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Narrative (Details)
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Property, Equipment and Software Useful Lives
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Losses - Narrative (Details)
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Rate Reconciliation (Details)
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Consolidated Financial Statements - Impact on
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form i10-K/A
(Amendment No. 1)
i☒
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended iiDecember 31, 2022/
OR
i☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
iDelaware
i87-4340782
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i433 W. Ascension Way
i84123
iSuite
200
iMurray
iUtah
(Address of principal executive offices)
(Zip Code)
(i312) i324-7820
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock,
par value $0.01 per share
iRCM
iNASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. iYes☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐iNo☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐iNo☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐iNo☒
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. i☒
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
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1
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on June 30, 2022: $i2,950,791,223
R1 RCM Inc. (“we,”“us,”“our,” and the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to amend and restate certain items in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 16, 2023 (the “Original Report”).
In this Amendment, the
Company is restating its previously issued consolidated audited financial statements as of and for the years ended December 31, 2022 and 2021, as well as the related unaudited consolidated interim financial statements for each of the quarters within 2022 and 2021, to correct the accounting treatment for certain acquiree compensation costs incurred in connection with historical acquisitions, along with other immaterial adjustments, as further described below.
In addition, this Amendment includes audited consolidated financial statements as of and for the year ended December 31, 2020. Management concluded that the impact of the adjustments to the year ended December 31, 2020 was not material
to the consolidated financial statements; however, the consolidated financial statements for the year ended December 31, 2020 have been revised herein for this matter.
See Note 23, Restatement and Revision of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information on the audited consolidated financial statements as of and for the years ended December 31, 2022, 2021, and 2020.
See Note 24, Quarterly Financial Data (Unaudited), in Item 8, Financial Statements and Supplementary Data, for such restated information for each of the quarters within
2022 and 2021.
Restatement Background
As described in the Company's Current Report on Form 8-K filed with the SEC on November 13, 2023, immediately prior to the scheduled filing of the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023, the Company identified errors related to the accounting for certain acquiree compensation costs incurred in connection with acquisitions in 2022, 2021 and 2020 that the
Company was required to recognize as a Company expense immediately upon the closing of the transactions. These costs should have been recorded as other expenses within the Consolidated Statements of Operations and Comprehensive Income (Loss) in the applicable period and were instead recorded within the purchase price allocation and ultimately recorded as goodwill in the Consolidated Balance Sheets in previously issued financial statements.
As a result, (i) the Company’s audited consolidated financial statements as of and for the years ended December 31, 2022 and 2021, included in the Original Report; (ii) the Company’s unaudited
consolidated financial statements as of and for each of the quarters within 2022 and 2021, included in the Company’s Quarterly Reports on Form 10-Q filed with the SEC; and (iii) the unaudited consolidated financial statements for the quarters ended June 30, 2023 and March 31, 2023 included in the Company’s Quarterly Reports on Form 10-Q filed with the SEC (collectively, the “Non-Reliance Periods”) are being restated.
In addition to the errors described above, the Company is correcting certain items that were previously identified
and concluded as immaterial, individually and in aggregate, to its consolidated financial statements as of and for the years ended December 31, 2022 and 2021. These adjustments primarily consisted of share-based compensation expense for a modified award that was originally recognized in 2022 but should have been recognized in 2021 and operating expenses recognized in 2022 that should have been recognized in 2021 relating to immaterial adjustments to the timing and amounts of accrued expenses and prepaid expenses.
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Internal Control Considerations
In
connection with the restatements, as a result of the accounting errors, the Company’s management has identified a material weakness in its internal control over financial reporting relating to the design and operating effectiveness of controls over business combinations impacting the accounting for acquiree compensation arrangements during the Non-Reliance Periods and has determined that its disclosure controls and procedures also were not effective as of December 31, 2022 and 2021 and all interim and subsequent periods.
See Item 9A, Controls and Procedures, for additional information related to this material weakness in internal control over financial reporting and the related remedial measures.
Items
Amended in this Filing
This Amendment amends and restates the following items of the Original Report:
•Part I — Item 1A. Risk Factors
•Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•Part II — Item 8. Financial Statements and Supplementary
•Part II — Item 9A. Controls and Procedures
•Part IV — Item 15. Exhibits and Financial Statement Schedules
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), this Amendment includes new certifications specified in Rule 13a-14 under the Exchange Act, dated as of the date of this Amendment, from the Company’s Chief Executive Officer and Chief Financial Officer. This Amendment also contains an amended report of Ernst & Young LLP (“EY”), the Company’s independent registered public accounting firm, on the consolidated financial statements for years ended December 31, 2022, 2021, and 2020, an amended report of EY's opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2022 and a new consent of EY.
Pursuant to Rule 12b-15 under the Exchange Act, this Amendment contains only the items and exhibits to the Original Report that are being amended and restated, and unaffected items and exhibits are not included herein. Accordingly, this Amendment should be read in conjunction with the Original Report and with our filings with the SEC made after the Original Report, including any amendment to those filings. This Amendment continues to describe the conditions as of the date of the Original Report and, except as contained herein, we have not updated or modified the disclosures contained in the Original Report to reflect any events that have occurred after the Original Report. Accordingly, forward-looking statements included in this Amendment may
represent management’s views as of the Original Report and should not be assumed to be accurate as of any date thereafter.
This Amendment contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included in this Amendment are forward-looking statements. The words “anticipate,”“believe,”“contemplate,”“designed,”“estimate,”“expect,”“forecast,”“goal,”“intend,”“may,”“outlook,”“plan,”“predict,”“project,”“see,”“seek,”“target,”“would” and similar expressions or variations or negatives of these words are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such forward-looking statements include, among other things, statements
about our strategy, our future operations, our future financial position, our projected costs, our prospects, our plans, objectives of management, our ability to successfully deliver on our commitments to our customers, our ability to deploy new business as planned, our ability to successfully implement new technologies, our ability to complete or integrate acquisitions as planned and to realize the expected benefits from acquisitions, the expected outcome or impact of pending or threatened litigation, and expected market growth. Such forward-looking statements are based on management’s current expectations about future events as of the date hereof and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Subsequent events and developments, including actual results or changes in our assumptions, may cause our views to change. We do not undertake to update our forward-looking
statements except to the extent required by applicable law. Readers are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements included herein are expressly qualified in their entirety by these cautionary statements. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, the impact of the restatements of the financial statements for the applicable Non-Reliance Periods, and the non-compliance notice from Nasdaq relating to our late Form 10-Q, on the price of our common stock, our reputation, our relationships with our investors, suppliers, customers, employees and other parties; our ability to regain compliance with Nasdaq’s timely filing requirements for continued listing within the applicable cure period; our ability to remediate the material weakness in our internal control over financial reporting;
economic downturns and market conditions beyond our control, including periods of inflation; the quality of global financial markets; our ability to timely and successfully achieve the anticipated benefits and potential synergies of the acquisition of Cloudmed; our ability to retain existing customers or acquire new customers; the development of markets for our revenue cycle management offering; variability in the lead time of prospective customers; competition within the market; breaches or failures of our information security measures or unauthorized access to a customer’s data; delayed or unsuccessful implementation of our technologies or services, or unexpected implementation costs; disruptions in or damages to our global business services centers and third-party operated data centers; the volatility of our stock price; our substantial indebtedness; and the factors set forth in Part I, Item 1A “Risk Factors” and elsewhere in this Amendment and our other filings
with the SEC.
The forward-looking statements in this Amendment represent our views as of the date of this Amendment. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Amendment.
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PART I
Unless
the context indicates otherwise, references in this Amendment to “R1 RCM,”“R1,” the “Company” or “company,”“we,”“our,” and “us” mean R1 RCM Holdco Inc. (f/k/a R1 RCM Inc.) ("Old R1 RCM") and its subsidiaries prior to the Holding Company Reorganization completed on June 21, 2022 and described herein, and R1 RCM Inc. (f/k/a Project Roadrunner Parent Inc.) and its subsidiaries, including Old R1 RCM following the Holding Company Reorganization.
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Item 1A.
Risk Factors
Summary Risk Factors
The material risks summarized in further detail below include the following:
Risks Relating to our Operations and Service Offering
•We operate in a highly competitive industry, and our current or future competitors may be able to compete more effectively than we do, which could have a material adverse effect on our operating results, growth rates and market share.
•The markets
for our RCM service offering may develop more slowly than we expect.
•Delayed or unsuccessful implementation of our technologies or services with our customers or implementation costs that exceed our expectations may adversely affect our operating results.
•We may be liable to our customers or third parties if errors occur during the provision of our services, or if we fail to maintain high service levels, our anticipated net services revenue may be lower.
•Our business operations currently include the collection, on behalf of our customers, of medical co-pays and other payments that are due to our customers from their patients. This business practice has been perceived negatively by the public and this negative perception has adversely affected and may continue to
adversely affect our business, operating results, and financial condition.
Risks Relating to our Customers
•If we are unable to retain our existing customers or acquire new customers, our operating results could be adversely affected.
•We face a selling cycle of variable length to secure new RCM operating partner agreements, making it difficult to predict the timing of specific new customer relationships and related revenue.
•The imposition of legal responsibility for obligations related to our customers’ employees could adversely affect our business and subject us to liability.
Risks Relating to our Cybersecurity and Technology
•If
our information technology security measures are breached or fail, resulting in unauthorized access to customer data, our service may be perceived as not being secure, which could impact our ability to attract new customers, cause a loss of revenues from current customers due to penalties or contract termination, or cause us to incur significant liabilities.
•Disruptions in service or damage to our global business services centers or third-party operated data centers could adversely affect our business.
Risks Relating to our Employees
•If we are unable to attract, hire, integrate, and retain key personnel and other necessary employees, our business could be harmed.
•Our
growing global business services operations expose us to risks that could have a material adverse effect on our operating costs.
Risks Related to Ascension and the 2016 Transaction
•Healthcare providers affiliated with Ascension currently account for a significant portion of our net services revenue. The early termination of our A&R MPSA with Ascension would have a material adverse effect on our business, operating results, and financial condition.
•Our agreement with Ascension requires us to offer to Ascension service fees that are at least as low as the fees we charge any other customer receiving comparable services at comparable or lower volumes.
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Risks
Related to Ownership of Our Common Stock
•TCP-ASC and New Mountain Capital are significant shareholders in R1 and may have conflicts of interest with us or other stockholders in the future.
