest as to a prorated portion of the then-unvested Restricted Stock Units granted, with such proration based on the number of days the Participant provided services from the Vesting Commencement Date to the date of Termination (or, if applicable, from the immediately prior Vesting Date to the date of Termination); or (iii) (A) by the Service Recipient without Cause or (B) by the Participant for Good Reason, in each case, on or within 12 months following a Change in Control, the Participant shall fully vest in the Participants then-unvested Restricted Stock Units; provided, however, that any such Restricted Stock Units shall be settled in accordance with Section 3 of the Restricted Stock Unit Agreement within 30 days following the Vesting Date originally applicable to such Restricted Stock Units. |
Definition: | Good Reason means (i) a material diminution in the Participants authority, title, duties or responsibilities, or the assignment to the Participant of any duties inconsistent with the Participants position; (ii) a material reduction in the Participants base salary or target bonus opportunity; (iii) relocation by more than 50 miles of the Participants principal place of employment; or (iv) a material reduction in the level of employee benefits provided to the Participant. | |
* * * |
2
THE UNDERSIGNED PARTICIPANT ACKNOWLEDGES RECEIPT OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN, AND, AS AN EXPRESS CONDITION TO THE GRANT OF RESTRICTED STOCK UNITS HEREUNDER, AGREES TO BE BOUND BY THE TERMS OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN.
CHANGE HEALTHCARE INC. | PARTICIPANT | |||||||
|
|
|||||||
By: | ||||||||
Title: |
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
CHANGE HEALTHCARE INC.
2019 OMNIBUS INCENTIVE PLAN
Pursuant to the Restricted Stock Units Grant Notice (the Grant Notice) delivered to the Participant (as defined in the Grant Notice), and subject to the terms of this Restricted Stock Unit Agreement (this Restricted Stock Unit Agreement) and the Change Healthcare Inc. 2019 Omnibus Incentive Plan (the Plan), Change Healthcare Inc., a Delaware corporation (the Company), and the Participant agree as follows. Capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Plan.
1. Grant of Restricted Stock Units. Subject to the terms and conditions set forth herein and in the Plan, the Company hereby grants to the Participant the number of Restricted Stock Units provided in the Grant Notice (with each Restricted Stock Unit representing the right to receive one share of Common Stock upon the vesting of such Restricted Stock Unit). The Company may make one or more additional grants of Restricted Stock Units to the Participant under this Restricted Stock Unit Agreement by providing the Participant with a new Grant Notice, which may also include any terms and conditions differing from this Restricted Stock Unit Agreement to the extent provided therein. The Company reserves all rights with respect to the granting of additional Restricted Stock Units hereunder and makes no implied promise to grant additional Restricted Stock Units.
2. Vesting. Subject to the conditions contained herein and in the Plan, the Restricted Stock Units shall vest and the restrictions on such Restricted Stock Units shall lapse as provided in the Grant Notice. With respect to any Restricted Stock Unit, the period of time that such Restricted Stock Unit remains subject to vesting shall be its Restricted Period.
3. Settlement of Restricted Stock Units. As soon as reasonable practicable (and in any event, within 30 days) following the Vesting Date (as defined in the Grant Notice) applicable to such Restricted Stock Units, the Company shall pay cash to the Participant in respect of such Restricted Stock Units, with the amount of such cash payment to be equal to the product of (i) the Fair Market Value per share of Common Stock as of the date on which the Restricted Period lapsed with respect to such Restricted Stock Units and (ii) the number of such Restricted Stock Units to which such Vesting Date applies.
4. Treatment of Restricted Stock Units Upon Termination. Unless otherwise determined by the Committee, in the event of the Participants Termination for any reason:
(a) all vesting with respect to the Restricted Stock Units shall cease (after taking into account vesting of Restricted Stock Units as set forth in the Grant Notice); and
(b) the unvested Restricted Stock Units shall be forfeited to the Company by the Participant for no consideration as of the date of such Termination.
5. Company; Participant.
(a) The term Company as used in this Restricted Stock Unit Agreement with reference to employment shall include the Board, the Company and its Subsidiaries.
(b) Whenever the word Participant is used in any provision of this Restricted Stock Unit Agreement under circumstances where the provision should logically be construed to apply to the executors, the administrators, or the person or persons to whom the Restricted Stock Units may be transferred by will or by the laws of descent and distribution, the word Participant shall be deemed to include such person or persons.
