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

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the quarterly period ended 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: 001-34746
R1 RCM INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0698101
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification Number)
401 North Michigan Avenue
60611
Suite 2700
Chicago
Illinois
(Address of principal executive offices) (Zip code)
(312) 324-7820
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, par value $0.01 per share RCM NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No ☑
As of July 28, 2020, the registrant had 115,578,971 shares of common stock, par value $0.01 per share, outstanding.





Table of Contents

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45



PART I — FINANCIAL INFORMATION
ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS
3

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


(Unaudited)
  June 30, December 31,
  2020 2019
Assets
Current assets:
Cash and cash equivalents $ 123.1    $ 92.0   
Accounts receivable, net of $5.1 million and $2.8 million allowance
64.3    52.3   
Accounts receivable, net of $0.1 million and $0.0 million allowance - related party
25.3    30.8   
Prepaid expenses and other current assets 48.0    41.6   
Total current assets 260.7    216.7   
Property, equipment and software, net 112.3    116.9   
Operating lease right-of-use assets 68.3    77.9   
Intangible assets, net 240.0    164.7   
Goodwill 379.8    253.2   
Non-current deferred tax assets 39.1    64.2   
Non-current portion of restricted cash equivalents 1.0    0.5   
Other assets 39.7    35.0   
Total assets $ 1,140.9    $ 929.1   
Liabilities
Current liabilities:
Accounts payable $ 24.2    $ 20.2   
Current portion of customer liabilities 19.9    14.0   
Current portion of customer liabilities - related party 23.4    34.1   
Accrued compensation and benefits 52.4    95.1   
Current portion of operating lease liabilities 13.4    12.8   
Current portion of long-term debt 25.8    16.3   
Other accrued expenses 46.4    40.0   
Total current liabilities 205.5    232.5   
Non-current portion of customer liabilities - related party 18.2    18.6   
Non-current portion of operating lease liabilities 76.5    82.7   
Long-term debt 538.6    337.7   
Other non-current liabilities 15.9    10.4   
Total liabilities 854.7    681.9   
8.00% Series A convertible preferred stock, par value $0.01, 370,000 shares authorized, 277,296 shares issued and outstanding as of June 30, 2020 (aggregate liquidation value of $282.8); 370,000 shares authorized, 266,529 shares issued and outstanding as of December 31, 2019 (aggregate liquidation value of $271.9)
240.1    229.1   
Stockholders’ equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 129,289,960 shares issued and 115,374,788 shares outstanding at June 30, 2020; 127,807,546 shares issued and 114,021,280 shares outstanding at December 31, 2019
1.3    1.3   
Additional paid-in capital 375.2    372.7   
Accumulated deficit (245.3)   (277.8)  
Accumulated other comprehensive loss (10.4)   (4.5)  
Treasury stock, at cost, 13,915,172 shares as of June 30, 2020; 13,786,266 shares as of December 31, 2019
(74.7)   (73.6)  
Total stockholders’ equity 46.1    18.1   
Total liabilities and stockholders’ equity $ 1,140.9    $ 929.1   
See accompanying notes to consolidated financial statements.
4

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

 
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Net services revenue ($206.4 million and $414.8 million for the three and six months ended June 30, 2020, respectively, and $199.0 million and $380.8 million for the three and six months ended June 30, 2019, respectively, from related party)
$ 314.7    $ 295.0    $ 635.2    $ 570.9   
Operating expenses:
Cost of services 248.3    246.1    502.2    483.3   
Selling, general and administrative 23.3    25.8    48.8    48.3   
Other expenses 18.0    10.7    26.7    19.5   
Total operating expenses 289.6    282.6    577.7    551.1   
Income from operations 25.1    12.4    57.5    19.8   
Loss on debt extinguishment —    18.8    —    18.8   
Net interest expense 4.8    9.9    8.6    20.1   
Income (loss) before income tax provision (benefit) 20.3    (16.3)   48.9    (19.1)  
Income tax provision (benefit) 5.2    (11.1)   15.6    (14.1)  
Net income (loss) $ 15.1    $ (5.2)   $ 33.3    $ (5.0)  
Net income (loss) per common share:
Basic $ 0.04    $ (0.09)   $ 0.10    $ (0.14)  
Diluted $ 0.03    $ (0.09)   $ 0.08    $ (0.14)  
Weighted average shares used in calculating net income (loss) per common share:
Basic 115,067,552    110,956,014    114,754,298    110,382,509   
Diluted 165,887,964    110,956,014    167,809,324    110,382,509   
Consolidated statements of comprehensive income (loss)
Net income (loss) 15.1    (5.2)   33.3    (5.0)  
Other comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax 0.8    0.1    (3.6)   0.3   
Foreign currency translation adjustments (0.2)   —    (2.3)   0.5   
Comprehensive income (loss) $ 15.7    $ (5.1)   $ 27.4    $ (4.2)  

Basic:
Net income (loss) $ 15.1    $ (5.2)   $ 33.3    $ (5.0)  
Less dividends on preferred shares (5.6)   (5.1)   (11.0)   (10.1)  
Less income allocated to preferred shareholders (4.7)   —    (11.0)   —   
Net income (loss) available/allocated to common shareholders - basic $ 4.8    $ (10.3)   $ 11.3    $ (15.1)  
Diluted:
Net income (loss) $ 15.1    $ (5.2)   $ 33.3    $ (5.0)  
Less dividends on preferred shares (5.6)   (5.1)   (11.0)   (10.1)  
Less income allocated to preferred shareholders (3.8)   —    (8.9)   —   
Net income (loss) available/allocated to common shareholders - diluted $ 5.7    $ (10.3)   $ 13.4    $ (15.1)  
See accompanying notes to consolidated financial statements.
5

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

 
  Common Stock Treasury Stock Additional
Paid-In
Capital 		Accumulated
Deficit 		Accumulated
Other
Comprehensive
Loss 		Total
  Shares Amount Shares Amount        
Balance at December 31, 2019 127,807,546    $ 1.3    (13,786,266)   $ (73.6)   $ 372.7    $ (277.8)   $ (4.5)   $ 18.1   
Impact of credit-loss standard adoption, net of tax of $0.3 million
—    —    —    —    —    (0.8)   —    (0.8)  
Adjusted balance at January 1, 2020 127,807,546    $ 1.3    (13,786,266)   $ (73.6)   $ 372.7    $ (278.6)   $ (4.5)   $ 17.3   
Share-based compensation expense —    —    —    —    4.8    —    —    4.8   
Issuance of common stock related to share-based compensation plans 1,720    —    —    —    —    —    —    —   
Exercise of vested stock options 553,520    —    —    —    3.1    —    —    3.1   
Dividends paid/accrued —    —    —    —    (5.4)   —    —    (5.4)  
Acquisition of treasury stock related to share-based compensation plans —    —    (545)   —    —    —    —    —   
Net change on derivatives designated as cash flow hedges, net of tax of $1.5 million
—    —    —    —    —    —    (4.4)   (4.4)  
Foreign currency translation adjustments —    —    —    —    —    —    (2.1)   (2.1)  
Net income —    —    —    —    —    18.2    —    18.2   
Balance at March 31, 2020 128,362,786    $ 1.3    (13,786,811)   $ (73.6)   $ 375.2    $ (260.4)   $ (11.0)   $ 31.5   
Share-based compensation expense —    —    —    —    4.4    —    —    4.4   
Issuance of common stock related to share-based compensation plans 463,038    —    —    —    —    —    —    —   
Exercise of vested stock options 464,136    —    —    —    1.2    —    —    1.2   
Dividends paid/accrued —    —    —    —    (5.6)   —    —    (5.6)  
Acquisition of treasury stock related to share-based compensation plans —    —    (128,361)   (1.1)   —    —    —    (1.1)  
Net change on derivatives designated as cash flow hedges, net of tax of $0.3 million
—    —    —    —    —    —    0.8    0.8   
Foreign currency translation adjustments —    —    —    —    —    —    (0.2)   (0.2)  
Net income —    —    —    —    —    15.1    —    15.1   
Balance at June 30, 2020 129,289,960    $ 1.3    (13,915,172)   $ (74.7)   $ 375.2    $ (245.3)   $ (10.4)   $ 46.1   
See accompanying notes to consolidated financial statements.

6

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

  Common Stock Treasury Stock Additional
Paid-In
Capital 		Accumulated
Deficit 		Accumulated
Other
Comprehensive
Loss 		Total
  Shares Amount Shares Amount        
Balance at December 31, 2018 123,353,656    $ 1.2    (12,811,755)   $ (62.6)   $ 361.0    $ (289.8)   $ (3.5)   $ 6.3   
Share-based compensation expense —    —    —    —    4.5    —    —    4.5   
Issuance of common stock related to share-based compensation plans 2,613    —    —    —    —    —    —    —   
Exercise of vested stock options 145,235    —    —    —    0.4    —    —    0.4   
Dividends paid/accrued —    —    —    —    (5.0)   —    —    (5.0)  
Acquisition of treasury stock related to share-based compensation plans —    —    (342,998)   (3.3)   —    —    —    (3.3)  
Forfeitures —    —    (1,208)   —    —    —    —    —   
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million
—    —    —    —    —    —    0.2    0.2   
Foreign currency translation adjustments —    —    —    —    —    —    0.5    0.5   
Net income (loss) —    —    —    —    —    0.2    —    0.2   
Balance at March 31, 2019 123,501,504    $ 1.2    (13,155,961)   $ (65.9)   $ 360.9    $ (289.6)   $ (2.8)   $ 3.8   
Share-based compensation expense —    —    —    —    4.8    —    —    4.8   
Issuance of common stock related to share-based compensation plans 359,488    —    —    —    —    —    —    —   
Exercise of vested stock options 1,329,175    0.1    —    —    7.3    —    —    7.4   
Dividends paid/accrued —    —    —    —    (5.1)   —    —    (5.1)  
Acquisition of treasury stock related to share-based compensation plans —    —    (143,739)   (1.4)   —    —    —    (1.4)  
Forfeitures —    —    —    —    —    —    —    —   
Net change on derivatives designated as cash flow hedges, net of tax of $0.0 million
—    —    —    —    —    —    0.1    0.1   
Foreign currency translation adjustments —    —    —    —    —    —    —    —   
Net income (loss) —    —    —    —    —    (5.2)   —    (5.2)  
Balance at June 30, 2019 125,190,167    $ 1.3    (13,299,700)   $ (67.3)   $ 367.9    $ (294.8)   $ (2.7)   $ 4.4   
See accompanying notes to consolidated financial statements.
7

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


  Six Months Ended June 30,
  2020 2019
Operating activities
Net income (loss) $ 33.3    $ (5.0)  
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization 33.6    25.8   
Amortization of debt issuance costs 0.5    1.2   
Share-based compensation 9.1    9.0   
Loss on disposal and right-of-use asset write-downs 4.5    —   
Loss on debt extinguishment —    18.8   
Provision for credit losses 1.7    1.0   
Deferred income taxes 15.1    (17.3)  
Non-cash lease expense 6.0    5.6   
Changes in operating assets and liabilities:
Accounts receivable and related party accounts receivable (5.4)   25.4   
Prepaid expenses and other assets (10.5)   (10.1)  
Accounts payable 4.5    7.2   
Accrued compensation and benefits (44.2)   (12.9)  
Lease liabilities (5.9)   (5.5)  
Other liabilities 12.7    8.3   
Customer liabilities and customer liabilities - related party (9.7)   (7.5)  
Net cash provided by operating activities 45.3    44.0   
Investing activities
Purchases of property, equipment, and software (31.1)   (32.3)  
Acquisition of SCI, net of cash acquired and earn-out provision (189.0)   —   
Net cash used in investing activities (220.1)   (32.3)  
Financing activities
Issuance of senior secured debt, net of discount and issuance costs 190.6    321.8   
Borrowings on revolver 50.0    60.0   
Repayment of senior secured debt (10.5)   (268.7)  
Repayment of subordinated notes and prepayment penalty —    (112.2)  
Repayments on revolver (20.0)   —   
Exercise of vested stock options 4.3    7.7   
Shares withheld for taxes (1.1)   (4.7)  
Finance lease payments (0.7)   (0.4)  
Other (5.0)   —   
Net cash provided by financing activities 207.6    3.5   
Effect of exchange rate changes in cash, cash equivalents and restricted cash (1.2)   0.3   
Net increase in cash, cash equivalents and restricted cash 31.6    15.5   
Cash, cash equivalents and restricted cash, at beginning of period 92.5    65.1   
Cash, cash equivalents and restricted cash, at end of period $ 124.1    $ 80.6   
Supplemental disclosures of cash flow information
Accrued dividends payable to preferred stockholders $ 5.6    $ 5.1   
Accrued and other liabilities related to purchases of property, equipment and software $ 11.2    $ 21.5   
Accounts payable related to purchases of property, equipment and software $ 0.6    $ 2.1   
Interest paid $ 7.4    $ 17.7   
Income taxes paid $ 2.5    $ 2.6   
Income taxes refunded $ 0.2    $ 0.1   
See accompanying notes to consolidated financial statements.
8


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

1. Business Description and Basis of Presentation
Business Description
R1 RCM Inc. (the “Company”) is a leading provider of technology-enabled revenue cycle management (“RCM”) services to healthcare providers, including health systems and hospitals, physician groups, and municipal and private emergency medical service (“EMS”) providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for its customers. For further information regarding the Company's business, including relationships with Ascension Health (“Ascension”), TowerBrook Capital Partners (“TowerBrook”), and IHC Health Services, Inc. (“Intermountain”), and its prior acquisition of Intermedix Holdings, Inc. (“Intermedix”), refer to Note 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”).