•The trading price of our common stock has been and may continue to be highly volatile.
Risks Related to the Acquisition of Cloudmed
•If we do not integrate the businesses successfully, we may lose customers and fail to achieve our financial objectives.
•We may not realize the anticipated benefits from the Cloudmed Acquisition.
•We have incurred significant transaction and merger-related costs in connection with
the Cloudmed Acquisition and will remain liable for significant transaction costs, including legal, accounting, and other costs.
Risks Related to our Business
•Our business is significantly impacted by general macroeconomic conditions, and accordingly, our business, results of operations and financial condition could be materially adversely affected by further deterioration or a protracted extension of current macroeconomic challenges.
•Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 pandemic, which has negatively affected, and may continue to negatively affect, our business, operating results, and financial condition.
•We may fail to realize the success of strategic
initiatives and other investments.
•We have a substantial amount of indebtedness, which could adversely affect us, including by decreasing our business flexibility. The agreement that governs our indebtedness contains covenants that could impact our ability to perform certain transactions without obtaining pre-approval from our lenders.
•Litigation could materially adversely affect our business, financial condition, operating results, and cash flows and cause reputational damage from the view of current and potential customers and shareholders.
Regulatory Risks
•The healthcare industry is heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity, and adversely
affect our business.
•If we violate HIPAA, the HITECH Act or state or foreign health information privacy laws, we may incur significant liabilities, and any such violations could make it more difficult to retain existing customers or attract new customers, extend the time it takes to enter into service agreements with new customers, or result in a material adverse effect on our business, operating results, and financial condition.
•Developments in the healthcare industry, including national healthcare reform, could adversely affect our business.
Risks Related to Our Control Environment
•We have identified a material weakness in our internal control over financial reporting, which, if not corrected, could affect the reliability of
our consolidated financial statements and have other adverse consequences.
•As a result of the delayed filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, we face limitations in registering securities for a public offering or acquisitions, which could adversely affect our business.
•We face risks related to the restatement of the Company’s previously issued financial statements.
Risks Related to Intellectual Property
•We may be unable to adequately protect our intellectual property.
•Claims by others
that we infringe their intellectual property could force us to incur significant costs or revise the way we conduct our business.
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Risks Relating to our Operations and Service Offering
We operate in a highly competitive industry, and our current or future competitors may be able to compete more effectively than we do, which could have a material adverse effect on our operating results, growth rates and market share.
The market for our solutions is and will continue to be highly competitive. The rapid changes in the U.S. healthcare market resulting from pressures to reduce healthcare cost inflation and regulatory and legislative initiatives are increasing the level of competition. We
face competition from internal RCM departments and external participants. External participants that are our competitors include end-to-end RCM providers, software vendors and other technology-supported RCM business process outsourcing companies, traditional consultants, and information technology outsourcers. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, regulations, or customer requirements. We may not be able to compete successfully with these companies, and these or other competitors may introduce technologies or services that render our technologies or services obsolete or less marketable. Even if our technologies and services are more effective than the offerings of our competitors, our competitors may offer similar solutions at a lower price, which may cause our customers to choose our competitors’ solutions over ours. Increased competition is likely to result in pricing
pressures, which could adversely affect our operating results, growth rate, or market share. Even if we have a good relationship and strong performance history with a customer, open and competitive bidding practices mean we may not be awarded the renewal business or may have to aggressively price our services to be successful.
The markets for our RCM service offering may develop more slowly than we expect.
Our success depends, in part, on the willingness of healthcare organizations to implement integrated solutions for the areas in which we provide services. Some organizations may be reluctant or unwilling to implement our solutions for a number of reasons, including failure to perceive the need for improved revenue cycle operations, lack of knowledge about the potential benefits our solutions provide, concerns over the cost of using an external solution, or as a result of investments
or planned investments in internally developed solutions, choosing to continue to rely on their own internal resources.
Delayed or unsuccessful implementation of our technologies or services with our customers or implementation costs that exceed our expectations may adversely affect our operating results.
In periods during which we add new customers, our operating costs are typically higher because we incur expenses to integrate our solutions with our customers’ existing patient accounting and clinical systems. The implementation process varies from customer to customer, and we may face unanticipated challenges, including failure to obtain approvals or access rights from our customers’ vendors in a timely manner or at all. If the implementation process is not executed successfully or is delayed, our relationships with our customers and our operating results may be adversely affected.
Implementation of our solutions also requires us to integrate our employees into customer’s operations. Depending on our customers’ implementation needs, we may be required to devote a larger number of our employees than anticipated, which may increase our costs and adversely affect operating results.
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We may be liable to our customers or third parties if errors occur during the provision of our services, or if we fail to maintain high service levels, our anticipated net services revenue may be lower.
The services we offer are complex and involve numerous manual and automated touchpoints with patients, providers and payers, which inherently creates a higher error risk. Errors can result from the interface of our
proprietary technology applications and a customer’s existing technologies or we may make human errors in any aspect of our service offerings. The costs incurred in correcting any significant errors may be substantial and could adversely affect our operating results. Our customers, or third parties such as our customers’ patients, may assert claims against us alleging that they suffered damages due to our errors, and such claims could subject us to significant legal defense costs in excess of our existing insurance coverage and adverse publicity regardless of the merits or eventual outcome of such claims. In addition, if we are unable to maintain high service levels and our customers fail to achieve agreed upon improvement in financial or operating metrics, the incentive fee payments to us from such customers may be lower than anticipated.
Our business operations currently include the collection, on behalf of our customers,
of medical co-pays and other payments that are due to our customers from their patients. This business practice has been perceived negatively by the public and this negative perception has adversely affected and may continue to adversely affect our business, operating results, and financial condition.
We currently collect, on behalf of our customers, medical co-pays and other non-defaulted payments that are due to our customers from their patients, pursuant to managed services agreements with our customers. Collection of these payments from patients may become a more significant part of our RCM services as industry trends continue to increase patient responsibility as a percentage of total compensation to healthcare providers. This business practice, which has been negatively perceived by the public, has made it more difficult to retain existing customers and attract new customers, extended the time it takes to enter into
service agreements with new customers, and resulted, and may continue to result, in a material adverse effect on our business, operating results, and financial condition.
Negative public perception and proposed legislation in the United States regarding offshore outsourcing may increase the cost of delivering our services.
Offshore outsourcing is a politically sensitive topic in the United States. For example, various organizations and public figures in the United States have expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in the United States. Current or prospective customers may elect to perform such RCM services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal
of existing industry trends towards offshore outsourcing would increase the cost of delivering our services if we had to relocate aspects of our services from our global business services operations to the United States, where operating costs are higher.
In the United States, federal and state legislation has been proposed, and in several states enacted, to restrict or discourage U.S. companies from outsourcing their services to companies outside the United States. Further, through rule making or executive action, some states have imposed limitations on offshore outsourcing of administrative services for the Medicaid program. It is possible that additional legislation could be enacted or regulatory guidance issued that would restrict U.S. private sector companies that have federal or state government contracts, or that receive government
funding or reimbursement, such as Medicare or Medicaid payments, from outsourcing their services to offshore service providers. Any changes to existing laws or the enactment of new legislation restricting offshore outsourcing in the United States may adversely affect our ability to do business, particularly if these changes are widespread, and could have a material adverse effect on our business, operating results, financial condition, and cash flows.
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Risks Relating to our Customers
If we are unable to retain our existing customers or acquire new customers, our operating results could be adversely affected.
Our future financial performance depends upon the retention of
our customers and our ability to acquire new customers. We earn net services revenue primarily from managed services agreements pursuant to which we receive performance-based fees. Our profitability on customer agreements increases over time, as we integrate our systems, processes, and procedures with our customers. Customers can elect not to renew their managed services agreements with us upon expiration. Certain customer agreements permit early termination for convenience, subject to a notice period. If a customer does not renew or terminates a managed services agreement for any reason, we may not recognize sufficient revenue from that customer prior to the non-renewal or termination to offset the implementation costs associated with that customer.
Some of our managed services agreements require us to adhere to extensive, complex data security, network access, and other institutional procedures and requirements of our customers,
and we cannot guarantee that some of our customers will not allege that we have not complied with all such procedures and requirements. Factors external to us and beyond our control, including but not limited to cyber attacks, failures of a contracted vendor, or regulatory changes, may cause a failure to perform under a contract. If a breach of a managed services agreement occurs or there is an actual or perceived service level performance failure, we may be liable to the customer for damages or may need to allocate additional resources or incur additional costs to resolve the breach that has arisen, and either we or the customer may generally terminate an agreement for a material uncured breach by the other.
Increasing consolidation within the healthcare provider industry may also make it more difficult for us to acquire new customers
and retain existing customers, as consolidated healthcare systems may be more likely to have incumbent revenue cycle management providers or significant internal revenue cycle capabilities. For example, certain of our smaller customers ceased to be customers after being acquired by larger healthcare systems.
We face a selling cycle of variable length to secure new RCM operating partner agreements, making it difficult to predict the timing of specific new customer relationships and related revenue.
We face a selling cycle of variable length, typically spanning six to 18 months or longer, to secure a new managed services agreement. Even if we succeed in developing a relationship with a potential new customer, we may not be successful in entering into a managed services agreement with that customer. In addition, we cannot accurately predict the timing of entering into managed services
agreements with new customers due to the complex procurement decision processes of most healthcare providers, which often involves high-level management or board committee approvals. Due to our variable selling cycle length, we have only a limited ability to predict the timing of specific new customer relationships, which affects our ability to predict future revenues and cash flows.
The imposition of legal responsibility for obligations related to our customers’ employees could adversely affect our business and subject us to liability.
Under our co-management model, we work with customers’ employees engaged in the activities included in the scope of our services. Our co-management model agreements establish the division of responsibilities between us and our customers for various personnel management matters, including compliance with and liability under various employment laws
and regulations. We could, nevertheless, be found to have liability with our customers for actions against or by employees of our customers, including under various employment laws and regulations, such as those relating to discrimination, retaliation, wage and hour matters, occupational safety and health, family and medical leave, notice of facility closings and layoffs and labor relations, and any such liability could result in a material adverse effect on our business.
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Risks Relating to our Cybersecurity and Technology
If our information technology security measures are breached or fail, resulting in unauthorized access to customer data, our service may be perceived as not being secure, which could impact our
ability to attract new customers, cause a loss of revenues from current customers due to penalties or contract termination, or cause us to incur significant liabilities.