6. Non-Transferability. The Restricted Stock Units are not transferable by the Participant except to Permitted Transferees in accordance with Section 13(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Restricted Stock Units, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Restricted Stock Units shall terminate and become of no further effect.
7. Rights as Stockholder. The Participant or a Permitted Transferee of the Restricted Stock Units shall have no rights as a stockholder with respect to any share of Common Stock underlying a Restricted Stock Unit unless and until the Participant shall have become the holder of record or the beneficial owner of such Common Stock, and no adjustment shall be made for dividends or distributions or other rights in respect of such share of Common Stock for which the record date is prior to the date upon which the Participant shall become the holder of record or the beneficial owner thereof.
8. Dividend Equivalents. The Restricted Stock Units shall be entitled to be credited with dividend equivalent payments (upon the payment by the Company of dividends on shares of Common Stock), which shall accrue in cash without interest and shall be delivered in cash. Accumulated dividend equivalents shall be payable at such time as the underlying Restricted Stock Units to which such dividend equivalents relate are settled in accordance with Section 3 above. For the avoidance of doubt, dividend equivalents accrued in respect of Restricted Stock Units shall only be paid to the extent the underlying Restricted Stock Unit vests and is settled, and to the extent that any Restricted Stock Units are forfeited and not vested, the Participant shall have no right to such dividend equivalent payments.
9. Tax Withholding. The provisions of Section 13(d) of the Plan are incorporated herein by reference and made a part hereof. In addition, the Committee, subject to its having considered the applicable accounting impact of any such determination, has full discretion to allow the Participant to satisfy, in whole or in part, any additional income, employment and/or other applicable taxes payable by the Participant with respect to an Award by electing to have the Company withhold from the shares of Common Stock otherwise issuable or deliverable to, or that would otherwise be retained by, the Participant upon the grant, vesting or settlement of the Award, as applicable, shares of Common Stock having an aggregate Fair Market Value that is greater than the applicable minimum required statutory withholding liability (but such withholding may in no event be in excess of the maximum statutory withholding amount(s) in the Participants relevant tax jurisdictions).
10. Notice. Every notice or other communication relating to this Restricted Stock Unit Agreement between the Company and the Participant shall be in writing, and shall be mailed to or delivered to the party for whom it is intended at such address as may from time to time be designated by such party in a notice mailed or delivered to the other party as herein provided; provided that, unless and until some other address be so designated, all notices or communications by the Participant to the Company shall be mailed or delivered to the Company at its principal executive office, to the attention of the Corporate Secretary, and all notices or communications by the Company to the Participant may be given to the Participant personally or may be mailed to the Participant at the Participant last known address, as reflected in the Company records. Notwithstanding the above, all notices and communications between the Participant and any third-party plan administrator shall be mailed, delivered, transmitted or sent in accordance with the procedures established by such third-party plan administrator and communicated to the Participant from time to time.
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11. No Right to Continued Service. This Restricted Stock Unit Agreement does not confer upon the Participant any right to continue as an employee or service provider to the Company.
12. Binding Effect. This Restricted Stock Unit Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto.
13. Waiver and Amendments. Except as otherwise set forth in Section 12 of the Plan, any waiver, alteration, amendment or modification of any of the terms of this Restricted Stock Unit Agreement shall be valid only if made in writing and signed by the parties hereto; provided, however, that any such waiver, alteration, amendment or modification is consented to on the Companys behalf by the Committee. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver.
14. Governing Law. This Restricted Stock Unit Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Notwithstanding anything contained in this Restricted Stock Unit Agreement, the Grant Notice or the Plan to the contrary, if any suit or claim is instituted by the Participant or the Company relating to this Restricted Stock Unit Agreement, the Grant Notice or the Plan, the Participant hereby submits to the exclusive jurisdiction of and venue in the courts of Delaware.