SCI Solutions, Inc. Acquisition

On April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020 (“the Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (“the SCI Acquisition”). At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. Refer to Note 4, Acquisition for additional details.
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of June 30, 2020, the results of operations of the Company for the three and six months ended June 30, 2020 and 2019, and the cash flows of the Company for the six months ended June 30, 2020 and 2019. These financial statements include the accounts of R1 RCM Inc. and its wholly-owned subsidiaries. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020.
When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's 2019 Form 10-K.


9


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
2. Recent Accounting Pronouncements

Recently Issued Accounting Standards and Disclosures

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. The change will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 utilizing a modified retrospective transition method. Adoption of the new standard resulted in the recording of additional allowance for credit losses of $1.1 million and a corresponding impact to retained earnings and deferred tax assets. The adoption also required changes to the Company's process of estimating expected credit losses on trade receivables and customer contract assets.
3. Fair Value of Financial Instruments
The Company's accounting policy for fair values, including details of the fair value hierarchy levels, are outlined in Note 4 of the Company's 2019 Form 10-K.
The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other current liabilities, approximate their fair values, due to the short-term nature of these instruments. See Note 21, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts and interest rate swaps.

The Company believes the carrying value of the senior term loan (see Note 11, Debt) approximates fair value as it is variable rate bank debt.

4. Acquisition

SCI

On April 1, 2020, the Company completed the acquisition of SCI. The SCI Acquisition has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the SCI Acquisition.

The purchase price for the SCI Acquisition was $190.0 million, subject to customary adjustments for cash, transaction expenses, earn-out consideration, and normalized working capital. The Company funded the purchase price for the SCI Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 11, Debt). The purchase price has been provisionally allocated, on a preliminary basis, to assets acquired and liabilities assumed based on their preliminary estimated fair values as of the completion of the SCI Acquisition.
10


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
At the effective date of the SCI Acquisition, the assets acquired and liabilities assumed are generally required to be measured at fair value. The fair value estimate of assets acquired and liabilities assumed are pending completion of multiple elements, including gathering further information about the identification and completeness of all assets and liabilities acquired, the finalization of an independent appraisal and valuations of fair value of the assets acquired and liabilities assumed and final review by the Company's management. Accordingly, management considers the balances shown in the following table to be preliminary. Some of the more significant amounts that are not yet finalized relate to the fair value of accounts receivable, accounts payable, property, equipment and software, intangible assets, operating leases or commitments, contingent liabilities and income and non-income related taxes. Accordingly, there could be material adjustments to the consolidated financial statements, including changes in our depreciation and amortization expense related to the valuation of property equipment, and software, and intangible assets acquired and their respective useful lives among other adjustments. This measurement period will not exceed one year from the acquisition date.
The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities assumed as of the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The final determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in these consolidated financial statements.

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

Purchase Price Allocation
Total purchase consideration $ 196.7   
Allocation of consideration to assets acquired and liabilities assumed:
Cash and cash equivalents $ 2.9   
Accounts receivable 3.6   
Prepaid expenses and other current assets 1.1   
Property, equipment and software 0.3   
Operating lease right-of-use assets 1.2   
Intangible assets 84.3   
Goodwill 126.6   
Accounts payable (0.2)  
Current portion of customer liabilities (4.6)  
Accrued compensation and benefits (1.9)  
Current portion of operating lease liabilities (0.5)  
Other accrued expenses (0.3)  
Non-current portion of operating lease liabilities (0.7)  
Other non-current liabilities (5.0)  
Deferred income tax liabilities (10.1)  
Net assets acquired $ 196.7   

Other non-current liabilities contained a note payable for $5 million. The Company repaid this note prior to the end of the second quarter.

The goodwill recognized is primarily attributable to synergies that are expected to be achieved from the integration of SCI. None of the goodwill is expected to be deductible for income tax purposes.
11


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

The purchase price includes an earn-out provision, which is dependent on achieving certain revenue and operational targets in the year following the acquisition. The earn-out is binary, with the potential payment being either $10 million or $0. Based on projections at the time of Acquisition, the earn-out was valued at $4.8 million. Potential future adjustments to the earn-out will be recorded through the income statement.

Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 are net sales of $6.6 million and net loss before income taxes of $2.3 million related to the operations of SCI since the acquisition date of April 1, 2020.

Pro Forma Results

The following table summarizes, on a pro forma basis, the combined results of the Company as though the SCI Acquisition had occurred as of January 1, 2019. These pro forma results are not necessarily indicative of either the actual consolidated results had the SCI Acquisition occurred as of January 1, 2019 or of the future consolidated operating results for any period. Pro forma results are (in millions):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net services revenue $ 315.5    $ 301.5    $ 643.1    $ 583.5   
Net income (loss) $ 19.6    $ (7.9)   $ 35.1    $ (14.8)  

Supplemental pro-forma earnings were adjusted to exclude $5.4 million of acquisition-related costs incurred by the Company in 2020 and include those costs in 2019. Adjustments were also made to earnings to adjust depreciation and amortization to reflect fair value of identified assets acquired, to record the effects of extinguishing the debt of SCI and replacing it with the debt of the Company, and to record the income tax effect of these adjustments.

5. Accounts Receivable and Allowance for Credit Losses

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

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

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

The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience may differ significantly from historical collection trends.
12


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

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

Movements in the allowance for credit losses are as follows (in millions):

  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Beginning balance $ 4.7    $ 2.1    $ 2.8    $ 1.1   
Cumulative effect of ASC 326 adoption
—    —    1.1    —   
Provision (recoveries) 0.5    0.2    1.3    1.2   
Write-offs —    (0.2)   —    (0.2)  
Ending balance $ 5.2    $ 2.1    $ 5.2    $ 2.1   

6. Property, Equipment and Software
Property, equipment and software consist of the following (in millions):
  June 30, 2020 December 31, 2019
Buildings and land $ 4.6    $ 4.6   
Computer and other equipment 58.3    50.7   
Leasehold improvements 30.5    31.1   
Software 135.2    123.0   
Office furniture 8.6    9.4   
Property, equipment and software, gross 237.2    218.8   
Less accumulated depreciation and amortization (124.9)   (101.9)  
Property, equipment and software, net $ 112.3    $ 116.9   
The following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Cost of services $ 11.4    $ 8.6    $ 22.3    $ 17.5   
Selling, general and administrative 0.9    0.8    2.2    1.3   
Total depreciation and amortization $ 12.3    $ 9.4    $ 24.5    $ 18.8   

7. Leases

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

13


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Operating lease cost $ 4.9    $ 4.8    $ 9.8    $ 9.4   
Finance lease cost:
Amortization of right-of-use (“ROU”) assets 0.1    0.2    0.3    0.4   
Interest on lease liabilities —    —    0.1    0.1   
Sublease income (0.5)   (0.5)   (1.1)   (1.1)  
Total lease cost $ 4.5    $ 4.5    $ 9.1    $ 8.8   

Supplemental cash flow information related to leases are as follows (in millions):
Six Months Ended June 30,
2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 10.1    $ 9.1   
Operating cash flows for finance leases 0.1    0.1   
Financing cash flows for finance leases 0.7    0.4   
ROU assets obtained in exchange for lease obligations:
Operating leases 3.2    11.6   
Finance leases —    0.5   

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

Supplemental balance sheet information related to leases are as follows:

June 30, 2020 December 31, 2019
Weighted average remaining lease term:
Operating leases 7 years 8 years
Finance leases 2 years 2 years
Weighted average incremental borrowing rate:
Operating leases 8.83  % 8.84  %
Finance leases 6.59  % 6.45  %

Maturities of lease liabilities as of June 30, 2020 are as follows (in millions):

14


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Operating Leases Finance Leases
Remainder of 2020 $ 10.6    $ 0.1   
2021 18.8    0.5   
2022 16.3    0.1   
2023 15.1    —   
2024 14.9    —   
2025 14.7    —   
Thereafter 33.5    —   
Total 123.9    0.7   
Less:
Imputed interest 34.0    —   
Present value of lease liabilities $ 89.9    $ 0.7   

8. Intangible Assets

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at June 30, 2020 and December 31, 2019 (in millions):

June 30, 2020 December 31, 2019
Gross Carrying Value Accumulated Amortization Net Book Value Gross Carrying Value Accumulated Amortization Net Book Value
Customer relationships $ 163.7    $ (20.4)   $ 143.3    $ 160.9    $ (15.6)   $ 145.3   
Technology 108.3    (11.6)   96.7    26.8    (7.4)   19.4   
Total intangible assets $ 272.0    $ (32.0)   $ 240.0    $ 187.7    $ (23.0)   $ 164.7   

Through the SCI Acquisition, the Company acquired the following intangible assets in 2020 (in millions, except weighted average useful life):

Weighted Average Useful Life Gross Carrying Value
Customer relationships 10 years $ 2.8   
Technology 10 years $ 81.5   


Intangible asset amortization expense was $5.6 million and $9.1 million for the three and six months ended June 30, 2020, and $3.5 million and $7.0 million for the three and six months ended June 30, 2019.

Estimated annual amortization expense related to intangible assets with definite lives as of June 30, 2020 is as follows (in millions):

15


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Remainder of 2020 $ 11.2   
2021 22.3   
2022 22.3   
2023 22.3   
2024 19.4   
2025 17.9   
Thereafter 124.6   
Total $ 240.0   

9. Goodwill

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

Changes in the carrying amount of goodwill for the six months ended June 30, 2020 were (in millions):

Goodwill
Balance as of December 31, 2019
$ 253.2   
Acquisitions 126.6   
Balance as of June 30, 2020
$ 379.8   

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

Disaggregation of Revenue

In the following table, revenue is disaggregated by source (in millions):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net operating fees $ 287.8    $ 252.9    $ 568.7    $ 494.2   
Incentive fees 1.3    17.4    18.1    29.6   
Other 25.6    24.7    48.4    47.1   
Net services revenue $ 314.7    $ 295.0    $ 635.2    $ 570.9   
        
Contract Balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in millions):
June 30, 2020 December 31, 2019
Receivables (1) $ 89.6    $ 83.1   
Contract assets (2) 2.1    2.0   
Contract liabilities (2) 30.1    25.3   
16


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

(1) Receivables are included in accounts receivable, net. The balance includes accounts receivable, net - related party.
(2) Contract assets and contract liabilities are included in other current assets and customer liabilities, respectively. The contract liabilities balance contains related party amounts, including $4.1 million and $4.2 million of current customer liabilities and $18.2 million and $18.6 million of non-current customer liabilities for the six months ended June 30, 2020 and year ended December 31, 2019, respectively.