Our services involve the storage and transmission of customers’ proprietary information and protected health, financial, payment, and other personal information of patients. We rely on proprietary and commercially available systems, software, tools, and monitoring, as well as other processes, to provide security for processing, transmission, and storage of such information. Due to the sensitivity of this information, the effectiveness of such security efforts is very important. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance, or otherwise, someone may be able to obtain unauthorized access to customer or patient
data. Improper activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries, and other events or developments may facilitate or result in a compromise or breach of our computer systems.Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventive measures. Our security measures may not be effective in preventing these types of activities, and the information technology security measures of our third-party data centers and service providers may not be adequate.
To date, cyber attacks have not had a material impact on our business, operating results, or financial condition; however, we could suffer material losses in the future as a result of cyber attacks, and we are not able to predict
the severity of these attacks. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the ongoing shortage of qualified cybersecurity professionals, and the interconnectivity and interdependence of third parties to our systems. In addition, ransomware attacks have been a common threat impacting healthcare organizations. The occurrence of a cyber attack, breach, ransomware attack, unauthorized access, misuse, computer virus or other malicious code, or other cybersecurity event could jeopardize or result in the unauthorized disclosure, gathering, monitoring, misuse, corruption, loss, or destruction of confidential information that belongs to us or our customers or PHI that is processed and stored in, and transmitted through, our computer systems and networks. The occurrence of such an event could also result in damage to our software, computers, or systems, or otherwise cause interruptions or malfunctions
in our, our customers’, or third parties’ operations. If a breach of our information technology security occurs, we could face damages for contract breach, penalties for violation of applicable laws or regulations, possible lawsuits by individuals affected by the breach, and significant remediation costs and efforts to prevent future occurrences. Although we currently carry insurance coverage to protect ourselves against some of these risks, our inability to continue to obtain such insurance coverage at reasonable costs could also have a material adverse effect on us. In addition, whether there is an actual or a perceived breach of our information technology security, the market perception of the effectiveness of our security measures could be harmed and we could lose current or potential customers.
Additionally, cybersecurity has become
a top priority for regulators around the world, and every state in the U.S. has laws in place requiring companies to notify users if there is a security breach that compromises certain categories of their PII. In addition, in the U.S., the SEC has proposed rules for mandatory disclosure of cybersecurity incidents suffered by public companies, as well as cybersecurity governance and risk management. Any failure or perceived failure by us to comply with these laws may subject us to enforcement action or litigation, any of which could harm our business.
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Disruptions in service or damage to our global business services centers or third-party operated data centers could adversely affect our business.
Our global business
services centers and third-party operated data centers are essential to our business. Our operations depend on the availability of our global business service centers and their operating effectiveness in maintaining and protecting our applications, which are located in data centers that are operated and controlled by third parties. In addition, our information technologies and systems, as well as our data centers and global business services centers, are vulnerable to damage or interruption from various causes, including (1) natural disasters, war, acts of terrorism, and public health events, including the COVID-19 pandemic, and (2) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data, and similar events. We have a global business resiliency program and maintain insurance against fires, floods, other natural disasters, and general business interruptions to mitigate the adverse
effects of a disruption, relocation, or change in operating environment at one of our data centers or global business services centers, but the situations we plan for and the amount of insurance coverage we maintain may not be adequate in every case. In addition, the occurrence of any of these events could result in interruptions, delays, or cessations in service to our customers, or in the direct connections we establish between our customers and payers. Any of these events could impair or inhibit our ability to provide our services, reduce the attractiveness of our services to current or potential customers, and adversely affect our financial condition and operating results.
In addition, despite the implementation of security measures, our infrastructure, data centers, global business services centers, or systems that we interface with, including the internet and related systems,
may be vulnerable to intrusion, improper employee or contractor access, programming errors, computer viruses, malicious code, phishing attacks, denial-of-service attacks, or other cyber attacks and information security threats by third parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. Any of these can cause system failure, including network, software, or hardware failure, which can result in service disruptions. As a result, we may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by such breaches.
We rely on third-party providers, such as Microsoft Azure, for cloud infrastructure and other technology services, and any disruptions in or interference with our use of such services could adversely affect our business, operating
results, and financial condition.
As a result of our acquisition of Cloudmed, we face risks associated with utilizing cloud-based infrastructure. Failure of third-party providers to provide adequate cloud-based data infrastructure and other technology-related services to us could result in significant loss of revenue, or frequent or prolonged interruptions of these services. Interruptions could also cause users to perceive our services as not functioning properly. We have limited control over these third parties and cannot provide assurance that we will be able to maintain satisfactory relationships with these third parties on acceptable commercial terms or that the quality of services provided will remain at the levels needed to enable us to conduct our business effectively, which could adversely affect our business, operating results, and financial condition.
Moreover,
our cloud infrastructure providers and other providers of services, systems and technologies have no obligations to renew their agreements with us on commercially reasonable terms, or at all, and it is possible that we will not be able to switch our operations to another provider in a timely and cost effective manner should the need arise. If we are unable to renew our agreements with these providers on commercially reasonable terms, or if in the future we add new data center facility or other providers, we may face additional costs, expenses or downtime, which could adversely impact our business, operating results, and financial condition.
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Risks Relating to our Employees
If we are unable to attract, hire, integrate,
and retain key personnel and other necessary employees, our business could be harmed.
Our future success depends in part on the continued contributions of our executive officers and other key personnel, each of whom may be difficult to replace. The loss of services of any of our executive officers or key personnel, or the inability to continue to attract qualified personnel, could have a material adverse effect on our business.
To manage potential future growth, we will need to hire, integrate, and retain highly skilled and motivated employees, and will need to work effectively with a growing number of customer employees engaged in revenue cycle operations. Competition for the caliber and number of employees we require is intense. We may face difficulty identifying and hiring qualified personnel at compensation levels consistent with our existing compensation and salary structure.
In addition, we invest significant time and expense in training each of our employees, which increases their value to competitors who may seek to recruit them. Under the terms of our operating partner model agreements, we expect to transition a significant number of our customers’ revenue cycle management employees to our employment. We may experience difficulties in integrating and retaining these employees. We employ a significant number of personnel internationally and expect continued international growth. Significant growth in the technology sector in India has increased competition to attract and retain skilled employees and has led to a commensurate increase in compensation expense. If we fail to retain our employees, we could incur significant expenses in hiring, integrating, and training their replacements, and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect on our business.
Our
growing global business services operations expose us to risks that could have a material adverse effect on our operating costs.
Our reliance on an international workforce exposes us to business disruptions caused by the political and economic environment in those regions. Terrorist attacks and acts of violence or war may directly affect our facilities and workforce or contribute to general instability. Our global business services operations require us to comply with local laws and regulatory requirements, which are complex and of which we may not always be aware, and expose us to foreign currency exchange rate risk. Our global business services operations may also subject us to trade restrictions, reduced or inadequate protection for intellectual property rights, security breaches, and public health events, including the COVID-19 pandemic, and other factors that may adversely affect our business. Negative developments in
any of these areas could increase our operating costs or otherwise harm our business.
Risks Related to Ascension and the 2016 Transaction
Healthcare providers affiliated with Ascension currently account for a significant portion of our net services revenue. The early termination of our A&R MPSA with Ascension would have a material adverse effect on our business, operating results, and financial condition.
Healthcare providers affiliated with Ascension have accounted for a significant portion of our net services revenue each year since our formation. In 2022, 2021, and 2020, net services revenue from healthcare providers affiliated with Ascension represented 49%, 61%, and 64% of our total net services revenue, respectively. The early termination of the A&R MPSA or a reduction in our fees due to reduced business at Ascension could
have a material adverse effect on our business, operating results, and financial condition.
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Our agreement with Ascension requires us to offer to Ascension service fees that are at least as low as the fees we charge any other customer receiving comparable services at comparable or lower volumes.
Our A&R MPSA with Ascension requires us to offer to Ascension's affiliated healthcare providers fees for our services that are at least as low as the fees we charge any other customer receiving comparable services at lower volumes. If we were to charge lower service fees to any other customer receiving comparable services at lower volumes, we would be obligated to charge such lower fees to the hospital systems affiliated
with Ascension effective as of the date such lower charges were first implemented for such other customer. If we offer customers lower rates as discussed above, it could have a material adverse effect on our operating results and financial condition.
Risks Related to Ownership of Our Common Stock
TCP-ASCand New Mountain Capital are significant shareholders in R1 and may have conflicts of interest with us or other stockholders in the future.
TCP-ASC and certain entities affiliated with New Mountain Capital (collectively, the “Principal Stockholders”) beneficially own approximately62% of our common stock as of February 14, 2023, which means that the Principal Stockholders control the
vote of all matters submitted to a vote of our Board or stockholders, which will enable them to control the election of the members of our Board and all other corporate decisions. Even when the Principal Stockholders cease to own shares of our common stock representing a majority of the total voting power, for so long as the Principal Stockholders continue to own a significant portion of our common stock, they will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers, decisions on whether to raise future capital and amending our charter and bylaws, which govern the rights attached to our common stock. The concentration of ownership could deprive our other stockholders of an opportunity to receive a premium for their shares of common stock as part of a sale of us and ultimately might affect the
market price of our common stock.
The interests of the Principal Stockholders and their affiliates may differ from our other stockholders in material respects. For example, the Principal Stockholders may have an interest in pursuing acquisitions, divestitures, financings, or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to other stockholders. Additionally, Ascension is an affiliate of TCP-ASC and as our largest customer Ascension’s interests may differ from other stockholders’ interests. The Principal Stockholders, their affiliates, and their advisors are also in the business of making or advising on investments in companies, and may from time to time in the future, acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. They
may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Due to the Principal Stockholders’ ownership level, certain actions of the Principal Stockholders or their affiliates could negatively impact our stock price. Other stockholders should consider that the interests of the Principal Stockholders or their affiliates may differ from theirs in material respects.
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The trading price of our common stock has been and may continue to be highly volatile.
