SEC Info - R1 RCM Inc. - ‘10-K’ for 12/31/20


Item 9B.			Other Information

None

PART III


Item 10.			Directors, Executive Officers, and Corporate Governance

The information required by this item with respect to our directors and executive officers will be contained in our 2021 Proxy Statement under the caption “Information About Our Directors, Officers and 5% Stockholders” and is incorporated in this report by reference.

The information required by this item with respect to corporate governance matters will be contained in our 2021 Proxy Statement under the caption “Corporate Governance” and is incorporated in this report by reference.

Code of Integrity

We have adopted a global code of integrity that applies to all employees, including our directors and officers (our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions). Copies of our Code of Integrity: Living Our Values are available without charge upon written request directed to Corporate Secretary, R1 RCM Inc., 401 N. Michigan Avenue, Chicago, Illinois, 60611. Additionally, copies are available without charge online at http://s22.q4cdn.com/852369931/files/doc_downloads/governance_documents/2019/R1-Code-of-Integrity.pdf.


Item 11.			Executive Compensation

Information required to be furnished by Item 402 of Regulation S-K and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K regarding executive compensation will be included in our 2021 Proxy Statement under the caption “Executive Compensation” and is herein incorporated by reference.


Item 12.			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We maintain an Amended and Restated Stock Option Plan (“2006 Plan”), and a Second Amended and Restated 2010 Stock Incentive Plan (the “2010 Amended Plan”), and together with the 2006 Plan (the “Plans”). Under the 2010 Amended Plan we may issue up to a maximum of 46,374,756 shares, including any shares that remained available for issuance under the 2006 Plan as of the date of the IPO and any shares subject to awards that were outstanding under the 2006 Plan as of the date of the IPO that expire, terminate or are otherwise surrendered, canceled, forfeited, or repurchased by us without the issuance of shares thereunder. We will not make any further grants under the 2006 Plan. The 2010 Amended Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, and and other share-based awards. As of December 31, 2020, 5,028,242 shares were available for future grants of awards under the 2010 Amended Plan. However, to the extent that previously granted awards under the 2006 Plan or 2010 Amended Plan expire, terminate or are otherwise surrendered, canceled or forfeited, the number of shares available for future awards under the 2010 Amended Plan will increase.

The following table summarizes information about the securities authorized for issuance under our equity compensation plans as of December 31, 2020:


	(a)	(b)		(c)
Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options and Restricted Stock Units	Weighted- Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities reflected in Column (a))
Equity compensation plans approved by stockholders (1)	13,192,826	$	3.17	5,028,242
Equity compensation plans not approved by stockholders (2)	500,000	$	9.56	—
Total	13,692,826			5,028,242

(1) Includes 5,720,971 outstanding stock options, 2,108,447 restricted stock units, and 5,363,408 performance-based restricted stock units (“PBRSUs”) awarded under the Plans. The number of shares included for PBRSUs represents the maximum shares that could vest. Since the restricted stock units and PBRSUs have no exercise price, they are not included in the weighted-average exercise price calculation in column b.

(2) Represents stock option inducement grants made pursuant to the NYSE inducement grant rules.

The information required by this item with regard to security ownership of certain beneficial owners and management will be contained in our 2021 Proxy Statement under the caption “Information About Our Directors, Officers and 5% Stockholders - Security Ownership of Certain Beneficial Owners and Management” and is incorporated in this report by reference.


Item 13.			Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be contained in our 2021 Proxy Statement under the captions “Related Person Transactions” and “Corporate Governance” and is incorporated in this report by reference.


Item 14.			Principal Accountant Fees and Services

The information required by this item will be contained in our 2021 Proxy Statement under the caption “Ratification of the Selection of Independent Registered Public Accounting Firm” and is incorporated in this report by reference.

PART IV


Item 15.			Exhibits and Financial Statement Schedules

a) The following documents are filed as a part of this report:

(1) Financial Statements: The financial statements and notes thereto annexed to this report beginning on page F-1.

(2) Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts Disclosure schedules have been omitted because they are not required or because the required information is in the Consolidated Financial Statements and notes thereto.

(3) Exhibits: The list of Exhibits filed as part of this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.


Item 16.			Form 10-K Summary

None.

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: February 18, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Joseph Flanagan
Joseph Flanagan

President, Chief Executive Officer, and Director
(Principal Executive Officer)

/s/ Rachel Wilson
Rachel Wilson

Chief Financial Officer and Treasurer
(Principal Financial Officer)

/s/ Richard B. Evans, Jr.
Richard B. Evans, Jr.

Principal Accounting Officer

/s/ Michael C. Feiner

Michael C. Feiner

Director

/s/ John B. Henneman III
John B. Henneman III

Director

/s/ Alex J. Mandl
Alex J. Mandl

Lead Director

/s/ Neal Moszkowski
Neal Moszkowski

Director

/s/ Ian Sacks
Ian Sacks

Director

/s/ Jill Smith

Jill Smith

Director

/s/ Anthony J. Speranzo

Anthony J. Speranzo

Director

/s/ Anthony R. Tersigni

Anthony R. Tersigni

Director

/s/ Albert R. Zimmerli

Albert R. Zimmerli

Director

R1 RCM Inc.

Index to Consolidated Financial Statements



									Page
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm									F-2
Consolidated Balance Sheets									F-5
Consolidated Statements of Operations and Comprehensive Income (Loss)									F-6
Consolidated Statements of Stockholders’ Equity (Deficit)									F-7
Consolidated Statements of Cash Flows									F-8
Notes to Consolidated Financial Statements									F-9

F-1

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors of R1 RCM Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of R1 RCM Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

F-2


						Revenue recognition - Incentive fee arrangements
Description of the Matter						As described in Note 2 of the consolidated financial statements, the Company recognizes revenue related to financial performance-based incentive fees ratably as the performance obligation for revenue cycle management services is satisfied. Incentive fees are structured to reflect quarterly or annual performance and are evaluated on a contract-by-contract basis. Auditing the Company’s recognition and measurement of variable incentive fees revenues is subjective due to the estimation uncertainty in the calculations for amounts not yet agreed upon and which remain unbilled at year end. In these situations, the Company performs an assessment of the estimated total incentive fees expected and the related revenues to be recognized. Further, the nature and terms of each individual customer agreement for end-to-end revenue cycle management services varies, and each contract requires separate analysis to ensure that incentive fee revenue recognition is appropriate.

How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the review of customer agreements and related amendments and incentive fee calculations, including management’s internal controls over the assessment of the estimated constraint applied to the incentive fee revenues. To test the appropriateness of the timing of recognition and measurement of incentive fee revenues, our audit procedures included, among others, obtaining and reviewing the customer contracts and any related amendments, recalculating the estimated revenues using management’s methodology, and independently confirming with external customers key operational measures that are included in the customer contract and utilized as inputs to the calculation. In addition, we compared historical estimated incentive fees to actual results to assess the accuracy of management’s estimation process.
						Acquisition - SCI business combination
Description of the Matter						As described in Note 5 to the consolidated financial statements, the Company completed its acquisition of SCI Solutions, Inc. (SCI) for consideration of $196.7 million in 2020. The transaction was accounted for as a business combination. Auditing the Company’s accounting for its acquisition of SCI was complex due to the significant estimation required by management to determine the fair value of the acquired identified intangible assets of $86.1 million, which principally consisted of developed technology. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the key assumptions included in the valuation. The Company used a discounted cash flow (excess earnings) model to measure the developed technology intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue and cost growth rates and technology obsolescence curves). These significant assumptions are forward looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls addressing the risks of material misstatement over its accounting for the SCI acquisition including, among others, management's process to establish the significant assumptions and measure the acquired intangible assets. This included testing controls over management's review of the significant assumptions and other inputs used in the determination of fair value. The testing was inclusive of key management review controls to evaluate the acquired technology and estimated future sales, and controls to ensure that the data used to evaluate and support the significant assumptions was complete, accurate and, where applicable, verified to appropriate data sources. To test the Company’s accounting for the SCI acquisition, our audit procedures included, among others, inspecting the terms of the executed agreement, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and the significant assumptions included in the fair value estimates. We also evaluated the Company’s disclosures in the consolidated financial statements.

F-3

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2004.

Chicago, Illinois

F-4

R1 RCM Inc.

Consolidated Balance Sheets

(In millions, except per share data)

December 31,

2020

2019

Assets

Current assets:

Cash and cash equivalents

i 173.8

i 92.0

Accounts receivable, net of $ i 3.7 million and $ i 2.8 million allowance

i 91.3

i 52.3

Accounts receivable, net of $ i 0.1 million and $ i 0.0 million allowance - related party

i 30.9

i 30.8

Prepaid expenses and other current assets

i 59.4

i 41.6

Total current assets

i 355.4

i 216.7

Property, equipment and software, net

i 93.7

i 116.9

Operating lease right-of-use assets

i 57.8

i 77.9

Intangible assets, net

i 171.1

i 164.7

Goodwill

i 375.3

i 253.2

Non-current deferred tax assets

i 73.7

i 64.2

Non-current portion of restricted cash equivalents

i 1.0

i 0.5

Other assets

i 61.0

i 35.0

Total assets

i 1,189.0

i 929.1

Liabilities

Current liabilities:

Accounts payable

i 18.2

i 20.2

Current portion of customer liabilities

i 16.7

i 14.0

Current portion of customer liabilities - related party

i 15.3

i 34.1

Accrued compensation and benefits

i 51.9

i 95.1

Current portion of operating lease liabilities

i 12.2

i 12.8

Current portion of long-term debt

i 32.3

i 16.3

Accrued expenses and other current liabilities

i 59.7

i 40.0

Total current liabilities

i 206.3

i 232.5

Non-current portion of customer liabilities - related party

i 16.3

i 18.6

Non-current portion of operating lease liabilities

i 71.0

i 82.7

Long-term debt

i 519.7

i 337.7

Other non-current liabilities

i 36.3

i 10.4

Total liabilities

i 849.6

i 681.9

i i 8.00 / % Series A convertible preferred stock, par value $ i i 0.01 / , i 370,000 shares authorized, i i 288,497 / shares issued and outstanding as of December 31, 2020 (aggregate liquidation value of $ i 294.3); i 370,000 shares authorized, i i 266,529 / shares issued and outstanding as of December 31, 2019 (aggregate liquidation value of $ i 271.9)

i 251.5

i 229.1

Stockholders’ equity:

Common stock, $ i i 0.01 / par value, i i 500,000,000 / shares authorized, i 137,812,559 shares issued and i 121,144,038 shares outstanding at December 31, 2020; i 127,807,546 shares issued and i 114,021,280 shares outstanding at December 31, 2019

i 1.4

i 1.3

Additional paid-in capital

i 393.7

i 372.7

Accumulated deficit

( i 161.5)

( i 277.8)

Accumulated other comprehensive loss

( i 6.5)

( i 4.5)

Treasury stock, at cost, i 16,668,521 shares as of December 31, 2020; i 13,786,266 shares as of December 31, 2019

( i 139.2)

( i 73.6)

Total stockholders’ equity

i 87.9

i 18.1

Total liabilities and stockholders’ equity

i 1,189.0

i 929.1

See accompanying notes to consolidated financial statements.