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

The Company recognized revenue of $87.0 million and $68.2 million during the six months ended June 30, 2020 and 2019, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $85.0 million and $66.7 million for the six months ended June 30, 2020 and 2019, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in millions). The estimated revenue does not include amounts of variable consideration that are constrained.
Net operating fees Incentive fees Other
2020 $ 39.4    $ 7.4    $ —   
2021 22.3    1.7    3.9   
2022 9.5    —    5.7   
2023 6.9    —    5.7   
2024 4.1    —    5.7   
2025 4.1    —    2.9   
Thereafter 0.5    —    —   
Total $ 86.8    $ 9.1    $ 23.9   
        
The amounts presented in the table above include variable fee estimates for the non-cancellable term of the Company's physician groups and EMS providers RCM services contracts, fixed fees which are typically recognized ratably as the performance obligation is satisfied, and incentive fees which are measured cumulatively over the contractually defined performance period.

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

11. Debt

The carrying amounts of debt consist of the following (in millions):
17


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2020 December 31, 2019
Senior Revolver $ 70.0    $ 40.0   
Senior Term Loan 497.5    316.9   
Unamortized discount and issuance costs (3.1)   (2.9)  
Total debt 564.4    354.0   
Less: Current maturities (25.8)   (16.3)  
Total long-term debt $ 538.6    $ 337.7   

Senior Secured Credit Facilities

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

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

The Incremental Term Loan was drawn substantially concurrently with the closing of the SCI Acquisition on April 1, 2020. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses. For further details on the closing, refer to Note 4, Acquisition. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement. The drawing of the Incremental Term Loan increased the balance of the obligation due under the Senior Term Loan, and therefore is shown as one consolidated obligation.

In accordance with ASC 470-50, the Amendment was treated as a loan modification in the financial statements.

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of June 30, 2020, the Company had $70.0 million in borrowings, no letters of credit outstanding, and $30.0 million of availability under the Senior Revolver.

Borrowings under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an Alternate Base Rate (“ABR”) equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on the Company's Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus between 1.75% and 2.75%, dependent on the Company's Net Leverage Ratio. The interest rate as of June 30, 2020 was 2.68%. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.30% and 0.50% of the average daily unutilized commitments thereunder dependent on the Company's net leverage ratio.

18


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the Company’s junior indebtedness; (xi) change the Company’s lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, the Company is required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of the covenants in the Credit Agreement as of June 30, 2020.

Debt Maturities

Scheduled maturities of the Company’s long-term debt are summarized as follows (in millions):

Scheduled Maturities
2020 $ 12.9   
2021 32.3   
2022 38.7   
2023 45.2   
2024 438.4   
Total $ 567.5   

For further details on the Company's debt, refer to Note 13 of the Company's 2019 Form 10-K.

12. Share-Based Compensation

The share-based compensation expense relating to the Company’s stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PBRSUs”) for the three months ended June 30, 2020 and 2019 was $4.3 million and $4.6 million, respectively, with related tax benefits of approximately $0.7 million and $0.7 million, respectively. The share-based compensation expense relating to the Company’s stock options, RSAs, RSUs and PBRSUs for the six months ended June 30, 2020 and 2019 was $9.1 million and $9.0 million, respectively, with related tax benefits of approximately $1.4 million and $1.4 million, respectively.

The Company accounts for forfeitures as they occur. Excess tax benefits and shortfalls for share-based payments are recognized in income tax expense (benefit) and included in operating activities. The Company recognized $1.1 million and $1.5 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2020 and 2019, respectively. The Company recognized $1.7 million and $3.4 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the six months ended June 30, 2020 and 2019, respectively.
Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):
19


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
  Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Share-Based Compensation Expense Allocation Details:
Cost of services $ 1.5    $ 1.5    $ 3.4    $ 2.8   
Selling, general and administrative 2.8    3.1    5.7    6.1   
Other —    —    —    0.1   
Total share-based compensation expense $ 4.3    $ 4.6    $ 9.1    $ 9.0   
The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of their grant dates. Monte Carlo simulations are used to estimate the fair value of its market-based PBRSUs. The market-based PBRSUs vest upon satisfaction of both time-based requirements and market targets based on share price. Expected life is based on the market condition to which the vesting is tied.
The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the six months ended June 30, 2020 and 2019:
  Six Months Ended June 30,
  2020 2019
Expected dividend yield —% —%
Risk-free interest rate
0.4% to 1.7%
1.9% to 2.5%
Expected volatility 43%
40% to 45%
Expected term (in years) 5.5
2.00 to 5.50

The risk-free interest rate input is based on U.S. Treasury instruments, and the expected volatility of the share price is based on review of the historical volatility levels of the Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.
Stock options
A summary of the options activity during the six months ended June 30, 2020 is shown below:
Options Weighted-
Average
Exercise
Price
Outstanding at December 31, 2019 10,680,340    $ 5.59   
Granted 65,933    10.54   
Exercised (1,017,656)   4.19   
Canceled/forfeited (76,259)   2.57   
Expired (1,214,220)   14.62   
Outstanding at June 30, 2020 8,438,138    $ 4.52   
Outstanding, vested and exercisable at June 30, 2020 7,251,608    $ 4.69   
Outstanding, vested and exercisable at December 31, 2019 7,868,280    $ 6.57   
20


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Restricted stock awards, restricted stock units, and performance-based restricted stock units 
A summary of the RSA, RSU, and PBRSU activity during the six months ended June 30, 2020 is shown below:
Weighted-
Average Grant
Date Fair Value
RSAs RSUs PBRSUs RSU PBRSU
Outstanding and unvested at December 31, 2019 —    1,373,356    4,119,436    $ 8.03    $ 6.37   
Granted —    1,443,143    203,874    9.87    9.81   
Vested —    (464,758)   —    6.50    —   
Forfeited —    (57,467)   (181,543)   6.46    5.73   
Outstanding and unvested at June 30, 2020 —    2,294,274    4,141,767    $ 9.54    $ 6.57   
Shares surrendered for taxes for the six months ended June 30, 2020 —    128,906    —   
Cost of shares surrendered for taxes for the six months ended June 30, 2020 (in millions)
$ —    $ 1.1    $ —   
Shares surrendered for taxes for the six months ended June 30, 2019 380,564    106,173    —   
Cost of shares surrendered for taxes for the six months ended June 30, 2019 (in millions)
$ 3.7    $ 1.0    $ —   

Outstanding PBRSUs issued prior to May 2019 vest upon satisfaction of both time-based requirements and market targets based on share price with certain awards vesting between December 31, 2020 and December 31, 2022. Depending on the percentage level at which the market-based condition is satisfied, the number of shares vesting could be between 0% and 350% of the number of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 vest in December 2021 upon satisfaction of both time-based and performance-based conditions. Depending on the award, performance condition targets may include cumulative adjusted EBITDA, end-to-end RCM agreement growth, scored revenue growth, or other specific performance factors. Depending on the percentage level at which the performance-based conditions are satisfied, the number of shares vesting could be between 0% and 200% of the number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all PBRSUs is 9,184,321.
13. Other Expenses
Other expenses (income) consist of the following (in millions):
Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Severance and related employee benefits $ 1.9    $ (0.1)   $ 3.0    $ (1.5)  
Strategic initiatives (1) 8.5    7.7    11.7    11.1   
Transitioned employees restructuring expense (2) (0.1)   0.6    (0.2)   4.8   
Digital Transformation Office (3) —    1.9    —    4.4   
Facility-exit charges (4) 4.5    (0.1)   4.9    (0.1)  
Other (5) 3.2    0.7    7.3    0.8   
Total other expenses $ 18.0    $ 10.7    $ 26.7    $ 19.5   

21


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
(1) Costs related to evaluating, pursuing and integrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
(3) Project costs related to the Company's initial efforts to automate its transactional environment.
(4) Costs include charges associated with exiting leased facilities.
(5) For the three and six months ended June 30, 2020, includes $2.7 million and $5.3 million, respectively, of expenses pertaining to appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
14. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.
The Tax Cut and Jobs Act (“Tax Act”) enacted on December 22, 2017 includes two sets of provisions aimed at preventing or decreasing U.S. tax base erosion - the global intangible low-taxed income (“GILTI”) provisions and the base erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The Company included the current year impact of the GILTI tax and BEAT in the estimated annual effective tax rate calculation.

The Company recognized income tax expense for the three months ended June 30, 2020 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions for GILTI plus the geographical mix of earnings, permanent differences and discrete items. The income tax expense for the six months ended June 30, 2020 was higher than the amount derived by applying the federal statutory tax rate of 21% primarily due to GILTI and discrete items.

The Company recognized income tax benefit for the three and six months ended June 30, 2019 on the year-to-date pre-tax loss. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions of BEAT and GILTI plus the geographical mix of earnings and permanent differences. The income tax benefit for the three and six months ended June 30, 2019 was higher than the amount derived by applying the federal statutory tax rate of 21% primarily due to discrete items.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since 2016 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years.

At December 31, 2019, the Company had gross deferred tax assets of $135.0 million, of which $64.1 million related to net operating loss carryforwards. The majority of the Company's carryforwards were generated in 2014 and 2016. The Company expects to be profitable, allowing the Company to utilize its NOL carryforward and other deferred tax assets.

22


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
15. 8.00% Series A Convertible Preferred Stock
The preferred stock is held by a related party, TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the “Investor”).

The following summarizes the preferred stock activity for the six months ended June 30, 2020 (in millions, except per share data):
Preferred Stock
Shares Issued and Outstanding Carrying Value
Balance at December 31, 2019 266,529    $ 229.1   
Dividends paid/accrued dividends 10,767    11.0   
Balance at June 30, 2020 277,296    $ 240.1   

16. Earnings (Loss) Per Share
Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the preferred stock, by the weighted average number of common shares outstanding during the period. As the preferred stock participates in dividends alongside the Company’s common stock (per their participating dividends), the preferred stock would constitute participating securities under ASC 260-10 and are applied to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the three and six months ended June 30, 2020 and 2019, the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by potentially dilutive securities outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of RSAs, RSUs, PBRSUs and shares issuable upon conversion of preferred stock.
Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
23


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Three Months Ended
June 30, 		Six Months Ended
June 30,
  2020 2019 2020 2019
Basic EPS:
Net income (loss) $ 15.1    $ (5.2)   $ 33.3    $ (5.0)  
Less dividends on preferred shares (5.6)   (5.1)   (11.0)   (10.1)  
Less income allocated to preferred shareholders (4.7)   —    (11.0)   —   
Net income (loss) available/(allocated) to common shareholders - basic $ 4.8    $ (10.3)   $ 11.3    $ (15.1)  
Diluted EPS:
Net income (loss) $ 15.1    $ (5.2)   $ 33.3    $ (5.0)  
Less dividends on preferred shares (5.6)   (5.1)   (11.0)   (10.1)  
Less income allocated to preferred shareholders (3.8)   —    (8.9)   —   
Net income (loss) available/(allocated) to common shareholders - diluted $ 5.7    $ (10.3)   $ 13.4    $ (15.1)  
Basic weighted-average common shares 115,067,552    110,956,014    114,754,298    110,382,509   
Add: Effect of dilutive equity awards 10,608,629    —    11,198,960    —   
Add: Effect of dilutive warrants 40,211,783    —    41,856,066    —   
Diluted weighted average common shares 165,887,964    110,956,014    167,809,324    110,382,509   
Net income (loss) per common share (basic) $ 0.04    $ (0.09)   $ 0.10    $ (0.14)  
Net income (loss) per common share (diluted) $ 0.03    $ (0.09)   $ 0.08    $ (0.14)  
Because of their anti-dilutive effect, 322,512 and 250,279 common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2020.
For the three and six months ended June 30, 2019, 25,113,533 common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. Additionally, for the three and six months ended June 30, 2019, the Investor's and Intermountain's exercisable warrants to acquire up to 60 million and 1.5 million shares, respectively, of the Company's common stock have been excluded from the diluted earnings per share calculation because they are anti-dilutive.