Since March 1, 2020, our common stock has traded at a price per share as high as
$31.28 and as low as $6.71. The trading price of our common stock may be highly volatile in the future and could be subject to wide fluctuations in response to various factors. In addition to the risks described in this section, factors that may cause the market price of our common stock to fluctuate include: fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; changes in estimates of our financial results or recommendations by securities analysts, if any, who cover our common stock, or failure to meet expectations of such securities analysts; the loss of service agreements with customers; lawsuits filed against us by governmental authorities or stockholders; unfavorable publicity concerning our operations or business practices; investors’ general perception of us; changes in local, regional or national economic conditions; changes in demographic trends; increased labor costs, including healthcare,
unemployment insurance, and minimum wage requirements; the entry into, or termination of, material agreements; changes in general economic, industry, regulatory, and market conditions not related to us or our business; the availability of experienced management and hourly-paid employees; issues in operating the company; future sales of our securities, including sales by our significant stockholders; and other potentially negative financial announcements, including delisting of our common stock from The Nasdaq Global Select Market, changes in accounting treatment or restatement of previously reported financial results, delays in our filings with the SEC or failure to maintain effective internal control over financial reporting.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected, and continue
to affect, the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation or launched activist campaigns following periods of market volatility. If we were involved in securities litigation or an activist campaign, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.
Risks Related to the Acquisition of Cloudmed
If we do not integrate the businesses successfully, we may lose customers and fail to achieve our financial objectives.
Achieving the benefits of the Cloudmed Acquisition will depend in part on the successful integration of Cloudmed’s business into our operations in a timely and efficient manner. In order for us to continue to provide our customers with the same level of service after the Cloudmed
Acquisition, we will need to continue to integrate our product lines and development organizations with those of Cloudmed. This may be difficult, unpredictable, and subject to delay because the businesses have been developed independently and were designed without regard to such integration. If we cannot successfully integrate the businesses and products and continue to provide customers with products and new product features in the future on a timely basis, we may lose customers and our business and operating results may be harmed.
We may not realize the anticipated benefits from the Cloudmed Acquisition.
The Cloudmed Acquisition involves the integration of two companies that have previously operated independently. We continue to expect financial and operational benefits from the Cloudmed Acquisition, including increased cost savings and other financial and operating benefits from
the Cloudmed Acquisition. There can be no assurance, however, regarding when or the extent to which we will be able to realize these increased cost savings or benefits. The companies must continue to integrate or, in some cases, replace numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll, and regulatory compliance, many of which are dissimilar. Difficulties associated with integrating the post-acquisition entity could have a material adverse effect on us and the market price of our common stock.
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We have incurred significant transaction and merger-related costs in connection with the Cloudmed Acquisition and will remain liable for significant transaction costs, including
legal, accounting, and other costs.
We have incurred and expect to continue to incur a number of non-recurring costs associated with combining the operations of the two companies which cannot be estimated accurately at this time. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all.
Risks Related to our Business
Our business is significantly impacted by general macroeconomic conditions, and accordingly, our business, results of operations and financial condition could be materially adversely affected by further deterioration or a protracted extension of current macroeconomic challenges.
The
COVID-19 pandemic, geopolitical instability, including the conflict between Russia and Ukraine, actual and potential shifts in U.S. and foreign, trade, economic and other policies, and rising trade tensions between the United States and China, as well as other global events, have significantly increased macroeconomic uncertainty at a global level. The current macroeconomic environment is characterized by record-high inflation, supply chain challenges, labor shortages, high interest rates, foreign currency exchange volatility, volatility in global capital markets, and growing recession risk. Such economic volatility could adversely affect our business, financial condition, results of operations and cash flows, and future market disruptions could negatively impact us. Further, adverse macroeconomic conditions may affect our customers’ and prospective customers’ operations and financial condition and make it difficult for our customers and prospective customers to accurately
forecast and plan future business activities, which may in turn cause our customers to elect not to renew their managed services agreements or affect their ability to pay amounts owed to us in a timely manner or at all, or adversely affect prospective customers’ ability or willingness to enter into managed services agreements with us. In the third quarter of 2022, we experienced lower than expected incentive fee revenue partially as a result of adverse macro-environmental factors delaying the achievement of our expected performance goals under certain of our customer contracts. We also observed the inflationary effect on our labor and cost structure to be higher than payer rate increases flowing to our customers’ revenue and cash collections, and weaknesses in consumer collections as healthcare bills were de-prioritized. If these trends continue into 2023 or beyond, our business,
operating results, financial condition and cash flows may be materially adversely affected.
An economic downturn or increased uncertainty may also lead to increased credit and collectability risks, higher borrowing costs or reduced availability of capital and credit markets, reduced liquidity, adverse impacts on our suppliers, failures of counterparties including financial institutions and insurers, asset impairments, and declines in the value of our financial instruments.
Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 pandemic, which has negatively affected, and may continue to negatively affect, our business, operating results, and financial condition.
Our
business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 global pandemic, the evolution of which continues to be uncertain. Recurring COVID-19 outbreaks around the world, have heightened concerns relating to new and potentially more dangerous virus variants, which, if transmitted around the globe, could lead to the re-introduction of restrictions that were in place in 2020, 2021, and to a lesser extent in 2022, or even the adoption of stricter measures to combat outbreaks. In 2020 and 2021, we experienced adverse impacts to our results of operations which resulted from revenue pressure due to decreased patient volumes. We may face similar effects to our results of operations in the event of a resurgence of COVID-19.
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The
COVID-19 pandemic contributed to the current macroeconomic environment and caused significant disruptions and volatility in the global capital markets, which can increase the cost of capital and adversely impact our ability to access capital. A resurgence of COVID-19 or another pandemic with effects similar to those of COVID-19 may adversely affect our liquidity position as well as our customers' ability to make timely payments to us.
On January 30, 2023, the Biden Administration announced plans to end the COVID-19 national emergency and PHE on May 11, 2023, which plans, if implemented, are likely to change a wide array of healthcare policies that our customers have relied upon during the PHE. Relatedly, states will begin to redetermine the eligibility of Medicaid recipients beginning on April
1, 2023 following the termination of the continuous enrollment provisions of the FFCRA, which may result in fewer eligible Medicaid recipients. These developments may cause a reduction in the amounts received by our customers and may have an adverse effect on our business and operating results.
As the COVID-19 pandemic continues to evolve, its ultimate impact on our business is subject to change. A severe outbreak of COVID-19 or another pandemic can disrupt our business and adversely materially impact our financial results.
We may fail to realize the success of strategic initiatives and other investments.
The anticipated benefits of acquisitions, strategic initiatives, and other investments will depend on, among other things, our ability to realize anticipated synergies, cost savings, and operational
benefits of corresponding activity, which benefits are subject to, among others, the following risks:
•the incurrence of additional indebtedness in connection with the financing of an acquisition may have an adverse effect on our liquidity;
•we may fail to retain key employees of the acquired company;
•we may be unable to successfully integrate personnel from acquired companies, while at the same time attempting to provide consistent, high quality services;
•we may fail to realize the anticipated synergies and cost savings we expect from an acquisition;
•future developments may impair the value of
our purchased goodwill or intangible assets;
•we may face difficulties establishing, integrating, or combining operations and systems;
•we may face challenges retaining the customers of an acquired business;
•we may encounter unforeseen internal control, regulatory or compliance issues; and
•we may face other additional risks relating to regulatory matters, legal proceedings, or tax laws or positions.
If any of these risks occurs, we may not be able to realize the anticipated benefits of an acquisition, or they may take longer to realize than expected. The integration process could result in the distraction of our
management, the disruption of our ongoing business, or inconsistencies in our services, standards, controls, procedures, and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors, and employees or to achieve the anticipated benefits of an acquisition, or could otherwise adversely affect our business and operating results.
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We have a substantial amount of indebtedness, which could adversely affect us, including by decreasing our business flexibility. The agreement that governs our indebtedness contains covenants that could impact our ability to perform certain transactions without obtaining pre-approval from our lenders.
Our
consolidated indebtedness as of December 31, 2022 was approximately $1.8 billion. In conjunction with the Cloudmed Acquisition, we entered into the second amended and restated senior credit agreement (the “Second A&R Credit Agreement”), which increased our consolidated indebtedness by $1.0 billion.
The loan agreement for this indebtedness contains certain customary representations and warranties, affirmative and negative financial covenants, indemnity obligations, and events of default. The amount of debt and related covenants could have significant consequences to us, including:
•affecting our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions, share repurchases
and dividends, or other purposes may be impaired or such financing may not be available on favorable terms, or at all;
•negative financial covenants contained in the debt agreement require us to meet financial tests that may affect our flexibility in planning for, and reacting to, changes in our business, including possible acquisition opportunities;
•a substantial portion of our cash flow is required to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations and future business opportunities; and
•level of indebtedness makes us more vulnerable than our less leveraged competitors to competitive pressures or a downturn in our business or the economy generally.
Our
ability to comply with the provisions of the debt agreement may be affected by events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate our debt repayment obligations.
Litigation could materially adversely affect our business, financial condition, operating results, and cash flows and cause reputational damage from the view of current and potential customers and shareholders.
We have been and in the future may become subject to lawsuits, claims, audits, and investigations related to our business, which may lead to unfavorable publicity for us and could materially adversely affect our business, financial condition, operating results, and cash flows in various ways, including subjecting us to significant liability,
resulting in significant settlement payments, or having a disruptive effect upon the operation of our business and consuming the time and attention of our senior management. In addition, we may incur substantial expenses in connection with these litigation matters, including substantial fees for attorneys. Although we maintain insurance that may provide coverage for some or all of these expenses, our insurers have rights under the policies to deny coverage under various policy exclusions. There is risk that the insurers will rescind the policies, that some or all claims will not be covered by such policies, or that, even if covered, our ultimate liability will exceed the available insurance.
We are unable to predict the outcome of pending legal actions. The ultimate resolutions of our pending litigation could have a material adverse effect on our operating results, financial condition or liquidity, and on the trading price
of our common stock.
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Regulatory Risks
The healthcare industry is heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity, and adversely affect our business.
The healthcare industry is heavily regulated and is subject to changing political, legislative, regulatory, and other influences. Many healthcare laws are complex, and their application to specific services and relationships may be unclear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the services we provide. There can be no assurance that our operations will not be challenged or adversely affected
by enforcement initiatives. Our failure to anticipate the application of these laws and regulations to our business, or any other failure to comply with regulatory requirements, could create liability for us, result in adverse publicity, and adversely affect the attractiveness of our services to existing customers and our ability to market new services. We are unable to predict what changes to laws or regulations might be made in the future or how those changes could affect our business or our operating costs.