F-5

R1 RCM Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In millions, except per share data)

Year Ended December 31,

2020

2019

2018

Net services revenue ($ i 809.5 million, $ i 790.4 million and $ i 600.1 million from related party for the year ended December 31, 2020, 2019 and 2018, respectively)

i 1,270.8

i 1,186.1

i 868.5

Operating expenses:

Cost of services

i 1,021.1

i 987.8

i 770.6

Selling, general and administrative

i 102.4

i 104.4

i 97.9

Other

i 67.3

i 36.2

i 30.4

Total operating expenses

i 1,190.8

i 1,128.4

i 898.9

Income (loss) from operations

i 80.0

i 57.7

( i 30.4)

Gain on business disposition

i 55.7

i —

Loss on debt extinguishment

i —

( i 18.8)

i —

Net interest expense

( i 17.3)

( i 29.1)

( i 26.3)

Income (loss) before income tax provision (benefit)

i 118.4

i 9.8

( i 56.7)

Income tax provision (benefit)

i 1.3

( i 2.2)

( i 11.4)

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Net income (loss) per common share:

Basic

i 0.41

( i 0.08)

( i 0.60)

Diluted

i 0.33

( i 0.08)

( i 0.60)

Weighted average shares used in calculating net income (loss) per common share:

Basic

i 115,729,645

i 111,505,993

i 108,175,159

Diluted

i 174,573,270

i 111,505,993

i 108,175,159

Consolidated statements of comprehensive income (loss)

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Other comprehensive loss:

Net change on derivatives designated as cash flow hedges, net of tax

( i 1.7)

( i 0.2)

i 0.5

Foreign currency translation adjustments

( i 0.3)

( i 0.8)

( i 2.4)

Comprehensive income (loss)

i 115.1

i 11.0

( i 47.2)

Basic:

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Less dividends on preferred shares

( i 22.4)

( i 20.7)

( i 19.1)

Less income allocated to preferred shareholders

( i 47.3)

i —

Net income (loss) available/allocated to common shareholders - basic

i 47.4

( i 8.7)

( i 64.4)

Diluted:

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Less dividends on preferred shares

( i 22.4)

( i 20.7)

( i 19.1)

Less income allocated to preferred shareholders

( i 37.7)

i —

Net income (loss) available/allocated to common shareholders - diluted

i 57.0

( i 8.7)

( i 64.4)

See accompanying notes to consolidated financial statements.

F-6

R1 RCM Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(In millions, except per share data)

Common Stock

Treasury Stock

Additional
Paid-In
Capital

Accumulated
Deficit

Accumulated
other
comprehensive
(loss)

Total

Amount

Balance at December 31, 2017

i 116,650,388

i 1.2

( i 12,240,427)

( i 59.6)

i 337.9

( i 244.5)

( i 1.6)

i 33.4

Share-based compensation expense

—

i 17.4

—

i 17.4

Reclassification of equity award

—

i 1.3

—

i 1.3

Issuance of common stock related to share-based compensation plans

i 323,964

—

Issuance of common stock and stock warrants

i 4,665,594

—

i 19.2

—

i 19.2

Exercise of vested stock options

i 1,713,710

—

i 4.3

—

i 4.3

Dividends paid/accrued on preferred stock

—

( i 19.1)

—

( i 19.1)

Acquisition of treasury stock related to equity award plans

—

( i 499,069)

( i 3.0)

—

( i 3.0)

Forfeitures

—

( i 72,259)

—

Net change on derivatives designated as cash flow hedges, net of tax of $ i 0.2

—

i 0.5

Foreign currency translation adjustments

—

( i 2.4)

Net (loss) income

—

( i 45.3)

—

( i 45.3)

Balance at December 31, 2018

i 123,353,656

i 1.2

( i 12,811,755)

( i 62.6)

i 361.0

( i 289.8)

( i 3.5)

i 6.3

Share-based compensation expense

—

i 18.8

—

i 18.8

Issuance of common stock related to share-based compensation plans

i 1,812,993

—

Exercise of vested stock options

i 2,640,897

i 0.1

—

i 13.6

—

i 13.7

Dividends paid/accrued on preferred stock

—

( i 20.7)

—

( i 20.7)

Acquisition of treasury stock related to equity award plans

—

( i 973,303)

( i 11.0)

—

( i 11.0)

Forfeitures

—

( i 1,208)

—

Net change on derivatives designated as cash flow hedges, net of tax of $ i 0.1

—

( i 0.2)

Foreign currency translation adjustment

—

( i 0.8)

Net (loss) income

—

i 12.0

—

i 12.0

Balance at December 31, 2019

i 127,807,546

i 1.3

( i 13,786,266)

( i 73.6)

i 372.7

( i 277.8)

( i 4.5)

i 18.1

Impact of credit-loss standard adoption, net of tax of $ i 0.3

—

( i 0.8)

—

( i 0.8)

Adjusted balance at January 1, 2020

i 127,807,546

i 1.3

( i 13,786,266)

( i 73.6)

i 372.7

( i 278.6)

( i 4.5)

i 17.3

Share-based compensation expense

—

i 24.2

—

i 24.2

Issuance of common stock related to share-based compensation plans

i 6,848,859

i 0.1

—

( i 0.1)

—

i —

Exercise of vested stock options

i 3,156,154

—

i 19.3

—

i 19.3

Dividends paid/accrued on preferred stock

—

( i 22.4)

—

( i 22.4)

Acquisition of treasury stock related to equity award plans

—

( i 2,882,255)

( i 65.6)

—

( i 65.6)

Net change on derivatives designated as cash flow hedges, net of tax of $ i 0.6

—

( i 1.7)

Foreign currency translation adjustment

—

( i 0.3)

Net (loss) income

—

i 117.1

—

i 117.1

Balance at December 31, 2020

i 137,812,559

i 1.4

( i 16,668,521)

( i 139.2)

i 393.7

( i 161.5)

( i 6.5)

i 87.9

See accompanying notes to consolidated financial statements.

F-7

R1 RCM Inc.

Consolidated Statements of Cash Flows

(In millions)

Year Ended December 31,

2020

2019

2018

Operating activities

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Adjustments to reconcile net income (loss) to net cash provided by operations:

Depreciation and amortization

i 68.7

i 55.7

i 38.8

Amortization of debt issuance costs

i 1.0

i 1.6

i 1.5

Share-based compensation

i 24.1

i 18.6

i 18.4

Gain on sale of Emergency Medical Services business

( i 55.7)

i —

Loss on disposal and right-of-use asset write-downs

i 17.0

i 0.1

i 0.4

Loss on debt extinguishment

i —

i 18.8

i —

Provision for credit losses

i 0.6

i 2.9

i 0.8

Deferred income taxes

( i 1.2)

( i 5.1)

( i 14.0)

Non-cash lease expense

i 7.3

i 11.4

i —

Change in value of contingent consideration

i 4.7

i —

Changes in operating assets and liabilities:

Accounts receivable and related party accounts receivable

( i 56.5)

i 11.5

( i 39.1)

Prepaid expenses and other assets

( i 12.9)

( i 17.9)

( i 17.0)

Accounts payable

( i 3.4)

i 9.9

( i 3.0)

Accrued compensation and benefits

( i 40.3)

i 18.2

i 31.9

Lease liabilities

( i 13.6)

( i 11.8)

i —

Other liabilities

i 25.3

i 4.8

i 9.8

Customer liabilities and customer liabilities - related party

( i 20.4)

( i 16.8)

i 35.1

Net cash provided by operating activities

i 61.8

i 113.9

i 18.3

Investing activities

Purchases of property, equipment, and software

( i 49.3)

( i 61.0)

( i 33.5)

Acquisition of SCI, net of cash acquired and earn-out provision

( i 191.0)

i —

Acquisition of RevWorks, net of contingent consideration

( i 5.0)

i —

Acquisition of Intermedix Holdings, Inc., net of cash acquired

i —

( i 462.8)

Proceeds from sale of Emergency Medical Services business, net of cash disposed

i 128.3

i —

Net cash used in investing activities

( i 117.0)

( i 61.0)

( i 496.3)

Financing activities

Issuance of senior secured debt, net of discount and issuance costs

i 190.6

i 321.8

i 253.1

Issuance of subordinated notes, net of discount and issuance costs

i —

i 105.5

Borrowings on revolver

i 50.0

i 60.0

i —

Payment of debt issuance costs related to the Senior Revolver

i —

( i 0.4)

Repayment of senior secured debt

( i 23.4)

( i 276.8)

( i 1.3)

Repayment of subordinated notes and prepayment penalty

i —

( i 112.2)

i —

Repayments on revolver

( i 20.0)

i —

Issuance of common stock and stock warrants, net of issuance costs

i —

i 19.2

Exercise of vested stock options

i 18.4

i 13.7

i 4.3

Shares withheld for taxes

( i 71.9)

( i 11.0)

( i 3.0)

Finance lease payments

( i 0.8)

i —

Other

( i 5.0)

i —

Net cash provided by (used in) financing activities

i 137.9

( i 25.3)

i 377.4

Effect of exchange rate changes in cash

( i 0.4)

( i 0.2)

( i 0.7)

Net increase (decrease) in cash, cash equivalents, and restricted cash

i 82.3

i 27.4

( i 101.3)

Cash, cash equivalents, and restricted cash at beginning of period

i 92.5

i 65.1

i 166.4

Cash, cash equivalents, and restricted cash at end of period

i 174.8

i 92.5

i 65.1

Supplemental disclosures of cash flow information

Accrued dividends payable to Preferred Stockholders

i 5.8

i 5.3

i 4.9

Accrued and other liabilities related to purchases of property, equipment and software

i 8.1

i 20.6

i 19.6

Accounts payable related to purchases of property, equipment and software

i 2.9

i 1.2

i 0.9

Interest paid

i 15.8

i 26.5

i 23.4

Income taxes paid

i 4.2

i 4.0

i 3.3

Income taxes refunded

i 0.4

i 0.2

i 0.5

See accompanying notes to consolidated financial statements.