15. Section 409A of the Code. This Restricted Stock Unit Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder, and shall be interpreted consistent with such intent. Without limiting the foregoing, the Committee will have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the shares of Common Stock contemplated hereunder. Notwithstanding any other provision of this Agreement to the contrary, if the Participant is a specified employee within the meaning of Section 409A of the Code, and is subject to U.S. federal income tax, no payments in respect of any Restricted Stock Unit that is deferred compensation subject to Section 409A of the Code and which would otherwise be payable upon the Participants separation from service (as defined in Section 409A of the Code) will be made to the Participant prior to the date that is six months after the date of the Participants separation from service or, if earlier, the Participants date of death. Following any applicable six-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A of the Code that is also a business day. The Participant is solely responsible and liable for the satisfaction of all taxes and penalties under Section 409A of the Code that may be imposed on or in respect of the Participant in connection with this Restricted Stock Unit Agreement, and the Company will not be liable to any Participant for any payment made under the Plan or this Restricted Stock Unit Agreement that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Restricted Stock Unit Agreement as an amount includible in gross income under Section 409A of the Code.
16. Exhibit for Non U.S. Participants. If the Participant is residing and/or working outside of the United States, the Restricted Stock Units shall be subject to any special provisions set forth in Exhibit A to this Restricted Stock Unit Agreement. If the Participant becomes based outside the United States while holding any Restricted Stock Units, the special provisions set forth in Exhibit A shall apply to the Participant to the extent that the Company determines that the application of such provisions is necessary or advisable for legal or administrative reasons. Moreover, if the Participant relocates between any of the
6
countries included on Exhibit A, the special provisions set forth in Exhibit A for such country shall apply to the Participant to the extent that the Company determines that the application of such provisions is necessary or advisable for legal or administrative reasons. Exhibit A constitutes part of this Restricted Stock Unit Agreement.
17. Plan. The terms and provisions of the Plan are incorporated herein by reference. In the event of a conflict or inconsistency between the terms and provisions of the Plan and the provisions of this Restricted Stock Unit Agreement, the Plan shall govern and control.
7
Exhibit 10.3
Executive Form
RESTRICTED STOCK UNIT GRANT NOTICE
UNDER THE
CHANGE HEALTHCARE INC.
2019 OMNIBUS INCENTIVE PLAN
Change Healthcare Inc., a Delaware corporation (the Company), pursuant to its 2019 Omnibus Incentive Plan (the Plan), hereby grants to the Participant set forth below the number of Restricted Stock Units set forth below. The Restricted Stock Units are subject to all of the terms and conditions as set forth herein, in the Restricted Stock Unit Agreement (attached hereto or previously provided to the Participant in connection with a prior grant), and in the Plan, all of which are incorporated herein in their entirety. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan.
Participant: | [Insert Participant Name] | |
Date of Grant: | [Insert Grant Date] | |
Vesting Commencement Date: | [Insert Date] | |
Number of Restricted Stock Units: | [Insert No. of RSUs Granted] | |
Vesting Schedule: |
Provided the Participant has not undergone a Termination at the time of each applicable vesting date (or event):
One-third (1/3) of the Restricted Stock Units will vest on each of the second, third and fourth anniversaries of the Vesting Commencement Date (each such anniversary, a Vesting Date).
Notwithstanding the foregoing, in the event that the Participant undergoes a Termination (i) as a result of the Participants death prior to any Vesting Date, the Participant shall fully vest in the Participants then-unvested Restricted Stock Units; (ii) as a result of the Participants Disability or Retirement, in either case, prior to a Vesting Date, the Participant shall vest as to a prorated portion of the then-unvested Restricted Stock Units granted, with such proration based on the number of days the Participant provided services from the Vesting Commencement Date to the date of Termination (or, if applicable, from the immediately prior Vesting Date to the date of Termination); or (iii) (A) by the Service Recipient without Cause or (B) by the Participant for Good Reason, in each case, on or within 12 months following a Change in Control, the Participant shall fully vest in the Participants then-unvested Restricted Stock Units; provided, however, that any such Restricted Stock Units shall be settled in accordance with Section 3 of the Restricted Stock Unit Agreement within 30 days following the Vesting Date originally applicable to such Restricted Stock Units. |
Definition: | Good Reason means (i) a material diminution in the Participants authority, title, duties or responsibilities, or the assignment to the Participant of any duties inconsistent with the Participants position; (ii) a material reduction in the Participants base salary or target bonus opportunity; (iii) relocation by more than 50 miles of the Participants principal place of employment; or (iv) a material reduction in the level of employee benefits provided to the Participant. | |
* * * |
2
THE UNDERSIGNED PARTICIPANT ACKNOWLEDGES RECEIPT OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN, AND, AS AN EXPRESS CONDITION TO THE GRANT OF RESTRICTED STOCK UNITS HEREUNDER, AGREES TO BE BOUND BY THE TERMS OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN.