17. Commitments and Contingencies

Legal Proceedings

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

24


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. The Company and plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.
18. Related Party Transactions
This note encompasses transactions between Ascension and the Company pursuant to the amended and restated Master Professional Services Agreement (“A&R MPSA”), including all supplements, amendments and other documents entered into in connection therewith. For further details on the Company's agreements with Ascension, see Note 1 and Note 18 of the Company's 2019 Form 10-K.
Net services revenue from services provided to Ascension included in the Company’s consolidated statements of operations were (in millions):
  Three Months Ended
June 30, 		Six Months Ended June 30,
  2020 2019 2020 2019
Ascension $ 206.4    $ 199.0    $ 414.8    $ 380.8   
Amounts included in the Company's consolidated balance sheets for Ascension, excluding debt, are (in millions):
  June 30, 2020 December 31, 2019
Accounts receivable, net of $0.1 million and $0.0 million allowance - related party
$ 25.3    $ 30.8   
Current portion of customer liabilities $ 23.4    $ 34.1   
Non-current portion of customer liabilities $ 18.2    $ 18.6   
Total customer liabilities $ 41.6    $ 52.7   

Since Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's global business services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.
19. Deferred Contract Costs
Certain costs associated with the initial phases of customer contracts and the related transition of customer hospitals and physician groups are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations in the future, and are expected to be recovered through the margins realized. The following table summarizes the breakout of deferred contract costs (in millions):

25


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2020 December 31, 2019
Prepaid expenses and other current assets $ 4.2    $ 4.0   
Other assets 21.2    20.8   
Total deferred contract costs $ 25.4    $ 24.8   
The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three and six months ended June 30, 2020, total amortization was $1.2 million and $2.3 million, respectively, and there were no associated impairment losses. For the three and six months ended June 30, 2019, total amortization was $0.8 million and $1.5 million, respectively, and there were no associated impairment losses.
20. Segments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with how its business activities are managed and evaluated. All of the Company’s significant operations are organized around the single business of providing end-to-end management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only one reportable segment.
Healthcare providers affiliated with Ascension have accounted for a significant portion of the Company’s net services revenue each year since the Company’s formation. For the three months ended June 30, 2020 and 2019, net services revenue from healthcare organizations affiliated with Ascension accounted for 66% and 67% of the Company's total net services revenue, respectively. For the six months ended June 30, 2020 and 2019, net services revenue from Ascension accounted for 65% and 67%, respectively. The loss of customers within the Ascension health system could have a material adverse impact on the Company’s operations. For the three months ended June 30, 2020 and 2019, Intermountain Healthcare accounted for 14% and 14% of the Company's total net services revenue, respectively. For the six months ended June 30, 2020 and 2019, Intermountain Healthcare accounted for 15% and 14% of the Company’s total net services revenue, respectively.
As of June 30, 2020 and December 31, 2019, the Company had a concentration of credit risk with Ascension accounting for 28% and 37% of accounts receivable, respectively.
21. Derivative Financial Instruments

The Company utilizes cash flow hedges to mitigate its currency risk arising from its global delivery resources and to reduce variability in interest cash flows from its outstanding debt. As of June 30, 2020, the Company has recorded $1.0 million and $3.4 million of existing losses in accumulated other comprehensive income for the foreign currency hedges and interest rate swaps, respectively. The Company estimates that $1.0 million and $1.9 million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months for the foreign currency hedges and interest rate swaps, respectively. The amounts related to foreign currency hedges that were reclassified into cost of services were a net loss of $0.6 million and $0.7 million during the three and six month period ended June 30, 2020, and a net gain of $0.4 million and $0.5 million during the three and six month period ended June 30, 2019. The amounts related to the interest rate swaps that were reclassified into interest expense were a net loss of $0.4 million and $0.3 million during the three and six month period ended June 30, 2020, respectively. The interest rate swaps were entered into in the third quarter of 2019, and therefore had no impact on the three and six month period ended June 30, 2019.

The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of June 30, 2020, the Company’s currency forward contracts have maturities extending no later than December 31, 2020. The Company's interest rate swaps extend no later than August of 2022.

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R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
As of June 30, 2020, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $26.9 million and $200.0 million, respectively. As of December 31, 2019, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $52.6 million and $100.0 million, respectively. As of June 30, 2020, the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.
22. Subsequent Events

RevWorks Acquisition

On June 2, 2020, the Company entered into a definitive agreement to acquire the RevWorks services business (the “RevWorks Acquisition”) from Cerner Corporation.

Pursuant to the terms of the definitive agreement, the Company will acquire RevWorks for $30 million in cash. The Company intends to fund the RevWorks Acquisition and the related fees and expenses with cash on hand. The payments to Cerner Corporation will occur in three installments between the closing and the second anniversary of closing.

The closing of the acquisition occurred on August 3, 2020.

Emergency Medical Services Sale

On July 19, 2020, the Company entered into a definitive agreement to dispose of its emergency medical services (EMS) business, including EMS Revenue Cycle Management and Electronic Patient Care Reporting (the “EMS Disposition”).

Pursuant to the terms of the definitive agreement, the disposition price will be $140 million, inclusive of a $5 million hold-back amount subject to the completion of certain transition services, to be paid approximately one year from the date of the disposition. The disposition price is subject to customary adjustments for working capital, cash, and transaction expenses.

The closing of the EMS Disposition is expected to take place in the third quarter of 2020, subject to satisfaction of certain closing conditions. As of June 30, 2020, the assets and liabilities of the EMS business were not classified as held-for-sale as management had not committed to a formal plan to sell the business.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “R1,” “the Company,” “we,” “our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes. Also refer to Note 1 of our consolidated financial statements.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, that involve substantial risks and uncertainties. These statements are often identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “designed,” “may,” “plan,” “predict,” “project,” “would” and similar expressions or variations. These forward-looking statements include, among other things, statements about the potential impacts of the COVID-19 pandemic, our strategic initiatives, our capital plans, our costs, our ability to successfully deliver on our commitments to our customers, our ability to deploy new business as planned, our ability to successfully implement new technologies, our future financial performance, and our liquidity. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the severity, magnitude and duration of the COVID-19 pandemic; responses to the pandemic by the government and healthcare providers and the direct and indirect impacts of the pandemic on our customers and personnel; the disruption of national, state and local economies as a result of the pandemic; the impact of the pandemic on our financial results, including possible lost revenue and increased expenses; as well as those discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and elsewhere in this Report, and those set forth in Part I, Item 1A of the 2019 Form 10-K and our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Our Business
R1 is a leading provider of technology-enabled revenue cycle management (“RCM”) services to healthcare providers, including health systems and hospitals, physicians groups, and municipal and private emergency medical service (“EMS”) providers. Our services help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician and staff satisfaction for our customers.
We achieve these results for our customers by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections from patients and payers. We do so by deploying a unique operating model that leverages our extensive healthcare site experience, innovative technology and process excellence. We assist our RCM customers in managing their revenue cycle operating costs while simultaneously increasing the portion of the maximum potential services revenue they receive. Together, these benefits can generate significant and sustainable improvements in operating margins and cash flows for our customers.
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Our primary service offering consists of end-to-end RCM services for health systems, hospitals, physician groups, and EMS providers, which we deploy through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused management, subject matter specialists, proprietary technology solutions and other resources. Under the operating partner model, we record higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are our employees and more third-party vendor contracts are controlled by us. Under the co-managed model, the majority of the revenue cycle personnel and more third-party vendor contracts remain with the customer and those costs are netted against our co-managed revenue. For the six months ended June 30, 2020 and 2019, substantially all of our net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.

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

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

On April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020 (“the Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (“the SCI Acquisition”). At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. The aggregate purchase price consisted of $190 million in cash, which was adjusted pursuant to the Stock Purchase Agreement for estimated cash and working capital at the closing of the transaction, and is subject to a post-closing adjustment process. We will also be required to make an additional earn-out payment of up to $10 million if certain financial and operational targets are met within twelve months following the closing date.

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

The Incremental Term Loan was drawn substantially concurrently with the acquisition of SCI. The proceeds of the Incremental Term Loan were used to fund the purchase price for SCI and related expenses. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement.

Coronavirus Pandemic

In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The United States, where we are headquartered and where the majority of our customers’ operations are based, has declared a state of emergency. Governments around the world have enacted temporary closures of businesses, issued stay-at-home orders, and taken other restrictive measures in response to the COVID-19 pandemic. Re-opening of businesses are occurring based on state and local guidelines and vary by locality and cannot be reasonably predicted.

Given the ongoing challenges associated with efforts to contain the spread of COVID-19 and related business impact for our customers, we initiated a number of actions in the first half of 2020 to ensure (1) the health and safety of our workforce and (2) uninterrupted and, in many respects, expanded support for our customers and the patients and communities they serve. Our efforts to date include: restricting all non-essential domestic and international travel; repositioning more than 15,000 global employees to a work-from-home operating environment; offering free COVID-19 testing; expanding paid time off for employees impacted by low work volumes; providing appreciation bonuses to our front-line, patient-facing services employees; launching a new remote patient registration tool to minimize contact between patients and registration staff and conserve personal protective equipment; leveraging capabilities acquired via our SCI acquisition to assist customers with processes to restart elective procedure scheduling; offering in-depth regulatory analysis and guidance for our customers given numerous changes to healthcare regulatory federal and state rules; and providing customers with operational best practices for implementation and revenue cycle management of telehealth services.

We have been able to substantially offset the revenue pressure faced during the six months ended June 30, 2020 by implementing measures to control costs and cash spending, including freezing hiring for non-critical roles, reducing non-COVID-related and non-SCI-related capital expenditures, eliminating discretionary spending, and suspending our 401(k) match and non-essential travel for the remainder of 2020. We are deferring our payroll tax remittances to the federal government as allowed under the CARES Act, allowing us to shift cash outflows from 2020 to 2021 and 2022. In addition, we are receiving an employee retention credit for allowable payroll expenses in conjunction with the CARES Act. We have also accelerated corporate cost savings initiatives that were originally planned for the fourth quarter into the second and third quarters. We have conducted a comprehensive review of our cost structure and capital expenditure needs, which have contributed to our cost control measures that we have implemented and continue to implement. As we navigate the uncertainties of the pandemic, our focus has been on balancing long-term growth opportunities with short-term challenges.

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Given the ongoing impact of the pandemic, there continues to be decreased patient volumes for our customers. We have continued to employ our full customer-facing workforce, even during lower patient volumes, because it is important to have that capacity available to serve our customers as volumes return. As restrictions are lifted, we expect a corresponding return in patient volumes, however we anticipate continued volume constraints and corresponding revenue pressure to continue into the second half of 2020. Despite the impacts of the pandemic, we have been able to complete the acquisition of SCI and RevWorks and sign Penn State Health, and we continue to be active in additional strategic initiatives. We have been able to maintain our cash on hand by obtaining an incremental term loan to fund the acquisition of SCI, and continue to have strong operating cash flows through the first half of 2020.