If we violate HIPAA, the HITECH Act or state or foreign health information privacy laws, we may incur significant liabilities, and any such violations could make it more difficult to retain existing customers or attract new customers, extend the time it takes to enter into service agreements with new customers, or result in a material adverse effect on our business, operating results, and financial condition.
As
described in Item 1 above, HIPAA contains substantial restrictions and requirements with respect to the use and disclosure of individuals’ PHI. Since the passage of the HITECH Act in 2009, enforcement of HIPAA violations has increased, as reflected by the announcement of a number of significant settlement agreements and sanctions by federal authorities, the pursuit of HIPAA violations by state attorneys general, and the roll-out of a federal audit program for covered entities and business associates. HHS may resolve HIPAA violations through informal means, such as allowing a covered entity to implement a corrective action plan, but HHS also has the discretion to move directly to impose monetary penalties and is required to impose penalties for violations resulting from willful neglect. In addition to enforcement by HHS, state attorneys general may bring civil actions in response to violations of HIPAA privacy and security regulations or state privacy and security laws
that threaten the privacy of state residents.
We and our customers also are subject to federal and state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary and could impose additional penalties and subject us to additional privacy and security restrictions. In addition, legislation has been proposed or implemented at various times at both the federal and the state levels that would limit, forbid or regulate the use or transmission of medical information pertaining to U.S. patients outside of the United States. In addition, various states recently have enacted, and other states are considering, new laws and regulations concerning the privacy and security of consumer and other personal information. To the extent we are subject to such requirements, these laws and regulations often have far-reaching effects, may require us to modify our data processing practices and
policies, may require us to incur substantial costs and expenses to comply, and may render our international operations impracticable or make them substantially more expensive. These laws and regulations often provide for civil penalties for violations, as well as a private right of action for data breaches, which may increase the likelihood or impact of data breach litigation.
Along with state and federal laws, international laws may impact our operations. The GDPR, for example, imposes obligations on us as well as our customers, depending on the operations at issue. The GDPR and related international laws also may restrict how we can store, transfer, and process personal information of our customers’ patients and other data subjects. These laws are constantly changing, and may impact how we may transfer or store information in the U.S. or abroad.
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We
have implemented and maintain commercially reasonable physical, technical, and administrative safeguards intended to protect all personal data and have processes in place to assist us in complying with applicable laws and regulations regarding the protection of this data and properly responding to any security incidents or breaches. Nonetheless, a knowing breach of HIPAA’s requirements could expose us to criminal liability, and a breach of our safeguards and processes that is not due to reasonable cause or involves willful neglect could expose us to significant civil penalties and the possibility of civil litigation under HIPAA and applicable state law.
In addition, given the omnipresent threat of potential cybersecurity incidents or security breaches, we, or our customers, could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could
damage our reputation or harm our business, financial position, and operating results. We have been the victim of theft of company property containing patient data in the past, and we may face similar incidents in the future. During the current COVID-19 pandemic, we shifted many employees to work from home environments, which involves additional risk surrounding theft of company property and access to PHI. Cybersecurity incidents or allegations of deficiencies regarding our data security practices could require us to change aspects of our business practices, make it more difficult to retain existing customers or attract new customers, extend the time it takes to enter into service agreements with new customers, or result in a material adverse effect on our business, operating results, and financial condition.
Developments in the healthcare industry, including national healthcare reform,
could adversely affect our business.
The healthcare industry has changed significantly in recent years and we expect this to continue. We are unable to predict each healthcare initiative that will be implemented at the federal or state level, or what the ultimate effect these initiatives may have on us. For example, changes to Medicare and Medicaid reimbursement are implemented periodically and may cause a reduction in the amounts received by our customers and may have an indirect adverse effect on our business. The No Surprises Act and its implementing regulations may also result in a reduction in the amounts received by our customers and may have an adverse effect on our business and operating results.
In addition, healthcare reform is causing some payors to transition from volume to value-based reimbursement models, which can include risk-sharing,
bundled payment, and other innovative approaches. While these models may provide us with opportunities to provide new or additional services (e.g., our value-based reimbursement capabilities within our RCM service offering) and to participate in incentive-based payment arrangements, there can be no assurance that such new models and approaches will prove to be profitable to our customers or us. Further, new models and approaches may require investment by us to develop technology or expertise to offer necessary and appropriate services or support to our customers, and the amount of such investment and the timing for return of such investment are not fully known at this time. In addition, some of these new models are being offered as pilot programs and there is no assurance that they will continue or be renewed. Further, adoption of such new models and approaches may require compliance with a range of federal and state laws relating to fraud and abuse, insurance, reinsurance
and managed care regulation, billing and collection, corporate practice of medicine, and licensing, among others. Many states in which these new value-based structures are being developed lack regulatory guidance or a well-developed body of law for these new models and approaches, or may not have updated their laws or enacted legislation yet to reflect the new healthcare reform models. As a result, although we have attempted to structure and conduct our operations in accordance with our interpretation of current laws and regulations, new and existing laws, regulations, or guidance could have a material adverse effect on our current and future operations and could subject us to the risk of restructuring or terminating our customer agreements and arrangements, as well as the risk of regulatory enforcement, penalties, and sanctions if state enforcement agencies disagree with our interpretation of state laws.
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If
we fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.
Healthcare is one of the largest industries in the country and one of the costliest line items in the federal budget. As a result, the healthcare industry continues to attract attention from legislators and regulators. As described in Item 1 above, a number of healthcare fraud and abuse laws, including but not limited to the AKS, FCA, Stark Law, and EMTALA, and their state counterparts, apply to hospitals, physicians, and others who (i) furnish healthcare services to patients and submit claims for reimbursement to government programs or commercial insurers, and (ii) refer patients to one another. Federal and state regulatory
and law enforcement authorities continue to focus on enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other healthcare reimbursement laws and rules in an effort to reduce overall healthcare spending.
These laws are complex, may change rapidly, and their application to our specific services and relationships may not be clear and may be applied to our business in ways we do not anticipate. New and evolving payment structures, for example, such as accountable care organizations and other arrangements involving combinations of healthcare providers who share savings, potentially implicate anti-kickback and other fraud and abuse laws. In addition, errors created by our proprietary applications or services that relate to entry, formatting, preparation, or transmission of claims, reporting of quality or other data pursuant to value-based purchasing initiatives, or cost report information
may be alleged or determined to cause the submission of false claims or otherwise be in violation of these laws. Further, the continued growth of our coding and billing services provided from a global business services environment necessitates comprehensive monitoring and oversight of these services to promote quality control and regulatory compliance.
While we seek to structure our business relationships and activities to avoid any activity that could be construed to implicate federal and state fraud and abuse laws, we cannot assure you that our arrangements and activities will be deemed outside the scope of these laws or that increased enforcement activities will not directly or indirectly have a material adverse effect on our business, financial condition, or operating results. Any determination that we have violated any of these laws could, for example (i) subject us to civil or criminal penalties (ii) require us to change
or terminate some portions of our operations or business (iii) disqualify us from providing services to healthcare providers doing business with government programs, (iv) give our customers the right to terminate our managed services agreements with them, and/or (v) require us to refund portions of our base fee revenues and incentive payment revenues, any of which could have a material adverse effect on our business and operating results. Moreover, any violations by, and resulting penalties or exclusions imposed upon, our customers could adversely affect their financial condition and, in turn, have a material adverse effect on our business and operating results. Finally, even absent an alleged violation of the law by us, participants in the healthcare industry receive inquiries or subpoenas to produce documents and provide testimony in connection with government investigations. We could be required to expend significant time and resources to comply with these requests,
and the attention of our management team could be diverted by these efforts.
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Our failure to comply with debt collection and other consumer protection laws and regulations could subject us to fines and other liabilities, which could harm our reputation and business, and could make it more difficult to retain existing customers or attract new customers, extend the time it takes to enter into service agreements with new customers, or result in a material adverse effect on our business, operating results, and financial condition.
Our business practices involve collecting or assisting our customers in collecting non-defaulted amounts owed by patients for current and prior services activities, which may subject us to
the FDCPA. The FDCPA and the TCPA restrict the methods that we may use to contact and seek payment from consumer debtors regarding past due accounts. Many states impose additional requirements on debt collection practices, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that may be inconsistent among different jurisdictions. We could incur costs or could be subject to fines or other penalties under the TCPA, the FDCPA and the FTC Act if we are determined to have violated the provisions of those authorities during the course of conducting our operations. Any perceived breach of the FDCPA could result in us being required to change aspects of our business practices, make it more difficult to retain existing customers or attract new customers, extend the time it takes to enter into service agreements with new customers, or result in a material adverse
effect on our business, operating results, and financial condition.
We cannot be certain that governmental officials responsible for enforcing EMTALA, or other parties, will not assert that our customers are in violation of EMTALA, and defending and settling allegations of EMTALA violations could have a material adverse effect on our business even if we are ultimately not found to have contributed to such violations.
Although EMTALA is not directly applicable to us because we are not a Medicare participating hospital, we cannot be certain that governmental officials responsible for enforcing EMTALA, or other parties, will not assert that our customers are in violation of EMTALA. If our customers are found to have violated EMTALA, they may assert claims that our management practices contributed to the violation. Defending and settling allegations of EMTALA violations could have
a material adverse effect on our business even if we ultimately are not found guilty of a violation.
Risks Related to our Control Environment
We have identified a material weakness in our internal control over financial reporting, which, if not corrected, could affect the reliability of our consolidated financial statements and have other adverse consequences.
Section 404 of the Sarbanes-Oxley Act and the related SEC rules require management of certain public companies to assess the effectiveness of their internal control over financial reporting annually and to include in Annual Reports on Form 10-K a management report on that assessment, together with an attestation report by an independent registered public accounting firm. Under Section 404 and the SEC rules, a company cannot conclude that its internal
control over financial reporting is effective if there exist any material weaknesses in its financial controls. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement within the annual or interim financial statements will not be prevented or detected on a timely basis.