F-8

R1 RCM Inc.

Notes to Consolidated Financial Statements

1. i Description of Business

R1 RCM Inc. (the “Company”) is a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for its customers.

The Company achieves these results for its customers by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections from patients and payers. The Company does so by deploying a unique operating model that leverages its extensive healthcare site experience, innovative technology, and process excellence. The Company assists its Revenue Cycle Management (“RCM”) customers in managing their revenue cycle operating costs while simultaneously increasing the portion of the maximum potential services revenue they receive. Together, these benefits can generate significant and sustainable improvements in operating margins and cash flows for the Company's customers.

The Company's primary service offering consists of end-to-end RCM services for health systems, hospitals, and physician groups, which the Company deploys through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, the Company provides comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions, and process workflow. Under a co-managed relationship, the Company leverages its customers’ existing RCM staff and processes, and supplement them with the Company's infused management, subject matter specialists, proprietary technology solutions, and other resources. Under the operating partner model, the Company records higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are employees of the Company and more third-party vendor contracts are controlled by the Company. Under the co-managed model, the majority of the revenue cycle personnel and more third-party vendor contracts remain with the customer and those costs are netted against the Company's co-managed revenue. For the years ended December 31, 2020, 2019, and 2018, substantially all of the Company's net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.

The Company also offers modular services, allowing customers to engage the Company for only specific components of its end-to-end RCM service offering, such as physician advisory services (“PAS”), practice management (“PM”), revenue integrity services (“RIS”), patient experience (“PX”), coding management, and business office. The Company's 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. The Company's PM services offer administrative and operational support to allow healthcare providers to focus on delivering high quality patient care and outsource non-core functions to the Company. The Company's RIS offering includes charge capture, charge description master (“CDM”) maintenance, and pricing services that help providers ensure they are capturing the maximum net compliant revenue for services delivered. The Company's PX 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. The Company's 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. The Company's business office service can help providers with the entire billing function or to specifically recoup revenue that may otherwise be lost by focusing skilled resources in lower priority areas with significant revenue potential.

Once implemented, the Company's technology solutions, processes and services are deeply embedded in its customers’ day-to-day revenue cycle operations. The Company believes its service offerings are adaptable to meet an evolving healthcare regulatory environment, technology standards and market trends.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

Ascension

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

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 5, Acquisitions for additional details.

RevWorks Acquisition

On August 3, 2020, the Company completed the acquisition of the RevWorks services business pursuant to an asset purchase agreement dated as of June 2, 2020 (the “RevWorks Purchase Agreement”) by and among the Company and Cerner Corporation (the “RevWorks Acquisition”). At the closing of the transaction, the Company purchased certain assets relating to the RevWorks services business, as specified in the RevWorks Purchase Agreement. The combination of R1 and RevWorks is expected to provide enhanced revenue cycle capabilities and expertise to RevWorks clients, helping drive sustainable financial improvements for providers while improving their patients’ overall experience. Refer to Note 5, Acquisitions for additional details.

EMS Disposition

As part of our portfolio analysis and strategic initiatives, the Company disposed the emergency medical services (“EMS”) business on October 30, 2020 for $ i 140 million, inclusive of a $ i 5 million hold-back amount subject to the completion of certain transition services, to be paid approximately i one year from the date of the disposition. The total sale price net of costs to sell was $ i 132.7 million, and is subject to finalization of customary adjustments for working capital, indebtedness, cash, and transaction expenses. R1 allocated goodwill to the disposed business based on the relative fair value methodology. The total goodwill allocated to the EMS Disposition was $ i 7.1 million. The gain recognized on the EMS Disposition was $ i 55.7 million.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

2. i Summary of Significant Accounting Policies

i Basis of Presentation

The consolidated financial statements include the assets, liabilities and results of operations of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with the United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results can differ from those estimates.

i Segments

Reporting segments are identified as components of an enterprise about which separate discrete financial information is available and is evaluated by the chief operating decision maker, or decision-making group, relating to resource allocation and performance assessments. All of the Company’s significant operations are organized around the single business of providing revenue cycle operations for healthcare providers. The Company views its operations and manages its business as i i one / operating and reportable segment.

Revenue Recognition

Revenue Cycle Management

Net Operating Fees

The Company’s net operating fees consist of:

i) gross base fees invoiced to customers; less

iii) fees accrued for physician group RCM services.

The Company recognizes revenue related to net operating fees ratably as the performance obligation for the RCM services is satisfied. Base fees are typically billed in advance of the quarter and paid in i three monthly payments as the entity performs and the customer simultaneously receives and consumes the benefits of the services provided. The costs of customers’ revenue cycle operations, which the Company pays pursuant to its RCM agreements, are accrued based on the service period. Net operating fees for physician groups are invoiced on a monthly basis and payment terms are typically 30 days.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

Incentive Fees

Other

The Company recognizes revenue related to other RCM fees as RCM services are provided. These services consist of an obligation to provide a specific component of its end-to-end RCM service offering. Fees are typically variable in nature with the entire amount being included in revenue in the month of service. The customer simultaneously receives and consumes the benefits provided by the services and the fees are typically billed on a monthly basis and payment terms are typically 30 days. To the extent that certain service fees are fixed and not subject to refund, adjustment, or concession, these fees are generally recognized into revenue ratably as the performance obligation is satisfied.

Bundled Services

Modular RCM services may be sold separately or bundled in a contract. End-to-end RCM services are typically sold separately but may be bundled with PAS. PAS are commonly sold separately. The typical length of an end-to-end RCM contract is two to i ten years (subject to the parties' respective termination rights) but varies from customer to customer. Modular RCM agreements generally vary in length between one and i three years.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

Cost of Services

Costs associated with generating the Company’s net services revenue, including the cost of operating its global business services centers, are expensed as incurred, with the exception of deferred contract costs, which are discussed further in Note 22. Cost of services consist of (i) on-site personnel and technology costs, (ii) global business services costs, and (iii) other costs. On-site personnel and technology costs consist primarily of wages, bonuses, benefits, share-based compensation, travel, and other costs associated with employees who are assigned to customer sites to help manage the Company’s customers’ revenue cycle operations. The other significant portion of such expenses is an allocation of the costs associated with maintaining, improving, and deploying our integrated proprietary technology suite. Global business services costs relate to the Company’s global business services centers in the U.S. and internationally that perform patient scheduling and pre-registration, medical transcription, cash posting, reconciliation of payments to billing records, patient follow-up, and Medicaid eligibility determination for our customers. The Company incurs expenses related to salaries and benefits for employees in its global business services centers and non-payroll costs associated with operating its global business services centers. Other expenses consist of costs related to managing other services. These expenses consist primarily of wages, bonuses, benefits, share-based compensation, and facilities costs.

Comprehensive Income (Loss)

Comprehensive income (loss) is the net income (loss) of the Company combined with other changes in stockholders’ equity (deficit) not involving ownership interest changes. For the Company, such changes are foreign currency translation adjustments and changes in derivatives designated as cash flow hedges.

i Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

i Restricted Cash Equivalents

In 2020 and 2019, restricted cash equivalents represent the amount of cash or certificate of deposits (“CDs”) that the Company is unable to access for operational purposes as it collateralizes certain Company expenses or derivatives.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable is comprised of unpaid balances pertaining to modular services and end-to-end RCM services, 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 practice management customers. 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.

Property, Equipment and Software

Property, equipment and software are stated at cost, and related depreciation and amortization are calculated on the straight-line method over the estimated useful lives of the assets.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

The Company capitalizes qualifying internal and third-party costs and hardware and software costs related to the Company’s software development activities in accordance with ASC 350-40. The Company amortizes the capitalized software development costs over their estimated life on a straight-line basis.