The impact of the COVID-19 pandemic is fluid and continues to evolve. We cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. However, we continue to assess its impact on our business and are actively managing our response. For further details on the potential impact of COVID-19 on our business, refer to “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides consolidated operating results and other operating data for the periods indicated:
  Three Months Ended June 30, 2020 vs. 2019
Change 		Six Months Ended June 30, 2020 vs. 2019
Change
  2020 2019 Amount % 2020 2019 Amount %
  (In millions except percentages)
Consolidated Statement of Operations Data:
Net operating fees $ 287.8    $ 252.9    $ 34.9    14  % $ 568.7    $ 494.2    $ 74.5    15  %
Incentive fees 1.3    17.4    (16.1)   (93) % 18.1    29.6    (11.5)   (39) %
Other 25.6    24.7    0.9    4  % 48.4    47.1    1.3    3  %
Net services revenue 314.7    295.0    19.7    7  % 635.2    570.9    64.3    11  %
Operating expenses:
Cost of services 248.3    246.1    2.2    1  % 502.2    483.3    18.9    4  %
Selling, general and administrative 23.3    25.8    (2.5)   (10) % 48.8    48.3    0.5    1  %
Other expenses 18.0    10.7    7.3    68  % 26.7    19.5    7.2    37  %
Total operating expenses 289.6    282.6    7.0    2  % 577.7    551.1    26.6    5  %
Income from operations 25.1    12.4    12.7    102  % 57.5    19.8    37.7    190  %
Loss on debt extinguishment —    18.8    (18.8)   (100) % —    18.8    (18.8)   (100) %
Net interest expense 4.8    9.9    (5.1)   (52) % 8.6    20.1    (11.5)   (57) %
Net income (loss) before income tax provision 20.3    (16.3)   36.6    225  % 48.9    (19.1)   68.0    356  %
Income tax provision (benefit) 5.2    (11.1)   16.3    147  % 15.6    (14.1)   29.7    211  %
Net income (loss) $ 15.1    $ (5.2)   $ 20.3    390  % $ 33.3    $ (5.0)   $ 38.3    766  %

Use of Non-GAAP Financial Information
We supplement our GAAP consolidated financial statements with the non-GAAP financial measure adjusted EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees.

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Selected Non-GAAP Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense, expense arising from debt extinguishment, strategic initiatives costs, transitioned employee restructuring expense, digital transformation office expenses, and other items which are detailed in the table below.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not reflect share-based compensation expense;
•Adjusted EBITDA does not reflect income tax expenses or cash requirements to pay taxes;
•Adjusted EBITDA does not reflect interest expenses or cash required to pay interest;
•Adjusted EBITDA does not reflect certain other expenses which may require cash payments;
•Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such replacements or other purchase commitments, including lease commitments; and
•Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table represents a reconciliation of adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:
  Three Months Ended June 30, 2020 vs. 2019
Change 		Six Months Ended June 30, 2020 vs. 2019
Change
  2020 2019 Amount % 2020 2019 Amount %
  (In millions except percentages)
Net income (loss) $ 15.1    $ (5.2)   $ 20.3    390  % $ 33.3    $ (5.0)   $ 38.3    766  %
  Net interest expense 4.8    9.9    (5.1)   (52) % 8.6    20.1    (11.5)   (57) %
  Income tax provision (benefit) 5.2    (11.1)   16.3    147  % 15.6    (14.1)   29.7    211  %
  Depreciation and amortization expense 17.9    12.9    5.0    39  % 33.6    25.8    7.8    30  %
  Share-based compensation expense (1) 4.3    4.6    (0.3)   (7) % 9.1    8.9    0.2    2  %
  Loss on debt extinguishment (2) —    18.8    (18.8)   (100) % —    18.8    (18.8)   (100) %
  Other expenses (3) 18.0    10.7    7.3    68  % 26.7    19.5    7.2    37  %
Adjusted EBITDA (non-GAAP) $ 65.3    $ 40.6    $ 24.7    61  % $ 126.9    $ 74.0    $ 52.9    71  %

(1)  Share-based compensation expense represents the expense associated with stock options, restricted stock units and restricted stock awards granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 12, Share-Based Compensation, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
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(2)  Loss on debt extinguishment represents the loss associated with the repayment of the credit agreement and subordinated notes dated May 8, 2018, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). For further details on the extinguishment, see Note 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
(3) Other expenses consist of the following (in millions):

Three Months Ended June 30, Six Months Ended June 30,
  2020 2019 2020 2019
Severance and related employee benefits $ 1.9    $ (0.1)   $ 3.0    $ (1.5)  
Strategic initiatives (1) 8.5    7.7    11.7    11.1   
Transitioned employees restructuring expense (2) (0.1)   0.6    (0.2)   4.8   
Digital Transformation Office (3) —    1.9    —    4.4   
Facility-exit charges (4) 4.5    (0.1)   4.9    (0.1)  
Other (5) 3.2    0.7    7.3    0.8   
Total other expenses $ 18.0    $ 10.7    $ 26.7    $ 19.5   

(1) Costs related to evaluating, pursuing and integrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
(3) Project costs related to the Company's initial effort to automate its transactional environment.
(4) Costs include charges associated with exiting leased facilities.
(5) For the three and six months ended June 30, 2020, includes $2.7 million and $5.3 million, respectively, of expenses pertaining to appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net Services Revenue
Net services revenue increased by $19.7 million, or 7%, from $295.0 million for the three months ended June 30, 2019, to $314.7 million for the three months ended June 30, 2020. The increase was primarily driven by organic growth at existing customers and new customer wins in the last twelve months, partially offset by lower incentive fees.
Cost of Services
Cost of services increased by $2.2 million, or 1%, from $246.1 million for the three months ended June 30, 2019, to $248.3 million for the three months ended June 30, 2020. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last twelve months and the SCI acquisition, partially offset by lower compensation costs, healthcare claims experience and CARES Act relief.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.5 million, or 10%, from $25.8 million for the three months ended June 30, 2019, to $23.3 million for the three months ended June 30, 2020. The decrease was primarily driven by lower travel and marketing expenses due to COVID-19 and lower compensation costs.
Other Expenses
Other expenses increased by $7.3 million, or 68%, from $10.7 million for the three months ended June 30, 2019, to $18.0 million for the three months ended June 30, 2020. The increase was primarily driven by expenses related to COVID-19, including pandemic response mobilization efforts, facility-exit expenses, and expenses related to strategic initiatives.


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Income Tax Provision (Benefit)
Income tax expense increased by $16.3 million from a $11.1 million income tax benefit for the three months ended June 30, 2019, to a $5.2 million income tax expense for the three months ended June 30, 2020, primarily due to higher pre-tax income and higher GILTI. Our effective tax rate (including discrete items) was approximately 26% and 68% for the three months ended June 30, 2020 and 2019, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net Services Revenue
Net services revenue increased by $64.3 million, or 11%, from $570.9 million for the six months ended June 30, 2019, to $635.2 million for the six months ended June 30, 2020. The increase was primarily driven by organic growth at existing customers and new customer wins since the beginning of 2019.
Cost of Services
Cost of services increased by $18.9 million, or 4%, from $483.3 million for the six months ended June 30, 2019, to $502.2 million for the six months ended June 30, 2020. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last twelve months and the SCI acquisition, partially offset by lower compensation costs, healthcare claims experience and CARES Act relief .
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.5 million, or 1%, from $48.3 million for the six months ended June 30, 2019, to $48.8 million for the six months ended June 30, 2020. The increase was primarily driven by investments in human resources and information technology spend to support scaling business operations, partially offset by lower travel and marketing expenses due to COVID-19.
Other Expenses
Other expenses increased by $7.2 million, or 37%, from $19.5 million for the six months ended June 30, 2019, to $26.7 million for the six months ended June 30, 2020. This increase was primarily driven by increased expenses related to COVID-19, including pandemic response mobilization efforts, facility-exit expenses, and expenses related to strategic initiatives.
Income Tax Provision (Benefit)
Income tax expense increased by $29.7 million from a $14.1 million income tax benefit for the six months ended June 30, 2019, to a $15.6 million income tax expense for the six months ended June 30, 2020, primarily due to higher pre-tax income and certain permanent items. Our effective tax rate (including discrete items) was approximately 32% and 74% for the six months ended June 30, 2020 and 2019, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.



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CRITICAL ACCOUNTING POLICIES
Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective, or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates” of our 2019 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2019 Form 10-K other than the impact of adopting new accounting standards.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new accounting guidance, see Note 2, Recent Accounting Pronouncements, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
Liquidity and Capital Resources
Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
  Six Months Ended June 30,
  2020 2019
  (In millions)
Net cash provided by operating activities $ 45.3    $ 44.0   
Net cash used in investing activities $ (220.1)   $ (32.3)  
Net cash provided by financing activities $ 207.6    $ 3.5   
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Operating Activities
Cash provided by operating activities increased by $1.3 million from $44.0 million for the six months ended June 30, 2019, to $45.3 million for the six months ended June 30, 2020. Cash provided by operating activities increased due to increased net income from operations of $37.7 million, offset by the timing of accounts receivables collections resulting in higher cash provided from operating activities for the six months ended June 30, 2019.
Investing Activities
Cash used in investing activities increased by $187.8 million from $32.3 million for the six months ended June 30, 2019, to $220.1 million for the six months ended June 30, 2020. Cash used in investing activities increased due to the SCI Acquisition.
Financing Activities
Cash provided by financing activities increased by $204.1 million from $3.5 million for the six months ended June 30, 2019, to $207.6 million for the six months ended June 30, 2020. This change was due to the incremental term loan drawn in conjunction with the SCI Acquisition, as well as increased borrowing under our revolver in 2020 in order to maintain sufficient cash on hand in light of the COVID-19 pandemic.


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Future Capital Needs
In June 2019, we refinanced our debt, paying off the prior senior credit facility and subordinated notes and replacing them with one senior secured credit facility, including a senior term loan of $325.0 million and a senior revolver providing for borrowings of up to $100.0 million.

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

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

We continue to invest capital in order to achieve our strategic initiatives. In addition, we plan to continue to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers’ existing technologies in connection with our strategic initiatives. We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our shared services infrastructure and capabilities, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. Due to the COVID-19 impact on the economy, we have reduced discretionary spending in order to ensure we maintain sufficient cash reserves throughout the time frame which we are impacted. Additionally, in the first quarter of 2020, we borrowed an additional $30 million under our senior revolver to maintain sufficient cash on hand in light of the COVID-19 pandemic.
New business development remains a priority as we plan to continue to invest in our sales and marketing efforts. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers.
We believe that our available cash balances, cash flows expected to be generated from operations, and additional capacity under the revolving credit facility will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months. No assurance can be given, however, that this will be the case. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially adversely impact our business, results of operations, and liquidity in future periods.
Debt and Financing Arrangements
Senior Secured Credit Facilities

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

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On April 1, 2020, substantially concurrently with the closing of the SCI Acquisition, we borrowed an additional $191.1 million under an incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as our existing Senior Term Loan provided under the Credit Agreement. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement. The drawing of the Incremental Term Loan increased the balance of the obligation due under the Senior Term Loan, and therefore is shown as one consolidated obligation.

In accordance with ASC 470-50, the Amendment was treated as a loan modification in the financial statements.

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of June 30, 2020, we had $70.0 million in borrowings, no letters of credit outstanding, and $30.0 million of availability under the Senior Revolver.

Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at: (i) an Alternate Base Rate (“ABR”) equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on our Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus between 1.75% and 2.75%, dependent on our Net Leverage Ratio. The interest rate as of June 30, 2020 was 2.68%. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.30% and 0.50% of the average daily unutilized commitments thereunder dependent on our net leverage ratio.

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and our subsidiaries' ability to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase our capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of our junior indebtedness; (xi) change our lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, we are required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. We were in compliance with all of the covenants in the Credit Agreement as of June 30, 2020.