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We have identified a material weakness in the design and operating effectiveness of the Company’s internal controls over financial reporting relating to the controls over business combinations impacting the accounting for acquiree compensation
arrangements, and have determined that the Company’s disclosure controls and procedures were not effective, as of December 31, 2022 and 2021 and all interim and subsequent periods. This material weakness is described in “Part II - Item 9A - Controls and Procedures” of this Amendment. We have taken and will continue to take actions to remediate the material weakness and improve the effectiveness of our internal control over financial reporting. We cannot, however, assure you that we will be able to correct this material weakness in a timely manner, or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future. The material weakness in our internal control over financial reporting is not expected to be considered remediated until
the filing of our Annual Report on Form 10-K for the year ended December 31, 2023. If we do not successfully remediate the material weakness, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results, which could cause our financial results to be materially misstated and require restatement as occurred in connection with the filing of this Amendment. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
As
a result of the delayed filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, we face limitations in registering securities for a public offering or acquisitions, which could adversely affect our business.
Due to our inability to file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 on or prior to its due date, we generally are ineligible to use “short-form” registration statements, or Form S-3, that would allow us to incorporate by reference our SEC reports into our registration statements, or to use automatic shelf registration statements, until we have filed all of our periodic reports in a timely manner for a period of 12 months. Our inability to register our securities
on Form S-3 could increase the costs of selling securities publicly, significantly delay such sales and adversely affect our business.
We face risks related to the restatement of the Company’s previously issued financial statements.
As discussed in the Explanatory Note and in Note 1 to the consolidated financial statements in this Amendment, we determined to restate certain information in our previously issued consolidated financial statements for the years ended December 31, 2022 and 2021, for each of the quarters within 2022 and 2021, and for the quarters ended June 30, 2023 and March
31, 2023. As a result, we could be subject to additional risks and uncertainties, which could affect investor confidence in the accuracy of our financial disclosures. We could face litigation under the federal and state securities laws or other claims arising from the restatements. The cost of defending against any such claims and the ultimate outcome of any such litigation could materially affect our results of operations. In addition, we could discover additional material or immaterial errors in our financial statements, and our financial statements remain subject to the risk of future restatement.
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Risks Related to Intellectual Property
We may be unable to adequately protect our intellectual property.
Our
success depends, in part, upon our ability to establish, protect and enforce our intellectual property and other proprietary rights. If we fail to establish or protect our intellectual property rights, we may lose an important advantage in the market in which we compete. We rely upon a combination of patent, trademark, copyright and trade secret law and contractual terms and conditions to protect our intellectual property rights, all of which provide only limited protection. We cannot assure you that our intellectual property rights are sufficient to protect our competitive advantages. We cannot assure you that any patents issued or that will be issued from current or future applications will provide us with the protection that we seek or that any current or future patents issued to us will not be challenged, invalidated or circumvented. Legal standards relating to the validity, enforceability and scope of protection of patents are uncertain. Also, we cannot assure you
that any trademark registrations will be issued for pending or future applications or that any of our trademarks will be enforceable or provide adequate protection of our proprietary rights.
We also rely in some circumstances on trade secrets to protect our technology. Trade secrets may lose their value if not properly protected. We endeavor to enter into non-disclosure agreements with our employees, customers, contractors, and business partners to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use of our technology, and adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and proprietary technology. Moreover, others may reverse engineer or independently develop technologies that are competitive to ours or infringe our intellectual property.
Accordingly,
despite our efforts, we may be unable to prevent third parties from infringing or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, operating results, and financial condition. Monitoring infringement of our intellectual property rights can be difficult and costly, and enforcement of our intellectual property rights may require us to bring legal actions against infringers. Infringement actions are inherently uncertain and therefore may not be successful, even when our rights have been infringed, and even if successful, may require a substantial amount of resources and divert our management’s attention.
Claims by others that we infringe their intellectual property could force us to incur significant costs or revise the way we conduct our business.
Our
competitors protect their intellectual property rights by means such as patents, trade secrets, copyrights, and trademarks. We have not conducted an independent review of patents issued to third parties. Additionally, because patent applications in the United States and many other jurisdictions are kept confidential for 18 months before they are published, we may be unaware of pending patent applications that relate to our proprietary technology. Any party asserting that we infringe its proprietary rights would force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights; cause interruption or cessation of our operations; require us to enter into royalty or licensing agreements with third parties; and consume time which would otherwise be spent on our core business. Even if we prevail, the
cost of such litigation could deplete our financial resources. Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions, or trial testimony. The software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Moreover, the risk of such a lawsuit will likely increase as our size and scope of our services and technology platforms increase, as our geographic presence and market share expand and as the number of competitors in our market increases. Any of the foregoing could disrupt our business and have a material adverse effect on our operating results and financial condition.
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PART
II
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Amendment. Some of the information contained in this discussion and analysis or set forth elsewhere in this Amendment, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. Please review
Part I, Item 1A “Risk Factors” of this Amendment for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Restatement and Revision of Previously Issued Consolidated Financial Statements
We have restated our consolidated financial statements as of and for the years ended December 31, 2022 and 2021 and revised our consolidated financial statements as of and for the year ended December 31, 2020 contained in this Amendment. Refer to the Explanatory Note for background on the restatement and revision, the fiscal and interim periods impacted, internal control considerations,
and other information. As a result, the previously reported financial information as of and for the years ended December 31, 2022, 2021, and 2020 in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, has been updated to reflect the relevant restatements and revisions. See Note 23, Restatement and Revision of Previously Issued Consolidated Financial Statements, and Note 24, Quarterly Financial Data (Unaudited), in Item 8, Financial Statements and Supplementary Data, for additional information related to the restatement and revision, including descriptions of the adjustments and the impacts on our consolidated financial statements.
Other than the effect of the restatement, this section has not been otherwise modified and does not
reflect any information or events occurring after February 16, 2023, the filing date of the Original Report, or modify or update those disclosures affected by events that occurred at a later date or facts that subsequently became known to the Company, except to the extent they are otherwise required to be included and discussed herein.
Overview
We are a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare providers. We help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for our customers.
While we cannot control the
changes in the regulatory environment imposed on our customers, we believe that our role becomes increasingly more important to our customers as macroeconomic, regulatory, and healthcare industry conditions continue to impose financial pressure on healthcare providers to manage their operations effectively and efficiently.
We achieve these results for our customers by managing healthcare providers’ revenue cycle operations, which encompass patient registration, insurance and benefit verification, scheduling, medical treatment documentation and coding, bill preparation, and collections from patients and payers. We do so by deploying a unique operating model that leverages our extensive healthcare domain expertise, innovative technology and intelligent automation, and process excellence. We assist our RCM customers in managing their revenue cycle operating costs while simultaneously increasing the portion of the maximum potential
services revenue they receive. Together, these benefits can generate significant and sustainable improvements in operating margins and cash flows for our customers.
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Our largest service offering consists of end-to-end RCM services, which we deploy through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions, and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused management, subject matter specialists, proprietary technology solutions, and other
resources. Under the operating partner model, our employees are the revenue cycle personnel providing services and we typically control third party vendors either through direct contracts or the assumption of the customer’s vendor contracts. As a result, under the operating partner model we record higher expenses as well as higher revenues related to the negotiated cost to collect. Under the co-managed model, the revenue cycle personnel and third party vendors remain with the customer and those costs do not impact our financial results. For the year ended December 31, 2022, substantially all of our net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.
We
also offer modular solutions, allowing customers to engage us to address specific revenue cycle improvement opportunities, such as revenue intelligence solutions (which were enhanced through the acquisition of Cloudmed), automation solutions, revenue integrity solutions, PM, accounts receivables and denials recovery, PAS, CDI, coding management, business office services, and patient experience.
We operate our business as a single segment configured with our significant operations and offerings organized around the business of providing RCM services to healthcare providers.
Summary of Operations
While our performance in the second half of 2022 was impacted by operational and industry-related factors, we made progress in several key areas over the course of the year including:
•Completion
of the Cloudmed Acquisition, which added an industry-leading revenue intelligence platform to our product portfolio, enabling us to broaden and further differentiate our capabilities for customers.
•New business wins of approximately $13 billion in net patient revenue under management on an end-to-end basis, including Sutter Health, Scion Health, and St. Clair Health.
•Continued expansion of our digitization effort, including advancement of our automation capabilities by approximately 80 million manual tasks compared to 2021, bringing our automation capabilities to 150 million tasks annually.
•Revenue growth of 22.5% compared to 2021, driven by the Cloudmed Acquisition and new business
wins.
Trends and Economic Conditions
Revenue cycle is a critical function for healthcare providers as they seek to increase process efficiency and maximize cash collected from health insurance companies and patients. Healthcare providers operate their revenue cycle with a combination of labor, software, and services vendors. Third-party vendors offer various solutions including consulting services, software, and other services, including point solutions that cover one or multiple components of the revenue cycle and full outsourcing services, among others. The Centers for Medicare and Medicaid Services (“CMS”) projects hospital care and physician care expenditures in the U.S. to amount to $1.5 trillion and $959 billion in 2023, respectively. We estimate the cost of hospital and physician revenue cycle operations to
be approximately 5% of revenue, resulting in a market size of approximately $115 billion. According to Research and Markets data as of April 27, 2022, revenue cycle spend is projected to grow at a compounded annual growth rate of 11.6% through 2030.
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Health systems are currently facing challenges in their revenue cycle operations based on several factors including: (1) more complex and clinical-outcomes based reimbursement, (2) industry consolidation amongst hospitals and across the continuum of care, (3) increasing patient responsibility for their medical bills, (4) healthcare labor shortage, and (5) capital constraints to invest in the revenue cycle given financial difficulties
and requirements to invest in improving clinical care. We believe these trends provide opportunities for external RCM vendors that will result in further growth for the industry and our Company.
Growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications, contributed to high levels of inflation in 2022. We expect inflation to persist in 2023, which would negatively impact our costs for wages and other materials. Inflation may also impact the economic health of our customers, including their ability to pay amounts owed to us. In response to rising inflation, the Federal Reserve Board has raised interest rates and signaled that it may continue to raise rates. Our credit facility interest, in part, is based on a variable interest rate structure
which can result in increased cost in periods of rising interest rates. To date, rising interest rates have not had a material impact on our results of operations.
In 2022, notably in the second half of the year, our incentive fees were impacted by deterioration in payer-reimbursement turnaround times. We currently anticipate continued impact on our performance into 2023 from payer turnaround times. In addition, we are observing the following trends, which we expect will persist in 2023: (i) we expect the inflationary effect on our labor and cost structure to be higher than payer rate increases flowing to our customers’ revenue and cash collections; (ii) we expect reduced growth in our physician business serving emergency department physicians due to regulatory changes that are impacting some of the large groups in the industry; and (iii) with recessionary concerns increasing, we could see potential
weakness in consumer collections as healthcare bills are de-prioritized.