The major classifications of property, equipment and software and their expected useful lives are as follows:


Buildings and land						i 30 to i 42 years and indefinite
Computers and other equipment						i 3 to i 5 years
Leasehold improvements						Shorter of i 10 years or lease term
Office furniture						i 5 years
Software						i 3 to i 5 years

i Goodwill

Goodwill represents the difference between the purchase price of acquired companies and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. The Company annually tests goodwill for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value. The goodwill impairment test consists of a qualitative assessment of impairment indicators, followed by, if necessary, a quantitative assessment comparing the carrying amount to the reporting unit's fair value. To the extent that the carrying value exceeds the fair value, and impairment charge would be recorded. The Company has determined there to be i one reporting unit, consistent with its single operating and reportable segment. As part of its annual impairment analysis, the Company performed a qualitative assessment and determined there was i no impairment of goodwill for the year ended December 31, 2020.

i Impairment of Long-Lived Assets

Property, equipment, software, right-of-use (“ROU”) assets, deferred contract costs, and other acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If circumstances require a long-lived asset or asset group be reviewed for possible impairment, the Company first compares undiscounted cash flows expected to be generated by each asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying value exceeds the fair value. There was i i i i i i no / / / / / material impairment of property, equipment, software, deferred contract costs, or other acquired intangible assets for the years ended December 31, 2020, 2019, and 2018. For the year ended December 31, 2020, we impaired ROU assets related to leased facilities which we exited. See Note 16. Other for more information. For the year ended December 31, 2019, there was i no material impairment of ROU assets.

i Accrued Compensation and Benefits

Accrued compensation and benefits consists of accrued payroll, bonus, paid time off, health benefits, severance, and compensation and benefits related taxes. Deferred FICA taxes are split between accrued compensation and benefits and other non-current liabilities based on their due date.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using current tax laws and enacted tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance for deferred tax assets if, based upon the weight of all available evidence, both positive and negative, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the relevant tax authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest amount of benefit that has a greater than 50% percent likelihood of being realized upon ultimate settlement. Interest and penalties relating to income taxes are recognized in our income tax provision in the consolidated statements of operations and comprehensive income (loss).

Legal and Other Contingencies

In the normal course of business, the Company is subject to regulatory investigations or legal proceedings, as well as demands, claims and threatened litigation. The Company records an estimated loss for any claim, lawsuit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability and whether the loss can be reasonably estimated. Actual expenses could differ from such estimates.

Foreign Currency Translation and Transaction Gains (Losses)

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where such local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at average exchange rates during the year which approximates the rates in effect at the transaction dates. The resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss).

Share-Based Compensation Expense

The Company determines the expense for all employee share-based compensation awards by estimating their fair value and recognizing such value as an expense, on a ratable basis, in the consolidated financial statements over the requisite service period in which the employees earn the awards. Performance based stock awards are recognized in expense when the performance metrics are probable to be achieved. Changes in the estimate of achievement of the performance metrics are recognized in the period of the change through a cumulative catch-up. The Company assesses the performance metrics in its awards on a quarterly basis to determine if a cumulative catch-up is necessary. The fair value of stock options is calculated using the Black-Scholes option pricing model and, for market condition stock awards, the fair value is estimated using Monte Carlo simulations.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

To determine the fair value of a share-based award using the Black-Scholes option pricing model, the Company makes assumptions regarding the risk-free interest rate, expected future volatility and expected life of the award. These inputs are subjective and generally require significant analysis and judgment to develop. The Company aggregates all employees into one pool based on the grant date for valuation purposes. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company estimates the expected volatility of the share price by reviewing the historical volatility levels of its 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 then projecting this information toward its future expected volatility. The Company exercises judgment in selecting these companies, as well as in evaluating the available historical and implied volatility for these companies. The Company calculates the expected term in years for each stock option using a simplified method based on the average of each option’s vesting term and original contractual term. 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.

To determine the fair value of a share-based award using Monte Carlo simulations, the Company makes assumptions regarding the risk-free interest rate, expected future volatility, expected dividend yield and performance period. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company estimates the expected volatility of the share price by reviewing the historical volatility levels of its 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 then projecting this information toward its future expected volatility. Dividend yield is determined based on the Company’s future plans to pay dividends. The Company had no plans to pay dividends at December 31, 2020. The Company calculates the performance period based on the specific market condition to be achieved and derived from historical data and estimates of future performance.

The Company recognizes compensation expense using a straight-line method over the applicable service or performance period. During each quarter, the share-based compensation expense is adjusted to reflect forfeitures during the period; however, compensation expense already recognized is not adjusted if market conditions are not met.

Derivative Financial Instruments

The Company is actively managing the risk of changes in foreign currency exchange rates and change in interest rates through foreign currency forward contracts and interest rate swap contracts traded in over-the-counter markets governed by International Swaps and Derivatives Association, Inc. (ISDA) agreements. Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored using techniques such as market value and sensitivity analyses. The Company does not enter into derivative transactions for trading purposes.

In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a cash flow hedge by documenting the relationship between the derivative and the hedged item. The documentation includes a description of the hedging instrument, the hedged item, the risk being hedged, the Company’s risk management objective and strategy for undertaking the hedge, and the method for assessing the effectiveness of the hedge. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in the cash flows of the hedged item at both inception of the hedge and on an ongoing basis. Prospective and retrospective hedge effectiveness will be assessed by a comparison of the critical terms of the hedging instrument and the hedged transaction. In the event that the Company’s ongoing assessment demonstrates that the critical terms of the hedging instrument or the hedged transaction have changed and no longer match, hedge effectiveness is assessed by use of a Hypothetical Derivative Method, which assesses hedge effectiveness based on a comparison of the change in fair value of the actual derivative designated as the hedging instrument and the change in fair value of a perfectly effective hypothetical derivative. The perfectly effective hypothetical derivative would have terms that identically match the critical terms of the hedged item.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

The Company’s derivative financial instruments consist of non-deliverable foreign currency forward contracts and interest rate swaps. 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. The change in fair value of a hedging instrument is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is reclassified into either cost of services or interest expense in the consolidated statement of operations and comprehensive income (loss) during the period in which the hedged transaction impacts earnings.

Treasury Stock

The Company records treasury stock at the cost to acquire such shares, including commissions paid to brokers. Treasury stock is included as a component of stockholders’ equity.

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 (as defined in Note 14) 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 year ended December 31, 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 restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance-based restricted stock units (“PBRSUs”), and shares issuable upon conversion of preferred stock.

3. i Recent Accounting Pronouncements

i 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 $ i i 1.1 / million and a corresponding impact to retained earnings and deferred tax assets.

4. i i Fair Value of Financial Instruments /

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

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R1 RCM Inc.

Notes to Consolidated Financial Statements

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

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

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

The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other accrued expenses, approximate their fair values, due to the short-term nature of these instruments. See Note 24, 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 revolver and term loan (see Note 13, Debt) approximates fair value as they are variable rate bank debt.

Other than the items discussed above, the Company does i i no / t have any financial assets or liabilities that are required to be measured at fair value on a recurring basis.

5. i Acquisitions

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 $ i 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 13, Debt). The purchase price has been provisionally allocated, on a preliminary basis, to assets acquired and liabilities assumed based on their established fair values as of the acquisition date. The fair value estimate of assets acquired and liabilities assumed is pending the finalization of deferred tax assets and liabilities. Accordingly, there could be adjustments to the consolidated financial statements, including changes to goodwill although these are not currently expected to be material.

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

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R1 RCM Inc.

Notes to Consolidated Financial Statements



	Purchase Price Allocation
Total purchase consideration	$	i 196.7

Allocation of consideration to assets acquired and liabilities assumed:
Cash and cash equivalents	$	i 2.9
Accounts receivable	i 2.8
Prepaid expenses and other current assets	i 1.1
Property, equipment and software	i 0.3
Operating lease right-of-use assets	i 1.2
Intangible assets	i 86.1
Goodwill	i 125.6
Accounts payable	( i 0.2)
Current portion of customer liabilities	( i 4.0)
Accrued compensation and benefits	( i 1.6)
Current portion of operating lease liabilities	( i 0.5)
Other accrued expenses	( i 0.4)
Non-current portion of operating lease liabilities	( i 0.7)
Other non-current liabilities	( i 5.0)
Deferred income tax liabilities	( i 10.9)
Net assets acquired	$	i 196.7

Other non-current liabilities contained a note payable for $ i 5 million. The Company repaid this note in the second quarter of 2020.

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.

The purchase price includes an earn-out provision, which is dependent on achieving certain revenue and operational targets in the year following the acquisition. Based on projections at the time of acquisition, the earn-out was valued at $ i 4.8 million. However, because the contractual obligation is binary, the actual payment will be either $ i 10 million or $ i 0. Adjustments to the earn-out based on information obtained subsequent to the acquisition are recorded through the income statement. As of December 31, 2020, the Company updated the earn-out value to $ i 9.5 million, with the change being recorded as a component of other expenses.

Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020 are net sales of $ i 20.7 million and net loss before income taxes of $ i 6.9 million related to the operations of SCI since the acquisition date of April 1, 2020.

RevWorks

On August 3, 2020, the Company completed the acquisition of RevWorks. The RevWorks Acquisition has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect estimated fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the RevWorks Acquisition.

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R1 RCM Inc.

Notes to Consolidated Financial Statements

The $ i 30.0 million purchase consideration for the RevWorks Acquisition (inclusive of working capital) consisted of a $ i 5.0 million payment at closing and i two deferred payments, each of $ i i 12.5 / million and totaling $ i 25.0 million, which are due and payable on the first and second anniversary of the closing date. The i two deferred payments are contractual obligations of the Company; however, they are potentially effectively refundable to the Company contingent on the achievement of certain pre-existing customer revenue targets for the RevWorks business that were agreed in the purchase agreement. If such targets are not achieved, this will result in Cerner Corporation (“Cerner”) returning to the Company up to $ i 25.0 million. At the time of the acquisition, the Company recorded a present value liability for the contractual deferred payments of $ i 24.3 million, and recorded an asset for the contingently returnable consideration of $ i 22.3 million, including $ i 11.5 million in prepaid expenses and other current assets and $ i 10.8 million in other assets on the Consolidated Balance Sheets, which is measured at fair value. The Company reviewed the balances at December 31, 2020 and determined the fair value remained the same.

The assets acquired in the RevWorks Acquisition consist primarily of customer relationships of approximately $ i 2.8 million and fixed assets. There were no significant pre-closing liabilities of the RevWorks business included in the RevWorks Acquisition. 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 goodwill recognized of approximately $ i 3.6 million is primarily attributable to synergies that are expected to be achieved from the integration of RevWorks.

Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020 are net sales of $ i 26.8 million and net income before income taxes of $ i 0.5 million related to the operations of RevWorks since the acquisition date of August 3, 2020.