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

CONTRACTUAL OBLIGATIONS

The following table presents a summary of our contractual obligations as of June 30, 2020 (in millions):
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  2020 2021 2022 2023 2024 2025 Thereafter Total
Operating leases (1) $ 10.6    $ 18.8    $ 16.3    $ 15.1    $ 14.9    $ 14.7    $ 33.5    $ 123.9   
Purchase and finance lease obligations (2) $ 1.6    $ 5.5    $ 5.2    $ 4.0    $ —    $ —    $ —    $ 16.3   
Debt obligations $ 12.9    $ 32.3    $ 38.7    $ 45.2    $ 438.4    $ —    $ —    $ 567.5   
Interest on debt $ 8.9    $ 16.2    $ 14.3    $ 12.7    $ 5.6    $ —    $ —    $ 57.7   
Total $ 34.0    $ 72.8    $ 74.5    $ 77.0    $ 458.9    $ 14.7    $ 33.5    $ 765.4   

(1) Obligations and commitments to make future minimum rental payments under non-cancelable operating leases having remaining terms in excess of one year.
(2) Includes obligations associated with IT software and service costs.

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

Item 3. Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of June 30, 2020, we have hedged $100.0 million of our $567.5 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. An additional $100.0 million of our outstanding floating rate debt is hedged to a fixed rate of 1.1065% plus the applicable spread defined in the Credit Agreement. The remaining $367.5 million outstanding is subject to an average variable rate of 2.68% as of June 30, 2020. Assuming the current level of borrowings, a one percentage point increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $3.7 million. 
Our interest income is primarily generated from variable rate interest earned on operating cash accounts.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee and the Euro because a portion of our operating expenses are incurred by our subsidiaries in India and Lithuania, and are denominated in Indian rupees and Euros, respectively. We do not generate significant revenues outside of the United States. For the six months ended June 30, 2020 and 2019, 9% and 7% of our expenses were denominated in foreign currencies, respectively. As of June 30, 2020 and 2019, we had net assets of $51.5 million and $41.1 million in foreign entities, respectively. The reduction in earnings from a 10% change in foreign currency spot rates would be $5.8 million and $4.4 million at June 30, 2020 and 2019, respectively.
For designated cash flow hedges, gains and losses currently recorded in accumulated other comprehensive loss will be reclassified into earnings at the time when certain anticipated intercompany charges are accrued as cost of services. As of June 30, 2020, it was anticipated that approximately $0.6 million of losses, net of tax, currently recorded in accumulated other comprehensive loss will be reclassified into cost of services within the next 12 months.

We use sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our hedge portfolio. The sensitivity of the hedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the offsetting gain or loss on the underlying exposure. A 10% change in the levels of foreign currency exchange rates against the U.S. dollar (or other base currency of the hedge if not a U.S. dollar hedge) with all other variables held constant would have resulted in a change in the fair value of our hedge instruments of approximately $2.4 million as of June 30, 2020.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.

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

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

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

In May 2016, we were served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of our customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that our PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. We believe that we have meritorious defenses to all claims in the case and intend to vigorously defend the Company against these claims. We and the plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.


Item 1A. Risk Factors

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

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

The novel coronavirus (“COVID-19”) pandemic has negatively affected and will likely continue to negatively affect our business, operating results, and financial condition.

On March 11, 2020, the COVID-19 outbreak was characterized as a pandemic by the World Health Organization. In response to the pandemic, governments around the world have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. Re-opening of businesses are occurring based on state and local guidelines and vary by locality and cannot be reasonably predicted. Even after re-openings, a resurgence of cases may lead to further shut-downs or restrictions after the initial re-opening. These measures have impacted and may further impact all or portions of our workforce and operations and the operations of our customers. These impacts include decreases in patient volumes, the need for personal protective equipment and other protective measures for front-line employees, and work-from-home arrangements. Restrictions on our employees’ ability to travel could affect our ability to sell or onboard certain services. Our business, along with the global economy, has been adversely affected by these measures, which have resulted in a significant reductions in spending, volatile economic conditions and business disruptions across markets globally.

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During the six months ended June 30, 2020, the adverse impacts to our results of operations which resulted from certain revenue pressure due to declining volumes were substantially offset by our cost control initiatives which were implemented in the first half of 2020. However, due to the continued global spread of COVID-19, including throughout the U.S., we anticipate adverse effects on our results of operations throughout our business during the second half of 2020 as customers continue to experience disruptions to their businesses. In response to governmental restrictions and/or concerns regarding the spread of the virus, many patients and/or providers have delayed or cancelled routine and non-essential medical procedures and physician visits. As a result, a number of our customers have a reduced need for our personnel on site to manage their RCM activities. However, even with decreased patient volumes, we have continued to employ our full customer-facing workforce. We also have a large number of employees now working from home, and such arrangements may involve increased use of public Wi-Fi and use of office equipment off premises, which may make our business more vulnerable to cybersecurity breach attempts. This period of uncertainty could also lead to an increase in phishing and other scams, fraud, theft or other criminal activity. In addition, we have a significant number of personnel internationally, including in India, which has implemented strict travel restrictions across the country. Travel restrictions or other containment measures or the sudden spread of COVID-19 in India or in any other country where we have a large number of personnel or critical operations could impair our ability to manage day-to-day service delivery for our customers, which could result in, among other things, losses of revenue or breaches of our customer contracts if a large number of personnel were unable to work at the same time. Further, adverse impacts to our customers’ businesses as a result of the COVID-19 pandemic could cause delays in, or limit their ability to, make timely payments to us, which could adversely affect our results of operations. The COVID-19 pandemic and the response to it have caused an economic slowdown. An economic slowdown, recession or economic uncertainty as a result of the COVID-19 outbreak could negatively affect us by reducing patient or service volumes and payment ability. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially and adversely impact our business, results of operations, and liquidity in future periods. The COVID-19 pandemic has also significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets, which can increase the cost of capital and adversely impact our ability to access capital.

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















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Disruptions in service or damage to our global business services centers and third-party operated data centers could adversely affect our business.

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

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

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

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

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



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of common stock during the periods indicated:
Period Number of Shares  Purchased (1)   Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)    Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
April 1, 2020 through April 30, 2020   82,841       $ 8.41    —       $ 49.0   
May 1, 2020 through May 31, 2020 45,520    $ 9.81    —    $ 49.0   
June 1, 2020 through June 30, 2020 —    $ —    —    $ 49.0   

(1) Includes the surrender of shares of our common stock related to employees’ tax withholding upon vesting of restricted stock. See Note 12, Share-Based Compensation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
(2) On November 13, 2013, the Board authorized, subject to the completion of the restatement of our financial statements, the repurchase of up to $50.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the “2013 Repurchase Program”). The timing and amount of any shares repurchased under the 2013 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2013 Repurchase Program may be suspended or discontinued at any time.




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Item 6. Exhibits

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

(a)
Exhibit Number
Exhibit Description
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

+

Management contract or compensatory plan or arrangement.

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


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  
R1 RCM INC.
By: /s/ Joseph Flanagan
Joseph Flanagan
President and Chief Executive Officer
By: /s/ Rachel Wilson
Rachel Wilson
Chief Financial Officer and Treasurer
Date: August 4, 2020
        

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IMAGE011.JPG
Exhibit 10.1
R1 RCM Inc.
401 N Michigan Avenue, Suite 2700  
Chicago, IL 60611





April 29, 2020

Re: Employment Terms

Dear Rachel:

On behalf of R1 RCM Inc. (“R1”), I am delighted to confirm our offer to you to join R1 as Chief Financial Officer and Treasurer, reporting to R1’s Chief Executive Officer. Your start date will be June 1, 2020 and your position will be located at R1’s Chicago, Illinois headquarters (travel to which will be in accordance with any relevant restrictions related to the COVID pandemic).

Salary and Annual Bonus
Your starting base salary will be $465,000 per year, paid semi-monthly. You will be eligible to participate in the R1 annual cash incentive bonus plan (“Annual Bonus Plan”) with an annual bonus target equal to 80% of your base salary. The bonus is discretionary and will be earned each calendar year based upon achievement of corporate and individual performance objectives established for that calendar year, as determined in the sole discretion of R1. You will be eligible to receive a bonus at target for 2020 (paid in 2021) based on achievement of performance objectives, as determined in R1’s sole discretion.

Equity Grants
Subject to approval by the Human Capital Committee of the R1 Board of Directors, your initial equity award will consist of a PBRSU award based on a value of $800,000 (using R1’s share price on the date of the grant) to be granted subject to the terms and conditions of a PBRSU award agreement (including such performance metrics and targets as determined by the Human Capital Committee in its sole discretion), issued pursuant to the R1 RCM Inc. Second Amended and Restated 2010 Stock Incentive Plan (the “2010 Stock Incentive Plan”). Beginning in 2021, you will be eligible to participate in the long-term incentive (“LTI”) program along with other R1 executives. Awards under the LTI program are at the sole discretion of the R1 Human Capital Committee. Based on the current program, the target value of annual equity awards will be 200% of your base salary amount.

Sign-on Bonus
You will be eligible for a sign-on bonus in the amount of $250,000, to be paid on the following schedule: $75,000 by June 30,2020 and $175,000 by January 31, 2021. Should you resign your employment with R1 or be terminated by the company for Cause before the one-year anniversary of your employment with R1, you agree to repay the entire gross amount of this bonus within 15 days of your termination date.










Health Benefits
You will be eligible to participate in R1’s benefit and executive health programs as of the first day of employment.

Relocation and Benefits
You will be required to relocate to the Chicago, Illinois area as a condition of this offer, and must initiate this relocation within one year of your start date with R1. To support your relocation, you will be eligible for the executive relocation benefits in accordance with R1’s relocation program. In order to participate in this program, you will be required to enter into a repayment agreement, which describes the terms and conditions of the program, including, but not limited to, the repayment schedule and amounts owed should you leave R1 within two years after the receipt of benefits under the program.

Background Check
We are extending this offer contingent upon successful completion of routine background and reference checks, including verification of all information reported on your application. In addition, your acceptance of this offer indicates you are willing to participate in, and pass (if applicable), additional screening procedures (including immunizations and drug screenings) should they be requested prior to or during your employment with R1.

Additional Employment Terms
Attached as Exhibit A are additional terms of your employment.


Rachel, we truly believe that we are building the best team in the industry and are very pleased that you will be joining us at R1. To accept this offer, please sign below and return an executed copy to me.

Sincerely,

/s/ Kate Sanderson
Kate Sanderson
Executive Vice President, Chief HR Officer,
R1 RCM Inc.



Agreed and Accepted:


/s/ Rachel Wilson
Rachel Wilson

Date: 4/29/20




2


Exhibit A
Employment Terms

1.At Will Employment. Your employment with the R1 is “at will,” meaning it is terminable at any time by either you or R1, subject to the provisions of these terms of employment (“Employment Terms”) and the offer of employment, dated April 29, 2020 (“Offer Letter”) (together the “Employment Agreement”).

2.Notice of Termination. Your employment with R1, as well as your role as an officer and member of any Board of Directors of R1 or any subsidiary, will terminate:

a.upon at least thirty days’ prior written notice to R1 of your termination of employment (which R1 may, in its sole discretion, make effective earlier than any notice date);

b.as specified in a written notice by R1 to you of a termination of employment for Cause or without Cause (other than for Disability);

c.immediately upon your death; or

d.upon at least ten days’ prior written notice by R1 to you of your termination of employment due to Disability.

If requested, upon or following your termination (or earlier as requested by R1), you agree to timely execute letters of resignation and/or withdraw from all positions with any R1 legal entities for which you were an officer and/or director during your employment.

3.Severance.

a.In the event of your termination of employment from R1 by reason of your death, Disability, or by R1 for Cause, or by you for any reason, you will be entitled to receive:

i.any unpaid Base Salary through the date of termination,

ii.except in the case of your termination by R1 for Cause, any annual bonus earned but unpaid with respect to the fiscal year ending on or preceding the date of termination, payable at the same time as it would have been paid had you not undergone a termination of employment;

iii.reimbursement in accordance with applicable R1 policy for any unreimbursed business expenses incurred through the date of termination;

iv.any accrued but unused vacation time in accordance with R1 policy; and

v.all other payments, benefits or fringe benefits to which you are entitled under the terms of any applicable compensation or equity arrangement or employee benefit plan or program of R1 (collectively, the foregoing payment and benefits described in clauses (i)-(v) will be hereafter referred to as the “Accrued Benefits”).