Other adverse macroeconomic conditions, including but not limited to changes to fiscal and monetary policy and currency fluctuations, could impact macro-level consumer spending trends, which could affect the amount of volumes processed on our platform and result in fluctuations to our revenue streams. Certain of our customers may be negatively impacted by these events. Further, while patient volumes are largely in line with pre-COVID-19 levels, the COVID-19 pandemic continues to evolve and affect the population. In addition, our business and customers continue to face challenges relating to a tight labor market and increased turnover rates. In particular, the current labor market combined with heightened inflation across the globe may increase cost of labor for both us and our customers in 2023 and over time. We plan to continue
to invest in technology to help us offset these costs and expect to continue hiring talented employees and providing competitive compensation. The extent to which these macroeconomic conditions will affect our business is uncertain and will depend on political, social, economic, and regulatory forces that are outside of our control. We continue to assess fluctuating macroeconomic events to manage our response.
Components of Our Results of Operations
Net Services Revenue
Our largest source of revenue is our end-to-end RCM services fees. We also generate revenue through modular RCM services, where customers will engage us for only specific components of our end-to-end RCM service offering on a fixed-fee, per-use, contingency, or volumetric basis.
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Cost
of Services
Our cost of services includes:
•Personnel costs and technology expenses. We incur costs related to our management and staff employees who are devoted to customer operations. These expenses consist primarily of the wages, bonuses, benefits, share-based compensation, travel and other costs associated with our employees who are assigned to specific customer sites related to our customers’ revenue cycle operations. The employees assigned to customer sites typically have significant experience in revenue cycle operations, care coordination, technology, quality control, or other management disciplines. Included in these expenses is an allocation of the costs associated with maintaining, improving, and deploying our integrated proprietary technology suite.
•Global
business services center costs. We incur expenses related to salaries and benefits of employees in our global business services centers, as well as non-payroll costs associated with operating our global business services centers.
•Other expenses. We incur expenses related to our employees who manage PAS and other services. These expenses consist primarily of wages, bonuses, benefits, rent, share-based compensation, amortization of intangible assets, assumed vendor contracts for onboarded customers and other costs.
Estimates of Cost of Customers’ Revenue Cycle Operations
Cost of customers’ revenue cycle operations consist of payroll and third-party non-payroll costs. Customers’
payroll costs are reasonably estimable; however, third-party non-payroll costs are comprised of invoices from customer vendors and estimated costs not yet invoiced. We are at times dependent upon information generated from our customers’ records to determine the amount of third-party non-payroll costs. We estimate the amount of non-payroll costs incurred but not invoiced in order to properly calculate net operating fees at the end of each reporting period. Such estimated costs are based on contractually allowable expenses, historical reimbursed costs, and estimated lag in the timing of receipt of information for third-party non-payroll costs. The timing difference includes the lag between the services rendered by third-party vendors and their billings to our customers. The liabilities for such costs are included in accrued service costs and are part of the customer liabilities balance in the consolidated balance sheet. These estimates are based on the best available
information and are subject to future adjustments based on additional information received from our customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salary and benefit expenses for executives, sales, corporate IT, legal, regulatory compliance, finance, and human resources personnel, and professional service fees related to external legal, tax, audit, and advisory services. It also includes insurance premiums, facility charges, and other corporate expenses.
Other Expenses
Other expenses include expenses related to evaluating and pursuing acquisition opportunities and integrating completed acquisitions as part of our inorganic growth strategy, large-scale technology projects that transform how we operate the business,
reorganization-related expenses, capital structure related costs, costs associated with the sale of a business, and expenses incurred related to the COVID-19 pandemic. Reorganization expenses consist primarily of severance payments and employee benefits. As part of the transition of certain customers’ personnel to us, we have agreed to reimburse those customers for severance and retention expenses related to certain employees who will not be transitioned to us. Additionally, in 2020 as a part of our evaluation of our footprint, we began transitioning certain employees to a work from home environment and exited numerous leased facilities which generated facility exit costs including costs of writing off assets related to those leases. We continue to evaluate our future state workplace environment.
30
Interest
Expense
Interest expense reflects interest on debt arrangements, and the amortization of certain debt discounts and costs.
Income Taxes
Income tax provision (benefit) consists of federal and state income taxes in the United States and other foreign jurisdictions.
Application of Critical Accounting Estimates
Our consolidated financial statements reflect the assets, liabilities and results of operations of R1 RCM Inc. and our wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Our consolidated financial statements have been prepared in accordance with GAAP.
The
preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base estimates on historical experience and on assumptions that we believe to be reasonable given our operating environment. Estimates are based on our best knowledge of current events and the actions we may undertake in the future. Although we believe all adjustments considered necessary for fair presentation have been included, our actual results may differ materially from our estimates.
We believe that the accounting policies described below involve our more significant judgments, assumptions, and estimates, and therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion
of these policies is necessary to understand and evaluate the consolidated financial statements contained in this Amendment. For further information on our critical and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in this Amendment.
Revenue Recognition - Incentive Fees
Incentive fees are structured to reflect quarterly or annual performance, involve detailed calculations, and are evaluated on a contract-by-contract basis. The Company estimates incentive fee revenue based on contractually agreed-upon financial or operating
metrics. The Company recognizes revenue related to incentive fees ratably as the performance obligation for RCM services is satisfied, to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. Incentive fees are typically billed and paid on a quarterly basis, which means the amounts billed through the third quarter of the year will have been reviewed and approved by the customer. At year-end, the incentive fee revenue for the fourth quarter will not have been invoiced. If our estimates are not reasonably accurate, then incentive fee revenue reported in Note 6, Revenue Recognition, to the consolidated financial statements included in this Amendment could be misstated, which would also have a direct impact on our net income.
The contract assets balances represent estimated revenue related to certain modular revenue services and the Company’s right to consideration for services that the Company has transferred to a customer when that right is conditioned on something other than the passage of time. Revenues and contract assets are recognized when control of the promised services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange
for transferring those services. The contract asset balances relate to services with variable consideration contingent upon collections by our clients. We estimate the variable consideration for which we expect to be entitled from our service arrangements with each customer. We update our estimates at the end of each reporting period based on historical information and our best judgment at the time.
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The estimate of variable consideration included in the transaction price typically involves estimating the amounts our customers will ultimately collect and the relative fee we charge that is calculated as a percentage of those collections.
Inputs to these estimates include historical collections from the customer or a portfolio of similar contracts. When appropriate, we may apply a constraint whereby we include in the transaction price estimated variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. To the extent that historical data is not available, revenue is estimated using average assumptions across the solution. We allocate variable consideration to each distinct period to which it relates since this reflects the consideration to which we expect to be entitled in exchange for the services we have performed to date, the terms of the variable consideration relate specifically to our effort to satisfy the portion of our performance
obligation and the amount reflects the value transferred to the customer for the period.
Share-Based Compensation Expense
We determine the expense for all employee share-based compensation awards by estimating their fair value and recognizing that value as an expense, on a ratable basis, in our consolidated financial statements over the requisite service period in which our employees earn the awards. Judgment is required in estimating the probability of achievement of performance conditions for our performance-based restricted stock unit (“PBRSU”) awards. Changes in estimates to the completion of performance factors are applied utilizing the cumulative catch-up methodology. These awards typically have metrics related to cumulative adjusted EBITDA, end-to-end RCM agreement growth, modular sales revenue, or any combination of the three. To assess current performance, we review
our historical performance to date, along with any adjustments which have been approved to the reported performance, and add on our current future projections to determine the probable outcome of the award. 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. In 2022, over 65% of the total stock compensation expense reported in Note 13, Share-Based Compensation, to the consolidated financial statements included in this Amendment related to PBRSUs with performance-based conditions. If actual results vary from our performance condition estimates, we could have a significant amount of additional expense or reversal of expense in future periods.
We recognize compensation expense using a straight-line method over the applicable vesting 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.
Business Combinations
We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of acquired identified assets and liabilities is recorded as goodwill.
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Significant judgment is required in estimating the fair value of intangible assets. Our typical intangible assets acquired include developed technology, tradenames,
and customer relationships. There are several methods that can be used to determine the fair value of intangible assets. We typically use an income approach to value the specifically identifiable intangible assets which is based on forecasts of expected future cash flows. Under the income approach, we utilize a multi-period excess earnings methodology to value the primary intangible asset of a business combination. Fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We typically consult with an independent advisor to assist in the valuation of intangible assets. Significant estimates and assumptions inherent in valuations include discount rates, revenue and cost growth rates, and technology obsolescence curves. We consider marketplace participant assumptions in determining the amount and timing of future cash flows along with technology life cycles,
barriers to entry, and risks associated with cash flows in concluding upon our discount rates. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition dates, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, we may record adjustments to the purchase accounting. In addition, unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions. If the estimates do not reflect future results or assumptions utilized in the valuation are inaccurate, then our recorded intangible assets and goodwill could be misstated, or could result in future impairment.
New Accounting Standards
For additional information regarding new accounting guidance, see Note 2, Summary of Significant Accounting
Policies, to our consolidated financial statements included in this Amendment, which provides a summary of recently adopted accounting standards and disclosures.
Results of Operations
The following table provides consolidated operating results and other operating data for the periods indicated:
Net income (loss) before income tax provision (benefit)
(66.8)
117.3
116.5
(184.1)
(156.9)
%
0.8
0.7
%
Income
tax provision (benefit)
(3.5)
30.0
1.3
(33.5)
(111.7)
%
28.7
n.m.
Net income (loss)
$
(63.3)
$
87.3
$
115.2
$
(150.6)
(172.5)
%
$
(27.9)
(24.2)
%
Adjusted
EBITDA (1)
$
423.8
$
345.8
$
240.5
$
78.0
22.6
%
$
105.3
43.8
%
n.m.
- not meaningful
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(1) Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.
Net services revenue increased by $331.8 million, or 22.5%, from $1,474.6 million for the year ended December 31,
2021 to $1,806.4 million for the year ended December 31, 2022. The increase was driven by a $260.0 million contribution from Cloudmed and $97.9 million increase in net operating fees driven primarily by onboarding of new customers, partially offset by lower incentive fees of $37.0 million driven by longer payer-reimbursement turnaround times and execution issues at two operating partner customers.