Pro Forma Results (Unaudited)

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


	Year Ended December 31,
	2020		2019
Net services revenue	$	i 1,320.9	$	i 1,297.7
Net income (loss)	$	i 115.7	$	( i 1.6)

Supplemental pro-forma earnings were adjusted to exclude $ i 6.0 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.

6. i Accounts Receivable and Allowance for Credit Losses

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

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R1 RCM Inc.

Notes to Consolidated Financial Statements

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

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

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


	Year Ended December 31,
	2020		2019
Beginning balance	$	i 2.8	$	i 1.1
Cumulative effect of ASC 326 adoption	i 1.1		—
Provision (recoveries)	i 0.6		i 3.1
EMS Disposition	( i 0.6)		i —
Write-offs	( i 0.1)		( i 1.4)
Ending balance	$	i 3.8	$	i 2.8

7. i Property, Equipment and Software

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

Buildings and land

i 4.6

Computer and other equipment

i 55.0

i 50.7

Leasehold improvements

i 23.2

i 31.1

Software

i 135.7

i 123.0

Office furniture

i 6.4

i 9.4

Property, equipment and software, gross

i 224.9

i 218.8

Less accumulated depreciation and amortization

( i 131.2)

( i 101.9)

Property, equipment and software, net

i 93.7

i 116.9

Property, equipment and software, net, located internationally was $ i 17.1 million and $ i 14.8 million as of December 31, 2020 and 2019, respectively. The remaining property, equipment and software was located in the U.S.

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

F-21

R1 RCM Inc.

Notes to Consolidated Financial Statements


	Year Ended December 31,
	2020		2019		2018
Cost of services	$	i 46.6	$	i 37.8	$	i 23.9
Selling, general and administrative	i 4.0		i 4.0		i 4.3
Total depreciation and amortization	$	i 50.6	$	i 41.8	$	i 28.2

8. i i Leases /

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

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

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

The Company has operating and finance leases for corporate offices, operational facilities, global business services centers, and certain equipment. Leases have remaining lease terms of up to i i 13 / years, some of which include options to extend the leases for up to i i 10 / years. In circumstances where there are significant foreign tax incentives, the Company has determined it to be reasonably certain to exercise the renewal options. The Company subleases certain office spaces to third parties.

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

Year Ended December 31,

2020

2019

Operating lease cost

i 18.2

i 19.1

Finance lease cost:

Amortization of ROU assets

i 0.4

i 0.8

Interest on lease liabilities

i 0.1

Sublease income

( i 2.2)

Total lease cost

i 16.5

i 17.8

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

F-22

R1 RCM Inc.

Notes to Consolidated Financial Statements

Year Ended December 31,

2020

2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

i 20.7

i 18.7

Operating cash flows for finance leases

i 0.1

Financing cash flows for finance leases

i 0.8

ROU assets obtained in exchange for lease obligations:

Operating leases

i 3.3

i 17.3

Finance leases

i —

i 0.7

The Company presents all non-cash transactions related to adjustments to the lease liability or ROU 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:

Weighted average remaining lease term:

Operating leases

i 7 years

i 8 years

Finance leases

i 2 years

Weighted average incremental borrowing rate:

Operating leases

i 8.94

i 8.84

Finance leases

i 6.62

i 6.45

i i

Maturities of lease liabilities as of December 31, 2020 are as follows (in millions):

Operating Leases

Finance Leases

2021

i 18.7

i 0.5

2022

i 16.1

i 0.1

2023

i 15.3

i —

2024

i 15.0

i —

2025

i 14.8

i —

Thereafter

i 34.0

i —

Total

i 113.9

i 0.6

Less:

Imputed interest

i 30.7

i —

Present value of lease liabilities

i 83.2

i 0.6

/ /

9. i Intangible Assets

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

F-23

R1 RCM Inc.

Notes to Consolidated Financial Statements

Gross Carrying Value

Accumulated Amortization

Net Book Value

Gross Carrying Value

Accumulated Amortization

Net Book Value

Customer relationships

i 97.7

( i 14.7)

i 83.0

i 160.9

( i 15.6)

i 145.3

Technology

i 101.7

( i 13.6)

i 88.1

i 26.8

( i 7.4)

i 19.4

Total intangible assets

i 199.4

( i 28.3)

i 171.1

i 187.7

( i 23.0)

i 164.7

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

i 10 years

i 5.6

Technology

i 10 years

i 85.3

The fair value of the identifiable intangible assets was derived utilizing an income approach to derive the present value of future cash flows from developed technology and customer relationships.

Intangible asset amortization expense was $ i 18.1 million and $ i 13.9 million for the year ended December 31, 2020 and 2019, respectively.

Estimated annual amortization expense related to intangible assets with definite lives as of December 31, 2020 is as follows (in millions):


2021	$	i 17.3
2022	i 17.3
2023	i 17.3
2024	i 15.5
2025	i 14.5
Thereafter	i 89.2
Total	$	i 171.1

10. i Goodwill

Changes in the carrying amount of goodwill for the year ended December 31, 2020 were (in millions):


	Goodwill
Balance as of December 31, 2019	$	i 253.2
Acquisitions	i 129.2
EMS Disposition	( i 7.1)
Balance as of December 31, 2020	$	i 375.3

There was i i no / impairment of goodwill in 2020 and 2019.

F-24

R1 RCM Inc.

Notes to Consolidated Financial Statements

11. i Revenue Recognition

Disaggregation of Revenue

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

Year Ended December 31,

2020

2019

2018

Net operating fees

i 1,093.8

i 1,037.4

i 760.2

Incentive fees

i 70.6

i 56.2

i 38.3

Other

i 106.4

i 92.5

i 70.0

Net services revenue

i 1,270.8

i 1,186.1

i 868.5

Contract Balances

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


	December 31, 2020		December 31, 2019
Receivables (1)	$	i 122.2	$	i 83.1
Contract assets (2)	i —		i 2.0
Contract liabilities (2)	i 28.6		i 25.3

(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 $ i 5.6 million and $ i 4.2 million of current customer liabilities and $ i 16.3 million and $ i 18.6 million of non-current customer liabilities for the year ended December 31, 2020 and 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 $ i 91.6 million and $ i 69.7 million during the year ended December 31, 2020 and 2019, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $ i 85.0 million and $ i 66.7 million for the year ended December 31, 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

i 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.

F-25

R1 RCM Inc.

Notes to Consolidated Financial Statements

Net operating fees

Incentive fees

Other

2021

i 112.6

i 4.1

i 3.7

2022

i 62.3

i 17.6

i 5.7

2023

i 48.0

i —

i 5.7

2024

i 27.5

i —

i 5.7

2025

i 18.3

i —

i 2.9

Thereafter

i 12.7

i —

Total

i 281.4

i 21.7

i 23.7

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

Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services within the Company's PAS contracts that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.

The Company does not disclose information about remaining performance obligations with an original expected duration of one year or less. The Company has elected certain of the optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies a practical expedient to its modular RCM services and does not disclose information about variable consideration from remaining performance obligations when the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance completed to date. PAS performance obligations are typically short in duration (often less than 1 day) with any uncertainty related to the associated variable consideration resolved as each increment of service (completion of a level of care review or an appeal) is completed which reflects the value the customer receives from the Company’s fulfillment of the performance obligation. Modular RCM services performance obligations for variable consideration are of short duration with fees corresponding to the value the customer has realized, for example, patient accounts collected on behalf of the customer or medical record lines transcribed.

For end-to-end RCM contracts, the Company does not disclose information about remaining, wholly unsatisfied performance obligations for variable consideration that the Company is able to allocate to one or more, but not all, of the performance obligations in its contracts. The Company’s end-to-end RCM services performance obligations are satisfied over time and are substantially the same from period to period under either a co-managed or operating partner model. Fees are variable and consist of net operating fees and incentive fees, with the uncertainty related to net operating fees and certain incentive fees being resolved quarterly, and with the uncertainty of other incentive fees being resolved annually. The information presented in the table above includes estimates for incentive fees where the uncertainty related to the final fee is resolved on longer than a quarterly basis and to the extent the Company does not believe the associated consideration is constrained.

12. i Customer Liabilities

Customer liabilities include (i) accrued service costs (amounts due and accrued for cost reimbursements), (ii) collections payable to clients (consisting primarily of amounts collected on behalf of the Company’s physician group customers to be remitted within twelve months), (iii) refund liabilities (amounts potentially due as a refund to the Company's customers on incentive fees), (iv) customer deposits (consisting of amounts due as a refund to the Company's customers on incentive fees) and (v) deferred revenue (contract liabilities) (fixed or variable fees amortized to revenue over the service period).

F-26

R1 RCM Inc.

Notes to Consolidated Financial Statements

Customer liabilities consist of the following (in millions):


	December 31, 2020		December 31, 2019
Accrued service costs, current	$	i 12.2	$	i 33.3
Collections payable to clients, current	i 4.6		i 5.4
Customer deposits, current	i —		i 1.7
Refund liabilities, current	i 2.9		i 1.0
Deferred revenue (contract liabilities), current	i 12.3		i 6.7
Current portion of customer liabilities (1)	i 32.0		i 48.1

Deferred revenue (contract liabilities), non-current	i 16.3		i 18.6
Non-current portion of customer liabilities (1)	i 16.3		i 18.6
Total customer liabilities	$	i 48.3	$	i 66.7

(1) Current and non-current portion of customer liabilities include amounts for a related party. See Note 21, Related Party Transactions, for further discussion.