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b.In the event of your termination of employment by R1 without Cause, R1 shall pay or provide you with the following severance benefits in addition to the Accrued Benefits:

i.subject to your continued compliance with all of your post-termination obligations to R1, an amount equal to your monthly Base Salary rate, paid monthly for a period of twelve months following such termination, provided that, in the event that you obtain other full-time employment, you must notify R1 of such employment and you will not be entitled to any such payment in respect of the period beginning on the effective date of such new employment; and

ii.subject to (A) your timely election of continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), (B) your continued copayment of premiums at the same level and cost to you as if you were an employee of R1 (excluding, for purposes of calculating cost, an employee’s ability to pay premiums with pre-tax dollars), and (C) your continued compliance with all of your post-termination obligations to R1, continued participation in R1’s group health plan (to the extent permitted under applicable law and the terms of such plan) which covers you (and your eligible dependents) for a period of twelve months following such termination at R1’s expense; provided that you are eligible and remain eligible for COBRA coverage; and provided, further, that in the event that you obtain other employment that offers group health benefits, such continuation of coverage by R1 will immediately cease. Notwithstanding the foregoing, R1 will not be obligated to provide the foregoing continuation coverage if it would result in the imposition of excise taxes on R1 for failure to comply with the nondiscrimination requirements of the Patient Protection and Affordable Care Act of 2010, as amended, and the Health Care and Education Reconciliation Act of 2010, as amended (to the extent applicable).

c.Payment of all amounts described in part (b) above, excluding the Accrued Benefits (the “Severance Payments”) will only be payable if you deliver to R1 and do not revoke a general release of claims in favor of R1 and its affiliates in a form reasonably satisfactory to R1. Such release must be executed and delivered (and no longer subject to revocation, if applicable) within sixty days following termination. Any such payment scheduled to occur during the first sixty days following the termination of employment will not be paid until the sixtieth day following such termination of employment and will include payment of any amount that was otherwise scheduled to be paid prior thereto.

d.In the event that a Change of Control occurs while you have been in the continuous employment of R1, vesting of equity awards (or, if applicable, any securities granted or issued to you in respect of such equity award in connection with a Change of Control) shall be governed by the relevant plan document for each such award.

e.For purposes of this Employment Agreement:

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i.“Cause” means: (i) your conviction for, or plea of guilty or nolo contendere to, a felony; (ii) your engaging in conduct that constitutes gross neglect or willful misconduct and that, in either case, has the potential to result in material economic or reputational harm to R1; (iii) your willful breach of any provision of this Agreement or any applicable non-disclosure, non-competition, non-solicitation or other similar restrictive covenant obligation owed to R1; (iv) your failure to begin relocation within one (1) year after your start date; or (v) your repeated refusal, or failure to undertake good faith efforts, to perform your material employment duties and responsibilities for R1, so long as R1 provides written notice of the perceived violations under this subsection (v) and you fail to cure within thirty (30) days of such notice.

ii.“Change of Control” will take on the same meaning as defined in the relevant equity plan document and/or related agreements. Notwithstanding the foregoing, other than with respect to a Take Private Change of Control, a “Change of Control” shall not be deemed to have occurred if the event constituting such “Change of Control” is not (x) a change in the ownership of the corporation, (y) a change in effective control of the corporation, or (z) a change in the ownership of a substantial portion of the assets of the corporation, as those terms are used and defined in Section 409A(a)(2)(A)(v) of the Code, and the regulations thereunder, and where the word “corporation” used above and in such provisions is taken to refer to R1.

iii.“Disability” means you have been unable, with or without reasonable accommodation and due to physical or mental incapacity, to substantially perform your duties and responsibilities hereunder for a period of one hundred eighty days out of any consecutive three hundred sixty-five days.

iv.“Person” means any individual, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act, but excluding (i) R1 and any of its subsidiaries, (ii) any employee stock ownership or other employee benefit plan maintained by R1, and (iii) an underwriter or underwriting syndicate that has acquired R1’s securities solely in connection with a public offering thereof.

v.“Take Private Change of Control” means the consummation of any transaction or series of transactions following which no shares of R1 (or of its ultimate parent corporation) are listed on the New York Stock Exchange or the NASDAQ, on any other United States stock exchange, or are otherwise listed on a public trading market (including the OTC Markets Group, Inc.).

vi.“Third Party Purchaser” means any Person or group of Persons, none of whom is, immediately prior to the subject transaction, TowerBrook, Ascension, a TB/AS Co-Investment Vehicle, or any Affiliate thereof.

4.Restrictive Covenants. You, by virtue of your role with R1, will have access to, and be involved in the formulation of, certain confidential and secret information of R1 regarding its operations, and you could materially harm the business of R1 by competing with R1 or soliciting employees or customers of R1. You therefore agree to the following obligations and restrictive covenants.

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a.Non-Solicitation. During the time in which you perform services for R1 and for a period of eighteen months after you cease to perform services for R1, regardless of the reason, you shall not, directly or indirectly, either alone or in conjunction with any person, firm, association, company or corporation:

i.Hire, recruit, solicit or otherwise attempt to employ or retain or enter into any business relationship with, any person who is or was an employee of R1 within the twelve-month period immediately preceding the cessation of your service with R1; or

ii.Solicit the sale of any products or services that are similar to or competitive with products or services offered by, manufactured by, designed by, or distributed by R1, to any person, company or entity which was or is a customer or potential customer of R1 for such products or services.

b.Non-Disclosure. You will not, without R1’s prior written permission, directly or indirectly, utilize for any purpose other than for a legitimate business purpose solely on behalf of R1, or directly or indirectly, disclose to anyone outside of R1, either during or after your employment with R1 ends, R1’s Confidential Information, as long as such matters remain Confidential Information. This Agreement shall not prohibit you from (i) revealing evidence of criminal wrongdoing to law enforcement, (ii) disclosing or discussing concerns regarding regulatory or legal compliance with any governmental agency or entity to the extent that such disclosures or discussions are protected under any whistleblower protection provisions of Federal or state laws or regulations or (iii) divulging R1’s Confidential Information by order of court or agency of competent jurisdiction. However, you shall promptly inform R1 of any such situations and shall take such reasonable steps to prevent disclosure of R1’s Confidential Information until R1 has been informed of such requested disclosure and R1 has had an opportunity to respond to the court or agency. Further, notwithstanding the forgoing, you will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (i) is made (A) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and (B) solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Accordingly, you have the right to disclose in confidence trade secrets to federal, state, and local government officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law. You also have the right to disclose trade secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal and protected from public disclosure. Nothing in this Employment Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).

c.Return of Company Property. You agree that, in the event that your service to R1 is terminated for any reason, you shall immediately return all of R1’s property, including without limitation, (i) tools, pagers, computers, printers, key cards, documents or other tangible property of R1, and (ii) R1’s Confidential Information in any media, including paper or electronic form, and Participant shall not retain in your possession any copies of such information.

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d.Ownership of Software and Inventions. All discoveries, designs, improvements, ideas, inventions, software, whether patentable or copyrightable or not, shall be works-made-for-hire and R1 shall be deemed the sole owner throughout the universe of any and all rights of whatsoever nature therein, with the rights to use the same in perpetuity in any manner R1 determines in its sole discretion without any further payment to you whatsoever. If, for any reason, any of such results and proceeds which relate to the business shall not legally be a work-for-hire and/or there are any rights which do not accrue to R1 under the preceding sentence, then you hereby irrevocably assign and agree to quitclaim any and all of your right, title and interest thereto including, without limitation, any and all copyrights, patents, trade secrets, trademarks and/or other rights of whatsoever nature therein, whether or not now or hereafter known, existing, contemplated, recognized or developed to R1, and R1 shall have the right to use the same in perpetuity throughout the universe in any manner R1 determines without any further payment to you whatsoever. You shall, from time to time, as may be reasonably requested by R1, at R1’s expense, do any and all things which R1 may deem useful or desirable to establish or document R1’s exclusive ownership of any and all rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright and/or patent applications or assignments. To the extent you have any rights in the results and proceeds of your services that cannot be assigned in the manner described above, you unconditionally and irrevocably waive the enforcement of such rights. Notwithstanding anything to the contrary set forth herein, works developed by you (i) which are developed independently from the work developed for R1 regardless of whether such work was developed before or after you performed services for R1; or (ii) applications independently developed which are unrelated to the business and which you develop during non-business hours using non-business property shall not be deemed work for hire and shall not be the exclusive property of R1.

e.Non-Competition.

i.During the time of your employment for R1 and for a period of twelve months after the termination of your employment for R1, regardless of the reason, you shall not, directly or indirectly, either alone or in conjunction with any person, firm, association, company or corporation, within the Restricted Area, own, manage, operate, or participate in the ownership, management, operation, or control of, or be employed by or provide services to, any entity which is in competition with R1.

ii.Notwithstanding anything to the contrary, nothing in this Paragraph (e) prohibits you from being a passive owner of not more than one percent of the outstanding stock of any class of a corporation which is publicly traded, so long as you have no active participation in the business of such corporation.

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f.Acknowledgments. You acknowledge and agree that the restrictions contained herein with respect to time, geographical area and scope of activity are reasonable and do not impose a greater restraint than is necessary to protect the goodwill and other legitimate business interests of R1 and that you have the opportunity to review the provisions of this Employment Agreement with your legal counsel. In particular, you agree and acknowledge (i) that R1 is currently engaging in business and actively marketing its services and products throughout the United States, (ii) that your duties and responsibilities for R1 are co-extensive with the entire scope of R1's business, (iii) that R1 has spent significant time and effort developing and protecting the confidentiality of its methods of doing business, technology, customer lists, long term customer relationships and trade secrets, and (iv) that such methods, technology, customer lists, customer relationships and trade secrets have significant value.

g.Enforcement. You agree that the restrictions contained herein are necessary for the protection of the business, the Confidential Information, customer relationships and goodwill of R1 and are considered by you to be reasonable for that purpose and that the scope of restricted activities, the geographic scope and the duration of the restrictions set forth in this Employment Agreement are considered by you to be reasonable. You further agree that any breach of any of the restrictive covenants herein would cause R1 substantial, continuing and irrevocable harm for which money damages would be inadequate and therefore, in the event of any such breach or any threatened breach, in addition to such other remedies as may be available, R1 shall be entitled to specific performance and injunctive relief. This Agreement shall not in any way limit the remedies in law or equity otherwise available to R1 or its Affiliates. You further agree that to the extent any provision or portion of the restrictive covenants shall be held, found or deemed to be unreasonable, unlawful or unenforceable by a court of competent jurisdiction, then any such provision or portion thereof shall be deemed to be modified to the extent necessary in order that any such provision or portion thereof shall be legally enforceable to the fullest extent permitted by applicable law.

h.Severability; Modification. It is expressly agreed by you that:

i.Modification. If, at the time of enforcement of this Employment Agreement, a court holds that the duration, geographical area or scope of activity restrictions stated herein are unreasonable under circumstances then existing or impose a greater restraint than is necessary to protect the goodwill and other business interests of R1, you agree that the maximum duration, scope or area reasonable under such circumstances will be substituted for the stated duration, scope or area and that the court will be allowed to revise the restrictions contained herein to cover the maximum duration, scope and area permitted by law, in all cases giving effect to the intent of the parties that the restrictions contained herein be given effect to the broadest extent possible; and

8


ii.Severability. Whenever possible, each provision of this Employment Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Employment Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law, such invalidity, illegality or unenforceability will not affect any other provision, but this Employment Agreement will be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein.

i.Non-Disparagement. You understand and agree that you will not disparage R1, its officers, directors, administrators, representatives, employees, contractors, consultants or customers and will not engage in any communications or other conduct which might interfere with the relationship between R1 and its current, former, or prospective employees, contractors, consultants, customers, suppliers, regulatory entities, and/or any other persons or entities.

j.Definitions.

i.Confidential Information. “Confidential Information” as used in this Employment Agreement shall include R1’s trade secrets as defined under Illinois law, as well as any other information or material which is not generally known to the public, and which (A) is generated, collected by or utilized in the operations of R1’s business and relates to the actual or anticipated business, research or development of R1; or (B) is suggested by or results from any task assigned to you by R1 or work performed by you for or on behalf of R1. Confidential Information shall not be considered generally known to the public if you or others improperly reveal such information to the public without R1’s express written consent and/or in violation of an obligation of confidentiality to R1. Examples of Confidential Information include, but are not limited to, all customer, client, supplier and vendor lists, budget information, contents of any database, contracts, product designs, technical know-how, engineering data, pricing and cost information, research and development work, software, business plans, proprietary data, projections, market research, perceptual studies, strategic plans, marketing information, financial information (including financial statements), sales information, training manuals, employee lists and compensation of employees, and all other competitively sensitive information with respect to R1, whether or not it is in tangible form, and including without limitation any of the foregoing contained or described on paper or in computer software or other storage devices, as the same may exist from time to time.

ii.Restricted Area. For purposes of this Agreement, the term “Restricted Area” shall mean the United States of America.