CHANGE HEALTHCARE INC. | PARTICIPANT | |||
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By: | ||||
Title: |
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
CHANGE HEALTHCARE INC.
2019 OMNIBUS INCENTIVE PLAN
Pursuant to the Restricted Stock Units Grant Notice (the Grant Notice) delivered to the Participant (as defined in the Grant Notice), and subject to the terms of this Restricted Stock Unit Agreement (this Restricted Stock Unit Agreement) and the Change Healthcare Inc. 2019 Omnibus Incentive Plan (the Plan), Change Healthcare Inc., a Delaware corporation (the Company), and the Participant agree as follows. Capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Plan.
1. Grant of Restricted Stock Units. Subject to the terms and conditions set forth herein and in the Plan, the Company hereby grants to the Participant the number of Restricted Stock Units provided in the Grant Notice (with each Restricted Stock Unit representing the right to receive one share of Common Stock upon the vesting of such Restricted Stock Unit). The Company may make one or more additional grants of Restricted Stock Units to the Participant under this Restricted Stock Unit Agreement by providing the Participant with a new Grant Notice, which may also include any terms and conditions differing from this Restricted Stock Unit Agreement to the extent provided therein. The Company reserves all rights with respect to the granting of additional Restricted Stock Units hereunder and makes no implied promise to grant additional Restricted Stock Units.
2. Vesting. Subject to the conditions contained herein and in the Plan, the Restricted Stock Units shall vest and the restrictions on such Restricted Stock Units shall lapse as provided in the Grant Notice. With respect to any Restricted Stock Unit, the period of time that such Restricted Stock Unit remains subject to vesting shall be its Restricted Period.
3. Settlement of Restricted Stock Units. Subject to the proviso to Section 9(d)(ii) of the Plan, as soon as reasonable practicable (and in any event, within 30 days) following the Vesting Date (as defined in the Grant Notice) originally applicable to such Restricted Stock Units, the Company shall issue to the Participant or the Participants beneficiary, without charge, one share of Common Stock (or other securities or other property, as applicable) for each such outstanding Restricted Stock Unit.
4. Treatment of Restricted Stock Units Upon Termination. Unless otherwise determined by the Committee, in the event of the Participants Termination for any reason:
(a) all vesting with respect to the Restricted Stock Units shall cease (after taking into account vesting of Restricted Stock Units as set forth in the Grant Notice); and
(b) the unvested Restricted Stock Units shall be forfeited to the Company by the Participant for no consideration as of the date of such Termination.
5. Company; Participant.
(a) The term Company as used in this Restricted Stock Unit Agreement with reference to employment shall include the Board, the Company and its Subsidiaries.
(b) Whenever the word Participant is used in any provision of this Restricted Stock Unit Agreement under circumstances where the provision should logically be construed to apply to the executors, the administrators, or the person or persons to whom the Restricted Stock Units may be transferred by will or by the laws of descent and distribution, the word Participant shall be deemed to include such person or persons.
6. Non-Transferability. The Restricted Stock Units are not transferable by the Participant except to Permitted Transferees in accordance with Section 13(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Restricted Stock Units, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Restricted Stock Units shall terminate and become of no further effect.
7. Rights as Stockholder. The Participant or a Permitted Transferee of the Restricted Stock Units shall have no rights as a stockholder with respect to any share of Common Stock underlying a Restricted Stock Unit unless and until the Participant shall have become the holder of record or the beneficial owner of such Common Stock, and no adjustment shall be made for dividends or distributions or other rights in respect of such share of Common Stock for which the record date is prior to the date upon which the Participant shall become the holder of record or the beneficial owner thereof.