13. i Debt

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

Senior Revolver

i 70.0

i 40.0

Senior Term Loan

i 484.6

i 316.9

Unamortized discount and issuance costs

( i 2.6)

( i 2.9)

Total debt

i 552.0

i 354.0

Less: Current maturities

( i 32.3)

( i 16.3)

Total long-term debt

i 519.7

i 337.7

Senior Secured Credit Facilities

On June 26, 2019, the Company and certain of its subsidiaries entered into a new senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for the new senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $ i 325.0 million senior secured term loan facility (the “Senior Term Loan”) issued at i 99.66% of par and a $ i 100.0 million senior secured revolving credit facility (the “Senior Revolver”). In conjunction with entering into the Credit Agreement, the Company repaid in full the credit agreement dated May 8, 2018, the subordinated notes issued under the Subordinated Note Purchase Agreement dated May 8, 2018, and terminated all commitments and discharged all guarantees related to those agreements. The Company evaluated separately the previous credit agreement, subordinated notes, and revolver for debt modification and extinguishment guidance as indicated in ASC 470. The Company deemed the refinancing to be an extinguishment of the old debt, leading to a write-off of the prior issuance costs and recognition of new issuance costs, with the exception of a portion of the revolver which remained with the same lender. The Company recognized a loss on debt extinguishment of $ i 18.8 million in the second quarter of 2019.

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 $ i 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.

F-27

R1 RCM Inc.

Notes to Consolidated Financial Statements

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 5, Acquisitions. 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.

On January 13, 2021, the Company entered into Amendment No. 2 and Waiver to Credit Agreement (the “Second Amendment”), pursuant to which the lenders agreed (i) to waive the Company’s obligation to use the $ i 135.0 million of net proceeds from the EMS Disposition for purposes of reinvestments in useful assets of the Company, or to prepay the loans under the Credit Agreement, as otherwise required by the terms of the Credit Agreement, (ii) to amend the restricted payments covenant to permit the Company to make additional cash payments to the Investor in an amount not to exceed $ i 105.0 million in connection with the preferred stock conversion (refer to Note 18. i 8.00% Series A Convertible Preferred Stock) and reduce the “Available Amount” from which the Company can make certain investments, debt prepayments, or restricted payments by $ i 105.0 million and (iii) that the excess cash flow sweep will begin with fiscal year ended December 31, 2021 instead of fiscal year ended December 31, 2020.

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

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

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of December 31, 2020, the Company had $ i 70.0 million in borrowings, i no letters of credit outstanding, and $ i 30.0 million of availability under the Senior Revolver.

F-28

R1 RCM Inc.

Notes to Consolidated Financial Statements

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 i 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus i 100 basis points, plus between i 0.75% and i 1.75% dependent on the Company's Net Leverage Ratio (as defined below) (provided that the Eurodollar rate applicable to the Senior Term Loan shall not be less than i 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Senior Term Loan shall not be less than i 0.00% per annum), plus between i 1.75% and i 2.75%, dependent on the Company's Net Leverage Ratio. The interest rate as of December 31, 2020 was i 2.40%. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between i 0.30% and i 0.50% of the average daily unutilized commitments thereunder dependent on the Company's net leverage ratio.

The Credit Agreement requires the Company to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year ended December 31, 2021, i 50% (which percentage will be reduced upon the Company’s achievement of certain total net leverage ratios) of the Company’s annual excess cash flow; (ii) i 100% of net cash proceeds of all non-ordinary course assets sales or other dispositions of property or casualty events, subject to certain exceptions and thresholds; and (iii) i 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Credit Agreement. The Company is required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of $ i 6.5 million through June 30, 2021, $ i 9.7 million through June 30, 2023, and $ i 12.9 million through March 31, 2024, with the balance payable at maturity.

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 December 31, 2020.

Debt Maturities

Scheduled maturities of the Company's long-term debt for each of the five years succeeding December 31, 2020 and thereafter are summarized as follows (in millions):


	Scheduled Maturities
2021	$	i 32.3
2022	i 38.7
2023	i 45.2
2024	i 438.4


Total	$	i 554.6

F-29

R1 RCM Inc.

Notes to Consolidated Financial Statements

14. i Stockholders’ Equity (Deficit)

Preferred Stock and Warrants

As of December 31, 2020 and December 31, 2019, the Company had i i 5,000,000 / shares of authorized preferred stock, each with a par value of $ i i 0.01 / . The preferred stock may be issued from time to time in one or more series. The board of directors of the Company (“Board”) is authorized to determine the rights, preferences, privileges, and restrictions of the Company’s authorized but unissued shares of preferred stock. On February 16, 2016, at the close of the Transaction, the Company issued to TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the “Investor”): (i) i 200,000 shares of its i 8.00% Series A Convertible Preferred Stock, par value $ i 0.01 per share (the “Series A Preferred Stock” or “Preferred Stock”), for an aggregate price of $ i 200 million and (ii) an exercisable warrant to acquire up to i 60 million shares of its common stock with an exercise price of $ i 3.50 per common share and a term of i ten years. The Series A Preferred Stock is immediately convertible into shares of common stock. As of December 31, 2020 and December 31, 2019, the Company had i 288,497 and i 266,529 shares of Series A Preferred Stock outstanding, respectively. The Series A Preferred Stock was converted to common stock on January 15, 2021. See Note 18, i 8.00% Series A Convertible Preferred Stock, for additional information.

On January 23, 2018, the Company issued an exercisable warrant to acquire up to i 1.5 million shares of its common stock with an exercise price of $ i 6.00 per common share to IHC Health Services, Inc (“Intermountain”).

As of December 31, 2020 and December 31, 2019, all of the Investor’s and Intermountain’s warrants were outstanding.

Common Stock

Each outstanding share of the Company's common stock, par value $ i 0.01 per share (“common stock”), is entitled to i one vote per share on all matters submitted to a vote by shareholders. Subject to the rights of any preferred stock which may from time to time be outstanding, the holders of outstanding shares of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive pro rata all assets legally available for distribution to stockholders. i i No / dividends were declared or paid on the common stock during 2020 or 2019.

Treasury Stock

On November 13, 2013, the Board authorized a repurchase of up to $ i 50.0 million of the Company’s common stock in the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time at the sole discretion of the Board. Any repurchased shares will be available for use in connection with the Company’s stock plans and for other corporate purposes. The Company funds the repurchases from cash on hand. During the years ended December 31, 2020 and December 31, 2019, i i no / shares were repurchased. i No shares have been retired. As of December 31, 2020 and 2019, the Company held in treasury i i 5,321,393 / shares of repurchased stock.

Treasury stock also includes repurchases of Company stock related to employees’ tax withholding upon vesting of restricted shares. For the years ended December 31, 2020 and 2019, the Company repurchased i 2,882,255 and i 973,303 shares related to employees’ tax withholding upon vesting of restricted shares, respectively. See Note 15, Share-Based Compensation, for additional information.

F-30

R1 RCM Inc.

Notes to Consolidated Financial Statements

15. i Share-Based Compensation

The Company maintains i two stock incentive plans: the Amended and Restated Stock Option Plan (the “2006 Plan”) and the Second Amended and Restated Stock 2010 Incentive Plan (the “2010 Amended Plan”, together with the 2006 Plan, the “Plans”). In December 2016, the Company's stockholders approved the Second Amended and Restated 2010 Stock Incentive Plan, which authorized the issuance of an additional i 17 million shares of the Company's common stock pursuant to awards.

Under the Plans, the Company is authorized to issue up to a maximum of i 46,374,756 shares of common stock. This number includes any shares that remained available for issuance under the 2006 Plan as of the date of the IPO and any shares subject to awards that were outstanding under the 2006 Plan as of the date of the IPO that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company without the issuance of shares thereunder. The Company will not make any further grants under the 2006 Plan. The 2010 Amended Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, RSAs, RSUs, and other share-based awards. As of December 31, 2020, i 5,028,242 shares were available for future grants of awards under the 2010 Amended Plan. To the extent that previously granted awards under the 2006 Plan or 2010 Amended Plan expire, terminate or are otherwise surrendered, canceled or forfeited, the number of shares available for future awards under the 2010 Amended Plan will increase.

Under the terms of the Plans, all stock options will expire if they are not exercised within i ten years of their grant date. Generally all employee options, RSAs and RSUs vest ratably between one and i four years.

For the years ended December 31, 2020, 2019, and 2018, the Company recognized $ i 37.3 million, $ i 8.2 million, and $ i 2.4 million, respectively, of income tax benefit from windfalls associated with vesting and exercises of equity awards

The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. The Company uses the Monte Carlo simulations 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 Company assesses current performance on performance-based PBRSU’s by reviewing historical performance to date, along with any adjustments which have been approved to the reported performance, and add on future projections to determine the probable outcome of the awards. The current estimates are then compared to the scoring metrics and any necessary adjustments are reflected in the current period to update share-based compensation expense to the current performance expectations.

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 during 2020, 2019, and 2018:

Year Ended December 31,

2020

2019

2018

Expected dividend yield

i —%

Risk-free interest rate

i 0.3% to i 1.7%

i 1.5% to i 2.5%

i 2.3% to i 3.0%

Expected volatility

i 43%

i 40% to i 45%

Expected term (in years)

i 5.5

i 2.0 to i 5.5

i 2.6 to i 6.3

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

F-31

R1 RCM Inc.

Notes to Consolidated Financial Statements

Year Ended December 31,

2020

2019

2018

Share-Based Compensation Expense Allocation Details:

Cost of services

i 9.9

i 6.1

i 5.8

Selling, general and administrative

i 14.1

i 12.3

i 12.4

Other

i 0.1

i 0.2

Total share-based compensation expense (1)

i 24.1

i 18.6

i 18.4

(1) In addition to the share-based compensation expense recorded above, $ i 0.1 million, $ i 0.2 million, and $ i 0.3 million of share-based compensation expense was capitalized to deferred contract costs for the year ended December 31, 2020, 2019, and 2018, respectively. See Note 22, Deferred Contract Costs, for further discussion.