5.Section 409A Compliance.

9


a.It is intended that all payments and benefits under this Employment Agreement, the Annual Bonus Plan, the LTI, the 2010 Stock Incentive Plan, and any other plan under which you receive compensation shall comply with, or be exempt from, Internal Revenue Code Section 409A and the regulations and guidance promulgated thereunder (collectively “Code Section 409A”) and, to the maximum extent permitted, this Employment Agreement and such other agreements and plans will be interpreted in accordance with such intention. To the extent that any provision hereof is modified in order to comply with Code Section 409A, such modification will be made in good faith and will, to the maximum extent reasonably possible, maintain the original intent and economic benefit to you and R1 of the applicable provision without violating the provisions of Code Section 409A. R1 does not represent or covenant that payments and benefits to be paid to you under this Employment Agreement, the Annual Bonus Plan, the LTI, the 2010 Stock Incentive Plan, and any other plan under which you will receive compensation are not or will not be subject to any additional tax or interest under Code Section 409A. You agree to take any action, or refrain from taking any action, reasonably requested by R1 to comply with the terms of any correction procedure promulgated under Code Section 409A.

b.A termination of employment will not be deemed to have occurred for purposes of any provision of this Employment Agreement providing for the payment of any amount or benefit that is “nonqualified deferred compensation” under Code Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Code Section 409A and, for purposes of any such provision of this Employment Agreement, references to a “termination,” “termination of employment” or like terms will mean a “separation from service.” If on the date of your termination you are a “specified employee” for purposes of Code Section 409A, any payment or benefit that is “nonqualified deferred compensation” that is payable on account of a “separation from service” (as such terms are defined for purposes of Code Section 409A), such payment or benefit will be made or provided at the date that is the earliest of (a) the expiration of the six (6)-month period measured from the date of your “separation from service,” (b) the date of your death, or (c) such other date that such payment or benefit may be provided without incurring any additional tax or interest under Code Section 409A. Upon the expiration of the foregoing delay period, any payments and benefits delayed pursuant to the previous sentence will be paid or made available to you in a lump sum and all remaining benefits payments and benefits due will be paid or provided in accordance with the normal payment dates specified for them herein.

c.With regard to any reimbursement to you of any costs and expenses or the provision of any in-kind benefits, except as otherwise permitted by Code Section 409A, (a) the right to reimbursement or in-kind benefits will not be subject to liquidation or exchange for another benefit, (b) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year will not affect the expenses eligible for reimbursement, or in-kind to be provided, in any other taxable year, and (c) such payments will be made on or before the last day of your taxable year following the taxable year in which the expense occurred (it being understood that notwithstanding this (c), any reimbursements to you will be made promptly after you have substantially complied with R1’s policy regarding the reimbursement of expenses).

10


d.Your right to receive any installment payments under this Employment Agreement, the Annual Bonus Plan, the LTI, the 2010 Stock Incentive Plan, or any other plan under which you receive compensation shall be treated as a right to receive a series of separate payments, and each such payment shall be a separately identified and determinable amount, to the maximum extent permitted under Code Section 409A. Whenever a payment under this Employment Agreement specifies a payment within a period of days, the actual date of payment within such specified period will be within the sole discretion of R1.

e.In no event will any payment that constitutes “nonqualified deferred compensation” for purposes of Code Section 409A be subject to offset by any other amount unless otherwise permitted by Code Section 409A.

6.Governing Law. This Employment Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware, without regard to any applicable conflicts of law provisions.

7.Exclusive Jurisdiction/Venue. All disputes that arise from or relate to this Employment Agreement shall be decided exclusively by binding arbitration in Cook County, Illinois under the Commercial Arbitration Rules of the American Arbitration Association. The parties agree that the arbitrator’s award shall be final and may be filed with and enforced as a final judgment by any court of competent jurisdiction. Notwithstanding the foregoing, any disputes related to the enforcement of the restrictive covenants contained in this Employment Agreement shall be subject to and determined under Delaware law and adjudicated in Illinois courts.

8.Notices. Any notice hereunder by you shall be given to R1 in writing and such notice shall be deemed duly given only upon receipt thereof by the General Counsel of R1. Any notice hereunder by R1 shall be given to you in writing and such notice shall be deemed duly given only upon receipt thereof at such address as you may have on file with R1.

9.Headings. The titles and headings of the various sections of this Employment Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Employment Agreement.

10.Counterparts. This Employment Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument.

11.Severability. The invalidity or unenforceability of any provisions of this Employment Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Employment Agreement in such jurisdiction or the validity, legality or enforceability of any provision of this Employment Agreement in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law.

12.Binding Agreement; Assignment. This Employment Agreement shall inure to the benefit of, be binding upon, and be enforceable by R1 and its successors and assigns and you. You shall not assign any part of this Employment Agreement without the prior express written consent of R1.

11


13.Entire Agreement; Precedence; Amendment. The Offer Letter and these Employment Terms together contain the entire agreement between the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements or prior understandings, whether written or oral, between the parties relating to such subject matter. This Employment Agreement may only be modified or amended by a writing signed by the CEO or CHRO of R1 and you.
12



Exhibit 10.2
ADDENDUM NO. 7 TO
AMENDED AND RESTATED SERVICES AGREEMENT
        This Addendum No. 7 (this “Addendum”) is made and entered into as of the 30th day of April, 2020 (the “Addendum Effective Date”) by and between IHC Health Services, Inc., a Utah non-profit corporation, (“IMH” or sometimes referred to as “Intermountain” or “Intermountain Healthcare”) and R1 RCM Inc., a Delaware corporation, formerly known as Accretive Health, Inc. (“R1”) (each a “Party” and collectively, the “Parties”), pursuant to and subject to that certain Amended and Restated Services Agreement (as amended, referred to herein as the "Services Agreement") dated as of January 23, 2018, by and between the Parties.

        WHEREAS, the Services Agreement was amended by (i) Addendum No. 1 to Amended and Restated Services Agreement, effective as of April 30, 2018, (ii) Addendum No. 2 to Amended and Restated Services Agreement, effective as of June 18, 2018, (iii) Addendum No. 3 to Amended and Restated Services Agreement, effective as of September 27, 2018 and (iv) Addendum No. 4 to Amended and Restated Services Agreement, effective as of April 30, 2019, (v) Addendum No. 5 to Amended and Restated Services Agreement, effective as of December 31, 2019 and (vi) Addendum No. 6 to Amended and Restated Services Agreement, effective as of January 28, 2020.

        NOW THEREFORE, in consideration of the premises and mutual consents set forth below, the Parties hereby agree as follows:

1.Purpose.
This Addendum amends the process with respect to adjusting Metric No. 4 calculations and amends the Target Level for Service Level 12. When signed by both Parties, this Addendum shall be attached to, and deemed a part of, the Services Agreement. All other terms and conditions of the Services Agreement shall remain in full force and effect.
2.Amendments.
2.1Adjustments to [*****] Calculations. Effective as of the Addendum Effective Date, the Parties agree to delete Section 2.5(b) of Exhibit 11.1-B (Incentive Fees for Services) in its entirety and replace it with the following:
-1-
[*****] Text omitted for confidential treatment. The redacted information has been excluded because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.




“After [*****] days but before [*****] days after the end of each Contract Year, the Parties will refresh the [*****] calculation for the entire Contract Year just completed. For the period [*****], the [*****] calculations will be refreshed as part of the standard monthly querying process with [*****]. For the period [*****], the calculations will be queried with [*****]. Upon the conclusion of the Scorecard Review Period for such Scorecard Calculations, such Scorecard Calculations and the amount of Incentive Fees shall be deemed final and binding upon the Parties with respect to the Actual Results reflected therein for [*****], and shall no longer be subject to any adjustment or revision. If the fees paid to R1 for such Contract Year are greater than the actual Incentive Fees for such Contract Year, then R1 will provide IMH with a credit for such difference on the next available invoice, whether such invoice is for the Base Fee or Incentive Fees. If the fees paid to R1 for such Contract Year are less than the actual Incentive Fees for such Contract Year, then R1 will invoice IMH for, and IMH will pay, such additional amount.”
2.2Target Levels. Effective as of January 1, 2020, the Parties agree to delete Section 4.12 of Exhibit 3.6 in its entirety and replace it with the following:
“4.12 Service Level 12: ‘Patient Registration Satisfaction Survey’ –
(i) for all Measurement Windows in [*****], (a) for the Emergency Department Registration Survey Score, greater than or equal to [*****]; and (b) for the Inpatient Registration Survey Score, greater than or equal to [*****]. For the avoidance of doubt, R1 must meet (i) and (ii) to achieve the Target Level for this Service Level.
(ii) for all Measurement Windows beginning in [*****] through the end of the Term, (a) for the Emergency Department Registration Survey Score, greater than or equal to [*****]; and (b) for the Inpatient Registration Survey Score, greater than or equal to [*****]. For the avoidance of doubt, R1 must meet (i) and (ii) to achieve the Target Level for this Service Level.”

SIGNATURE PAGE FOLLOWS

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

-2-
[*****] Text omitted for confidential treatment. The redacted information has been excluded because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.




IN WITNESS WHEREOF, the Parties have caused this Addendum to be executed by their respective duly authorized representatives as of the Addendum Effective Date.


IHC Health Services, Inc.
R1 RCM Inc.
By: /s/ Todd E Craghead
By: /s/ John Sparby
Name: Todd E Craghead
Name: John Sparby
Title: VP Revenue Cycle
Title: EVP Customer Operations, R1 RCM

SIGNATURE PAGE TO ADDENDUM 7 TO AMENDED AND RESTATED SERVICES AGREEMENT


Exhibit 31.1


Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
I, Joseph Flanagan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of R1 RCM Inc.;
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 registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's 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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's 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 registrant's 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 registrant's internal control over financial reporting.
Date: August 4, 2020
/s/ Joseph Flanagan   
Joseph Flanagan
President and Chief Executive Officer
(Principal Executive Officer)



Exhibit 31.2


 
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
I, Rachel Wilson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of R1 RCM Inc.;
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 registrant's other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's 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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's 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 registrant's 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 registrant's internal control over financial reporting.
Date: August 4, 2020
/s/ Rachel Wilson
Rachel Wilson
Chief Financial Officer and Treasurer
(Principal Financial Officer)



Exhibit 32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
In connection with the Quarterly Report on Form 10-Q of R1 RCM Inc. (the “Company”) for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Joseph Flanagan, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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 4, 2020
/s/ Joseph Flanagan    
Joseph Flanagan
President and Chief Executive Officer
(Principal Executive Officer)





Exhibit 32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
In connection with the Quarterly Report on Form 10-Q of R1 RCM Inc. (the “Company”) for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Rachel Wilson, Chief Financial Officer and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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 4, 2020
/s/ Rachel Wilson 
Rachel Wilson
Chief Financial Officer and Treasurer
(Principal Financial Officer)