8. Dividend Equivalents. The Restricted Stock Units shall be entitled to be credited with dividend equivalent payments (upon the payment by the Company of dividends on shares of Common Stock), which shall accrue in cash without interest and shall be delivered in cash. Accumulated dividend equivalents shall be payable at such time as the underlying Restricted Stock Units to which such dividend equivalents relate are settled in accordance with Section 3 above. For the avoidance of doubt, dividend equivalents accrued in respect of Restricted Stock Units shall only be paid to the extent the underlying Restricted Stock Unit vests and is settled, and to the extent that any Restricted Stock Units are forfeited and not vested, the Participant shall have no right to such dividend equivalent payments.
9. Tax Withholding. The provisions of Section 13(d) of the Plan are incorporated herein by reference and made a part hereof. In addition, the Committee, subject to its having considered the applicable accounting impact of any such determination, has full discretion to allow the Participant to satisfy, in whole or in part, any additional income, employment and/or other applicable taxes payable by the Participant with respect to an Award by electing to have the Company withhold from the shares of Common Stock otherwise issuable or deliverable to, or that would otherwise be retained by, the Participant upon the grant, vesting or settlement of the Award, as applicable, shares of Common Stock having an aggregate Fair Market Value that is greater than the applicable minimum required statutory withholding liability (but such withholding may in no event be in excess of the maximum statutory withholding amount(s) in the Participants relevant tax jurisdictions).
10. Notice. Every notice or other communication relating to this Restricted Stock Unit Agreement between the Company and the Participant shall be in writing, and shall be mailed to or delivered to the party for whom it is intended at such address as may from time to time be designated by such party in a notice mailed or delivered to the other party as herein provided; provided that, unless and until some other address be so designated, all notices or communications by the Participant to the Company shall be mailed or delivered to the Company at its principal executive office, to the attention of the Corporate Secretary, and all notices or communications by the Company to the Participant may be given to the Participant personally or may be mailed to the Participant at the Participants last known address, as reflected in the Companys records. Notwithstanding the above, all notices and communications between the Participant and any third-party plan administrator shall be mailed, delivered, transmitted or sent in accordance with the procedures established by such third-party plan administrator and communicated to the Participant from time to time.
5
11. No Right to Continued Service. This Restricted Stock Unit Agreement does not confer upon the Participant any right to continue as an employee or service provider to the Company.
12. Binding Effect. This Restricted Stock Unit Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto.
13. Waiver and Amendments. Except as otherwise set forth in Section 12 of the Plan, any waiver, alteration, amendment or modification of any of the terms of this Restricted Stock Unit Agreement shall be valid only if made in writing and signed by the parties hereto; provided, however, that any such waiver, alteration, amendment or modification is consented to on the Companys behalf by the Committee. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver.
14. Governing Law. This Restricted Stock Unit Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Notwithstanding anything contained in this Restricted Stock Unit Agreement, the Grant Notice or the Plan to the contrary, if any suit or claim is instituted by the Participant or the Company relating to this Restricted Stock Unit Agreement, the Grant Notice or the Plan, the Participant hereby submits to the exclusive jurisdiction of and venue in the courts of Delaware.
15. Section 409A of the Code. This Restricted Stock Unit Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder, and shall be interpreted consistent with such intent. Without limiting the foregoing, the Committee will have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the shares of Common Stock contemplated hereunder. Notwithstanding any other provision of this Agreement to the contrary, if the Participant is a specified employee within the meaning of Section 409A of the Code, and is subject to U.S. federal income tax, no payments in respect of any Restricted Stock Unit that is deferred compensation subject to Section 409A of the Code and which would otherwise be payable upon the Participants separation from service (as defined in Section 409A of the Code) will be made to the Participant prior to the date that is six months after the date of the Participants separation from service or, if earlier, the Participants date of death. Following any applicable six-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A of the Code that is also a business day. The Participant is solely responsible and liable for the satisfaction of all taxes and penalties under Section 409A of the Code that may be imposed on or in respect of the Participant in connection with this Restricted Stock Unit Agreement, and the Company will not be liable to any Participant for any payment made under the Plan or this Restricted Stock Unit Agreement that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Restricted Stock Unit Agreement as an amount includible in gross income under Section 409A of the Code.