Stock options

i The following table sets forth a summary of all option activity under all plans for the years ended December 31, 2020, 2019, and 2018:

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic Value
(in millions)

Outstanding at January 1, 2018

i 17,742,966

i 4.70

i 7.9

i 23.7

Granted

i 274,162

i 6.51

Exercised

( i 1,713,710)

i 2.54

Canceled/forfeited

( i 2,418,948)

i 2.60

Outstanding at December 31, 2018

i 13,884,470

i 5.36

i 6.6

i 49.2

Granted

i 52,986

i 10.06

Exercised

( i 2,640,897)

i 5.20

Canceled/forfeited

( i 612,299)

i 2.55

Expired

( i 3,920)

i 12.98

Outstanding at December 31, 2019

i 10,680,340

i 5.59

i 5.5

i 81.1

Granted

i 80,425

i 11.18

Exercised

( i 3,156,154)

i 6.13

Canceled/forfeited

( i 169,420)

i 3.32

Expired

( i 1,214,220)

i 14.62

Outstanding at December 31, 2020

i 6,220,971

i 3.68

i 5.7

i 126.5

Outstanding, vested and exercisable at December 31, 2018

i 7,712,264

i 7.37

i 5.4

i 17.7

Outstanding, vested and exercisable at December 31, 2019

i 7,868,280

i 6.57

i 4.9

i 52.5

Outstanding, vested and exercisable at December 31, 2020

i 5,230,690

i 3.73

i 5.5

i 106.2

The weighted-average grant date fair value of options granted during the years ended December 31, 2020, 2019, and 2018 was $ i 4.41, $ i 4.25, and $ i 3.01 per share, respectively. The total intrinsic value of the options exercised in the years ended December 31, 2020, 2019, and 2018 was $ i 30.5 million, $ i 16.4 million, and $ i 9.6 million, respectively. The total fair value of options vested during the years ended December 31, 2020, 2019, and 2018 was $ i 2.2 million, $ i 3.4 million, and $ i 4.2 million, respectively.

F-32

R1 RCM Inc.

Notes to Consolidated Financial Statements

Restricted stock awards

As of December 31, 2019, all RSAs had fully vested. i No new RSAs were granted in 2020. i The following table sets forth a summary of the activity during the years ended December 31, 2019 and 2018:

Weighted-
Average Grant
Date Fair Value

Outstanding and unvested at January 1, 2018

i 2,352,490

i 3.03

Vested

( i 1,184,687)

i 3.07

Forfeited

( i 72,259)

i 3.24

Outstanding and unvested at December 31, 2018

i 1,095,544

i 3.02

Vested

( i 1,094,336)

i 3.02

Forfeited

( i 1,208)

i 5.38

Outstanding and unvested at December 31, 2019

i —

The total fair value of RSAs vested during the years ended December 31, 2019, and 2018 was $ i 3.3 million and $ i 3.6 million, respectively. The Company’s RSA agreements allowed employees to deliver to the Company shares of stock upon vesting of their RSAs in lieu of their payment of the required personal employment-related taxes. The Company does not withhold taxes in excess of maximum required statutory requirements. During the years ended December 31, 2019, and 2018, employees delivered to the Company i 380,564 and i 404,466 shares of stock, respectively, which the Company recorded at a cost of approximately $ i 3.8 million and $ i 2.3 million, respectively.

Forfeited and canceled RSAs are added to treasury stock. For the years ended December 31, 2019, and 2018, i 1,208, and i 72,259 shares were added to treasury stock due to canceled RSAs, respectively.

Restricted stock units

The following table sets forth a summary of all RSU activity during the years ended December 31, 2020, 2019, and 2018:

Weighted-
Average Grant
Date Fair Value

Outstanding and unvested at January 1, 2018

i 1,183,500

i 2.50

Granted

i 441,849

i 7.99

Vested

( i 323,964)

i 2.48

Forfeited

( i 174,704)

i 3.49

Outstanding and unvested at December 31, 2018

i 1,126,681

i 4.50

Granted

i 830,668

i 10.60

Vested

( i 422,770)

i 4.07

Forfeited

( i 161,223)

i 7.00

Outstanding and unvested at December 31, 2019

i 1,373,356

i 8.03

Granted

i 1,588,120

i 10.29

Vested

( i 504,708)

i 6.74

Forfeited

( i 348,321)

i 9.09

Outstanding and unvested at December 31, 2020

i 2,108,447

i 9.87

F-33

R1 RCM Inc.

Notes to Consolidated Financial Statements

The Company's RSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSUs in lieu of their payment of the required personal employment-related taxes. During the years ended December 31, 2020, 2019, and 2018, employees delivered to the Company i 141,331, i 109,112, and i 94,603 shares of stock, respectively, which the Company recorded at a cost of approximately $ i 1.4 million, $ i 1.1 million, and $ i 0.7 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.

Performance-based restricted stock units

Outstanding PBRSUs issued prior to April 2019 vest upon satisfaction of both time-based requirements and market targets based on share price with certain awards vesting between December 31, 2021 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 i 0% and i 150% of the number of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 vest either in December 2021 or December 2022 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 i 0% and i 200% of the number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all outstanding PBRSUs is i 5,363,408.

A summary of the PBRSU activity during the years ended December 31, 2020, 2019, and 2018 is shown below:

Weighted-
Average Grant
Date Fair Value

Outstanding and unvested at January 1, 2018

i 4,785,900

i 3.37

Granted

i 1,472,677

i 6.12

Vested

i —

Forfeited

( i 1,648,129)

i 3.34

Outstanding and unvested at December 31, 2018

i 4,610,448

i 4.26

Granted

i 1,282,797

i 9.99

Performance factor adjustment

i 463,408

i 2.06

Vested

( i 1,390,223)

i 2.06

Forfeited

( i 846,994)

i 5.08

Outstanding and unvested at December 31, 2019

i 4,119,436

i 6.37

Granted

i 1,637,581

i 13.25

Performance factor adjustment

i 3,879,186

i 14.72

Vested

( i 6,344,151)

i 13.11

Forfeited

( i 374,981)

i 6.66

Outstanding and unvested at December 31, 2020

i 2,917,071

i 11.35

The Company’s PBRSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their PBRSUs in lieu of their payment of the required personal employment-related taxes. During the years ended December 31, 2020 and 2019, employees delivered to the Company i 2,740,924 and i 483,627 shares of stock, respectively, which the Company recorded at a cost of approximately $ i 64.2 million and $ i 6.1 million, respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.

F-34

R1 RCM Inc.

Notes to Consolidated Financial Statements

16. i Other expenses

For the year ended December 31, 2020, 2019, and 2018, other expenses consist of the following (in millions):

Year Ended December 31,

2020

2019

2018

Severance and related employee benefits

i 6.4

i 3.6

i 2.3

Strategic initiatives (1)

i 29.3

i 19.8

i 19.7

Transitioned employees restructuring expense (2)

( i 0.2)

i 3.0

i 4.3

Digital Transformation Office (3)

i —

i 8.6

i 3.6

Facility-exit charges (4)

i 17.5

( i 0.2)

i 0.1

Other (5)

i 14.3

i 1.4

i 0.4

Total other expenses

i 67.3

i 36.2

i 30.4

(1) Costs related to evaluating, pursuing, and integrating acquisitions, performing portfolio and capital structure 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, severance and retention amounts associated with integration activities, and changes to contingent consideration related to acquisitions. For the year ended December 31, 2020, $ i 4.7 million of contingent consideration changes were included.

(3) Project costs related to the Company's initial efforts to automate its transactional environment.

(5) For the year ended December 31, 2020, includes $ i 10.9 million of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs.

17. i Income Taxes

The domestic and foreign components of income (loss) before income taxes consist of the following (in millions):


	Year Ended December 31,
	2020		2019		2018
Domestic	$	i 99.4	$	i 5.0	$	( i 65.5)
Foreign	i 19.0		i 4.8		i 8.8
Total income (loss) before income taxes	$	i 118.4	$	i 9.8	$	( i 56.7)

i For the years ended December 31, 2020, 2019, and 2018, the Company’s current and deferred income tax expense (benefit) attributable to income (loss) from operations are as follows (in millions):

F-35

R1 RCM Inc.

Notes to Consolidated Financial Statements

Current

Deferred

Total

Year Ended December 31, 2018

U.S. Federal

i —

( i 10.3)

State & Local

i 0.9

( i 2.6)

( i 1.7)

Foreign

i 1.9

( i 1.3)

i 0.6

i 2.8

( i 14.2)

( i 11.4)

Year Ended December 31, 2019

U.S. Federal

( i 0.3)

( i 2.2)

( i 2.5)

State & Local

i 0.7

( i 0.9)

( i 0.2)

Foreign

i 2.5

( i 2.0)

i 0.5

i 2.9

( i 5.1)

( i 2.2)

Year Ended December 31, 2020

U.S. Federal

i 0.2

( i 0.3)

( i 0.1)

State & Local

i —

i 1.0

Foreign

i 2.4

( i 2.0)

i 0.4

i 2.6

( i 1.3)

i 1.3

Reconciliation of the difference between the effective tax rate and the statutory U.S. federal income tax rate is as follows:


	Year Ended December 31,
	2020		2019		2018
Federal statutory tax rate	i 21	%	i 21	%	i 21	%
Increase in income tax rate resulting from:
State and local income taxes, net of federal tax benefits	i 1	%	( i 2)	%	i 2	%
Additional tax on foreign source income	i 3	%	i 18	%	( i 3)	%
Share-based compensation	( i 24)	%	( i 71)	%	i 3	%
Non-deductible expense	i 13	%	i 24	%	( i 3)	%
Gain on sale	( i 11)	%	i —	%	i —	%
Other	( i 2)	%	( i 12)	%	i —	%
Effective tax rate	i 1	%	( i 22)	%	i 20	%

i The following table sets forth the Company’s net deferred tax assets as of December 31, 2020 and 2019 (in millions):

F-36

R1 RCM Inc.

Notes to Consolidated Financial Statements

As of December 31,

2020

2019

Deferred tax assets and liabilities:

Net operating loss carryforwards

i 81.6

i 64.1

Share-based compensation

i 8.6

i 12.4

Accrued bonus

i 1.4

i 8.3

Advanced billing revenue

i 6.4

i 5.9

Alternative minimum tax

i 5.2

i 4.0

Interest expense limitation

i 5.6

i 10.2

Deferred rent liabilities

i 21.3

i 25.6

Deferred FICA liability

i 6.0

i —

Other

i 10.0

i 4.5

Total gross deferred tax assets

i 146.1

i 135.0

Intangible assets

( i 41.7)

( i 37.0)

Fixed assets

( i 3.1)

( i 4.4)

Contract implementation costs

( i 7.0)

( i 6.2)

Deferred rent assets

( i 14.8)

( i 21.3)

Less valuation allowances

( i 5.8)

( i 1.9)

Net deferred tax assets

i 73.7

i 64.2

At December 31, 2020, the Company had cumulative U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $ i 320.6 million and $ i 282.0 million, respectively, which are available to offset U.S. federal and state taxable income in future periods. These amounts include net operating losses acquired through acquisitions which are subject to Section 382 of the Internal Revenue Code. The general limitation rules allow the Company to utilize the net operating losses subject to an annual limitation that is determined by multiplying the federal long-term tax-exempt rate by the Company’s value immediately before the ownership change. The federal net operating losses will start to expire in 2022.

2017 Tax Reform subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries. An entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

A valuation allowance is required to be established when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset. Consideration is given to the weight of all available evidence, both positive and negative. The Company estimates its already contracted business growth will be profitable and allow the Company to utilize its NOL carryforwards and other deferred tax assets. Accordingly, the Company believes that it is more likely than not that the remaining deferred tax assets will be realized. Should the Company not operationally execute as expected, and the growth in business not be as profitable as expected, such realizability assessment may change.

F-37

R1 RCM Inc.

Notes to Consolidated Financial Statements

The Company has recorded valuation allowances at December 31, 2020 and 2019 of $ i 5.8 million and $ i 1.9 million, respectively, based on its assessment that it is more likely than not that a portion of the Company’s separate state income tax net operating loss will not be realized because the Company no longer has business activities in that state, or where the activity level has decreased to such a level where the Company believes the NOL will not be realized. In addition, the December 31, 2020 valuation allowance includes $ i 3.7 million attributable to research and development credits, acquired from the Company’s acquisition of SCI on April 1, 2020.

The 2020, 2019, and 2018 foreign current tax provision includes $ i 2.4 million, $ i 1.9 million, and $ i 1.5 million, respectively, for income taxes arising from the pre-tax income of the Company’s India subsidiaries. The tax provisions are net of the impact of a tax holiday in India. The Company’s benefits from this tax holiday were $ i 4.3 million, $ i 2.2 million, and $ i 1.6 million for the year ended December 31, 2020, 2019, and 2018, respectively. The tax holidays are set to expire between March 31, 2021 and March 31, 2027.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company’s unrecognized tax benefits as of December 31, 2020, 2019, and 2018 were i i i no / / t material.

In connection with tax return examinations, contingencies can arise that generally result from different interpretations of tax laws and regulations as they pertain to the amount, timing or inclusion of revenues and expenses in taxable income, or the ability to utilize tax credits to reduce income taxes payable. While it is probable, based on the potential outcome of the Company’s federal and state tax examinations or the expiration of the statute of limitations for specific jurisdictions, that the liability for unrecognized tax benefits may increase or decrease within the next 12 months, the Company does not expect any such change would have a material effect on its financial condition, results of operations or cash flow.

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 for 2017 and all subsequent years are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to i six years. Certain income tax returns since fiscal year 2009 for the Company’s India subsidiaries are currently open for final determination.

18. i 8.00% Series A Convertible Preferred Stock

At the close of the Transaction on February 16, 2016 (as described in Note 1), the Company issued to the Investor: (i) i 200,000 shares of Preferred Stock, for an aggregate price of $ i 200 million, and (ii) a warrant with a term of i ten years to acquire up to i 60 million shares of common stock at an exercise price of $ i 3.50 per share, on the terms and subject to the conditions set forth in the Warrant Agreement (“Warrant”).

On January 15, 2021 the Investor converted all of its i 294,266 shares (the “Current Shares”) of Preferred Stock into i 117,706,400 shares of common stock of the Company into which the Current Shares were convertible pursuant to the Certificate of Designation of the Preferred Stock, and, in consideration therefor, the Company (i) issued i 21,582,800 additional shares of common stock to the Investor, and (ii) paid the Investor $ i 105.0 million in cash. On January 19, 2021, the Company filed a Certificate of Elimination of i 8.00% Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware to eliminate the Certificate of Designations of the i 8.00% Series A Convertible Preferred Stock.

F-38

R1 RCM Inc.

Notes to Consolidated Financial Statements

Dividend Rights

The holders of the Preferred Stock were entitled to receive cumulative dividends January 1, April 1, July 1, and October 1 of each year (dividend payment dates), which commenced on April 1, 2016, at a rate equal to i 8% per annum (preferred dividend) multiplied by the liquidation preference per share, initially $ i 1,000 per share adjusted for any unpaid cumulative preferred dividends. As of December 31, 2020 and 2019, the Company had accrued dividends of $ i 5.8 million and $ i 5.3 million associated with the Preferred Stock, respectively, of which $ i 5.8 million and $ i 5.3 million was paid in additional shares and $ i 940 and $ i 580 was paid in cash in January of the following year, respectively. For the year ended December 31, 2020 and 2019, the dividends paid, or accrued, in additional shares of Preferred Stock totaled $ i 22.4 million and $ i 20.7 million, respectively.

The following summarizes the Preferred Stock activity for the year ended December 31, 2020 and 2019 (in millions, except per share data):

Preferred Stock

Shares Issued and Outstanding

Carrying Value

Balance at January 1, 2018

i 227,483

i 189.3

Dividends paid/accrued dividends

i 18,750

i 19.1

Balance at December 31, 2018

i 246,233

i 208.4

Dividends paid/accrued dividends

i 20,296

i 20.7

Balance at December 31, 2019

i 266,529

i 229.1

Dividends paid/accrued dividends

i 21,968

i 22.4

Balance at December 31, 2020

i 288,497

i 251.5

19. i 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 years ended December 31, 2020, 2019, and 2018, the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by 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.

i Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):

F-39

R1 RCM Inc.

Notes to Consolidated Financial Statements

Year Ended December 31,

2020

2019

2018

Basic EPS:

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Less dividends on preferred shares

( i 22.4)

( i 20.7)

( i 19.1)

Less income allocated to preferred shareholders

( i 47.3)

i —

Net income (loss) available/(allocated) to common shareholders - basic

i 47.4

( i 8.7)

( i 64.4)

Diluted EPS:

Net income (loss)

i 117.1

i 12.0

( i 45.3)

Less dividends on preferred shares

( i 22.4)

( i 20.7)

( i 19.1)

Less income allocated to preferred shareholders

( i 37.7)

i —

Net income (loss) available/(allocated) to common shareholders - diluted

i 57.0

( i 8.7)

( i 64.4)

Basic weighted-average common shares

i 115,729,645

i 111,505,993

i 108,175,159

Add: Effect of dilutive equity awards

i 12,731,424

i —

Add: Effect of dilutive warrants

i 46,112,201

i —

Diluted weighted average common shares

i 174,573,270

i 111,505,993

i 108,175,159

Net income (loss) per common share (basic)

i 0.41

( i 0.08)

( i 0.60)

Net income (loss) per common share (diluted)

i 0.33

( i 0.08)

( i 0.60)

Because of their anti-dilutive effect, i 97,244, i 21,262,959, i 25,725,761 common share equivalents comprised of stock options, RSAs, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the years ended December 31, 2020, 2019, and 2018, respectively. Additionally, for the years ended December 31, 2019 and 2018, warrants to acquire up to i 61.5 million shares of the Company's common stock has been excluded from the diluted earnings per share calculation because they are anti-dilutive.

20. i Commitments and Contingencies

Legal Proceedings

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

In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS clients and a place holder, John Doe hospital, representing all PAS clients (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties, and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. 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. Both the Company’s and plaintiff’s motions for summary judgment were denied in December 2020, and the parties are presently conducting damages and expert discovery. Discovery and dispositive motions are expected to extend through January 2022, with trial, if necessary, in mid-to-late 2022.

F-40

R1 RCM Inc.

Notes to Consolidated Financial Statements

21. i Related Party Transactions

As a result of the closing of the Transaction with Ascension Health Alliance on February 16, 2016 and Ascension Health Alliance's ownership interest in the Investor, Ascension became a related party to the Company. This note, encompasses transactions between Ascension and its affiliates, including AMITA Health, and the Company pursuant to the A&R MPSA, including all supplements, amendments and other documents entered into in connection therewith. See Note 1, Business Description and Basis of Presentation and Note 18, i 8.00% Series A Convertible Preferred Stock for further discussion about the agreements with Ascension.

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


Year Ended December 31,
2020		2019		2018
$	i 809.5	$	i 790.4	$	i 600.1

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


	December 31, 2020		December 31, 2019
Accounts receivable, net of $ i 0.1 million and $ i 0.0 million allowance - related party	$	i 30.9	$	i 30.8

Accrued service costs, current	$	i 9.1	$	i 28.9
Refund liabilities, current	i 0.6		i 1.0
Deferred revenue (contract liabilities), current	i 5.6		i 4.2
Current portion of customer liabilities	i 15.3		i 34.1


Deferred revenue (contract liabilities), non-current	i 16.3		i 18.6
Non-current portion of customer liabilities	i 16.3		i 18.6
Total customer liabilities	$	i 31.6	$	i 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.

Related party subordinated notes, along with a $ i 2.2 million prepayment penalty, were repaid upon execution of the Credit Agreement on June 26, 2019. For the years ended December 31, 2019 and 2018, $ i 7.2 million and $ i 9.5 million, respectively, of interest expense was attributable to related parties.

22. 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. i The following table summarizes the breakout of deferred contract costs (in millions):

F-41

R1 RCM Inc.

Notes to Consolidated Financial Statements