16. Exhibit for Non U.S. Participants. If the Participant is residing and/or working outside of the United States, the Restricted Stock Units shall be subject to any special provisions set forth in Exhibit A to this Restricted Stock Unit Agreement. If the Participant becomes based outside the United States while holding any Restricted Stock Units, the special provisions set forth in Exhibit A shall apply to the Participant to the extent that the Company determines that the application of such provisions is necessary or advisable for legal or administrative reasons. Moreover, if the Participant relocates between any of the
6
countries included on Exhibit A, the special provisions set forth in Exhibit A for such country shall apply to the Participant to the extent that the Company determines that the application of such provisions is necessary or advisable for legal or administrative reasons. Exhibit A constitutes part of this Restricted Stock Unit Agreement.
17. Plan. The terms and provisions of the Plan are incorporated herein by reference. In the event of a conflict or inconsistency between the terms and provisions of the Plan and the provisions of this Restricted Stock Unit Agreement, the Plan shall govern and control.
7
Exhibit 31.1
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Neil E. de Crescenzo, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Change Healthcare Inc. (the registrant); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. |
Designed such disclosure control and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
[Reserved] |
c. |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 6, 2020 | By: |
/s/ Neil E. de Crescenzo |
||||
Name: | Neil E. de Crescenzo | |||||
Title: | President and Chief Executive Officer of Change Healthcare Inc. |
Exhibit 31.2
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Fredrik Eliasson, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Change Healthcare Inc. (the registrant); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. |
Designed such disclosure control and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
[Reserved] |
c. |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 6, 2020 | By: |
/s/ Fredrik Eliasson |
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Name: | Fredrik Eliasson | |||||
Title: | Executive Vice President and Chief Financial Officer of Change Healthcare Inc. |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Change Healthcare Inc. (the Company) on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Neil E. de Crescenzo, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of the Company, that, to my knowledge:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 6, 2020 | By: |
/s/ Neil E. de Crescenzo |
||||
Name: | Neil E. de Crescenzo | |||||
Title: | President and Chief Executive Officer of Change Healthcare Inc. |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Change Healthcare Inc. (the Company) on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Fredrik Eliasson, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of the Company, that, to my knowledge:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 6, 2020 | By: |
/s/ Fredrik Eliasson |
||||
Name: | Fredrik Eliasson | |||||
Title: | Executive Vice President and Chief Financial Officer of Change Healthcare Inc. |
Exhibit 99.1
Financial Information of Consolidated Subsidiary
Change Healthcare LLC
EXPLANATORY NOTE
During the first quarter of fiscal year 2021, the Company decided to allocate all administrative and certain other corporate expenses to the respective reportable segments. This allocation methodology differs from the methodology utilized by the Joint Venture in prior fiscal years. The financial results of the Joint Ventures reportable segments were presented for periods prior to the Merger in the notes to the Change Healthcare LLC financial statements that were included as an exhibit the Companys financial statements. Therefore, the adjusted EBITDA of the Joint Ventures reportable segments has been retrospectively adjusted for those periods to be consistent with the Companys current allocation methodology as presented in the tables below.
SEGMENT ADJUSTED EBITDA
(unaudited, amounts in thousands)
Software and
Analytics |
Network
Solutions |
Technology-
Enabled Services |
Postage and
Eliminations |
Total | ||||||||||||||||
Fiscal Year 2020: |
||||||||||||||||||||
First Quarter |
$ | 176,501 | $ | 79,222 | $ | 25,333 | $ | | $ | 281,056 | ||||||||||
Second Quarter |
110,993 | 79,526 | 27,174 | | 217,693 | |||||||||||||||
Third Quarter |
127,793 | 87,571 | 17,262 | | 232,626 | |||||||||||||||
Fourth Quarter |
150,341 | 85,340 | 28,677 | | 264,358 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
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Total |
$ | 565,629 | $ | 331,659 | $ | 98,445 | $ | | $ | 995,733 | ||||||||||
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|
|
|
|
|
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Fiscal Year 2019: |
||||||||||||||||||||
First Quarter |
$ | 121,098 | $ | 76,852 | $ | 29,798 | $ | | $ | 227,749 | ||||||||||
Second Quarter |
117,132 | 78,775 | 20,045 | | 215,952 | |||||||||||||||
Third Quarter |
126,416 | 83,367 | 24,294 | | 234,077 | |||||||||||||||
Fourth Quarter |
154,434 | 78,191 | 24,556 | | 257,180 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 519,081 | $ | 317,185 | $ | 98,693 | $ | | $ | 934,958 | ||||||||||
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