Cost of Services
Cost of services increased by $286.0 million, or 24.6%, from $1,160.9 million for the year ended December 31, 2021, to $1,446.9 million for the year ended December 31, 2022.The increase was primarily driven by Cloudmed’s cost of services of $115.0 million following the
acquisition and the related amortization of acquisition intangibles of $89.0 million, costs related to onboarding of new customers, and operational investments to support new growth, partially offset by cost savings achieved through automation, our global workforce transitions, and vendor rationalizations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $50.5 million, or 41.4%, from $122.0 million for the year ended December 31, 2021 to $172.5 million for the year ended December 31, 2022.The increase was driven by $30.6 million of selling, general and administrative costs of Cloudmed following the acquisition, as well as incremental spend in corporate functions to support business
growth, higher share-based compensation expense, and a$11.8 millionincrease in allowance for credit losses primarily related to a physician customer that has been experiencing financial difficulties.
Other Expenses
Other expenses increased by $134.3 million, or 242.0%, from $55.5 million for the year ended December 31, 2021, to $189.8 million for the year ended December 31, 2022. See Note 14, Other Expenses, to the consolidated financial statements included in this Amendment for the details of the costs included in this total for the comparative periods.
Income Taxes
Income
tax benefit improved by $33.5 million from a $30.0 million income tax provision for the year ended December 31, 2021 to a $3.5 million income tax benefit for the year ended December 31, 2022. This was primarily due to a tax benefit for pre-tax loss, partially offset by an increase in tax expense for non-deductible expenses and taxes on foreign source income.
Net services revenue increased by $204.5 million, or 16.1%, from $1,270.1 million for the year ended December 31, 2020 to $1,474.6 million for
the year ended December 31, 2021. The increase was driven by improvement in net operating and incentive fees aided by a recovery in patient volumes, new customers onboarded in the last twelve months, and the RevWorks and iVinci Partners, LLC d/b/a VisitPay (“VisitPay”) acquisitions, partially offset by the disposition of the emergency medical services (“EMS”) business.
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Cost of Services
Cost of services increased by $139.8 million, or 13.7%, from $1,021.1 million for the year ended December 31, 2020, to $1,160.9 million for the year ended December 31, 2021.
The increase was primarily driven by the onboarding of new customers and acquisitions, technology investments to support scaling, and higher share-based compensation, partially offset by operational cost productivity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $20.7 million, or 20.4%, from $101.3 million for the year ended December 31, 2020 to $122.0 million for the year ended December 31, 2021. The increase was primarily driven by higher share-based compensation and the VisitPay acquisition.
Other Expenses
Other expenses decreased by $14.1 million, or 20.3%, from $69.6 million for the year ended December
31, 2020, to $55.5 million for the year ended December 31, 2021. The decrease was primarily due to lower costs associated with strategic initiatives and reduced facility-exit charges.
Income Taxes
Income tax provision increased by $28.7 million to $30.0 million for the year ended December 31, 2021 from $1.3 million for the year ended December 31, 2020. This was primarily due to lower tax benefit for share-based compensation and incremental withholding taxes in 2021 and the non-recurring impact from the disposition of the EMS business in 2020.
Non-GAAP Financial Measures
In
order to provide a more comprehensive understanding of the information used by our management team in financial and operational decision-making, we supplement our consolidated financial statements that have been prepared in accordance with GAAP with the non-GAAP financial measure of adjusted EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees.
Adjusted EBITDA
We define adjusted EBITDA as net income (loss) before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense,
CoyCo 2 share-based compensation expense, strategic initiatives costs, customer employee transition and restructuring expense, and other items which are detailed in Note 14, Other, to the Consolidated Financial Statements included in this Amendment.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect:
◦Changes in, or cash requirements for, our working capital needs;
◦Income tax expenses or cash requirements to pay taxes;
◦Interest expenses or cash required to pay interest;
◦Certain other expenses which may require cash payments;
•Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such replacements or other purchase commitments, including
lease commitments; and
•Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table presents a reconciliation of adjusted EBITDA to net income (loss), the most closely comparable GAAP measure, for each of the periods indicated:
(1)Share-based
compensation expense represents the expense associated with stock options, restricted stock units (“RSUs”), and PBRSUs, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 13, Share-Based Compensation, to the Consolidated Financial Statements included in this Amendment for the detail of the amounts of share-based compensation expense.
(2)CoyCo 2 share-based compensation expense represents the expense associated with CoyCo 2 limited partnership units, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 13, Share-Based Compensation, to the Consolidated Financial Statements included in this Amendment for the detail of the amounts of CoyCo 2 share-based compensation expense.
(3)Gain on business disposition represents the gain associated
with the disposition of the EMS business on October 30, 2020. See Note 1, Description of Business, to the Consolidated Financial Statements included in this Amendment for further details on the disposal.
(4)Other expenses are incurred in connection with acquisition and integration costs, various exit activities, transformation initiatives, and organizational changes to improve our business alignment and cost structure. See Note 14, Other, to the Consolidated Financial Statements included in this Amendment for the detail of the amounts included in other expenses.
Liquidity and Capital Resources
Our primary sources of liquidity include our cash flows
from operations and borrowings under the Second A&R Credit Agreement. As of December 31, 2022, we had total available liquidity of $609.2 millionreflecting our cash and cash equivalents as well as remaining availability under our senior secured revolving credit facility (the “Senior Revolver”).
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Our liquidity is influenced by many factors, including timing of revenue and corresponding cash collections, the amount and timing of investments in strategic initiatives, transaction costs related to business acquisitions, our investments in property, equipment and software, and the use of cash to pay tax withholding obligations upon surrender of shares upon
vesting of equity awards. We continue to invest capital in order to achieve our strategic initiatives and successfully integrate acquired companies. As part of our strategic initiatives, we plan to continue to invest in technology to increase the scalability and resiliency of our systems.
We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our global business services infrastructure and capabilities, including further expansion in the Philippines and India, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. New business development remains a priority as we plan to continue to boost our sales and marketing efforts. Additionally, we expect to continue to incur costs associated with implementation
and transition costs to onboard new customers.
We expect our cash and cash equivalents, cash flows from operations, and our availability under the Senior Revolver to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, including debt maturities and material capital expenditures, for the next 12 months and beyond. Similar to previous material acquisitions, future potential acquisitions may be funded through the incurrence of additional debt if our current credit facilities do not have the required capacity.
Our material cash requirements include the following contractual and other obligations:
Debt
Our indebtedness significantly
increased as a result of the Cloudmed Acquisition. As of December 31, 2022, we had outstanding debt of $1.8 billion with contractual payments extending through 2029, with $53.9 million payable within 12 months. Future interest payments associated with our debt total $527.6 million, with $116.6 million payable within the next 12 months, based on the floating rates as of December 31, 2022.
Leases
Our significant leasing activity encompasses leases for real estate, including corporate offices, operational facilities, and global business services centers. As of December 31, 2022, we had fixed future lease payments of $139.3 million, with $24.6 million payable within 12
months. In addition, we had purchase obligations related to leasehold improvements in the Philippines of $2.9 million, all payable with 12 months.
Software purchase and services obligations
Our primary purchase obligations relate to contracts entered into with vendors that supply various software services and products. As of December 31, 2022, we had purchase obligations related to software and service contracts of $281.1 million, with $54.4 million payable within 12 months.
As of December 31, 2022
and 2021, we had cash and cash equivalents of $110.1 million and $130.1 million, respectively. Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statements of Cash Flows, are summarized in the following table:
Net cash (used in) provided by operating activities
$
(9.9)
$
256.5
$
59.9
Net
cash used in investing activities
(949.5)
(332.1)
(115.1)
Net cash provided by financing activities
943.0
31.4
137.9
Effect
of exchange rate changes in cash
(3.6)
(0.5)
(0.4)
Net (decrease) increase in cash, cash equivalents, and restricted cash
(20.0)
(44.7)
82.3
Cash
Flows from Operating Activities
Cash used in operating activities increased by $266.4 million from cash provided of $256.5 million for the year ended December 31, 2021, to cash used of $9.9 million for the year ended December 31, 2022. Cash used in operating activities increased due to a larger cash bonus payout related to the 2021 bonus plan compared to the 2020 bonus plan, payment of Cloudmed compensation amounts, higher interest expense due to more indebtedness, transaction expenses related to the Cloudmed Acquisition, and decreased income from operations of $139.0 million.
Cash provided by operating activities increased by $196.6 million, from $59.9 million for the year ended December 31, 2020, to $256.5 million for the year ended
December 31, 2021. Cash provided by operating activities increased due to timing of working capital changes, including increased accrued compensation and benefits balances and customer liabilities balances in 2021, as well as a smaller overall increase in accounts receivable balances in 2021 compared to 2020. Accrued compensation and benefits liabilities increased in 2021 due to the bonus accruals recognized in 2021, as well as increases in accrued severance and retention and accrued health benefits. In addition to working capital changes, the Company had increased income from operations of $58.1 million, and an additional add back of cash flows provided by operating activities of $76.6 million related to stock compensation expense in 2021, compared to $24.1 million in 2020.
Cash Used in
Investing Activities
Cash used in investing activities primarily includes our inorganic growth initiatives and investments in property, equipment and software. Outflows for significant acquisitions are typically offset by cash inflows from financing activities related to obtaining new debt. Cash used in investing activities included the acquisitions of Cloudmed and VisitPay in 2022 and 2021, respectively. In 2020, cash used in investing activities included the acquisitions of SCI and RevWorks in 2020, which was partially offset by cash inflows related to the disposition of the EMS business. These inorganic activities are the primary drivers of the changes in cash flows from investing activities when comparing year-over-year.
Cash used in investing activities increased by $617.4 million from $332.1 million for the year ended December
31, 2021, to $949.5 million for the year ended December 31, 2022. The increase is primarily due to a $561.3 million difference in cash payments for the Cloudmed Acquisition compared to the VisitPay acquisition, and the timing of payments for property, equipment and software. See Note 3, Acquisitions, to our consolidated financial statements included in this Amendment for additional information.
Cash used in investing activities increased by $217.0 million from $115.1 million for the year ended December 31, 2020, to $332.1 million for the year ended December 31, 2021. The increase relates to the cash outflows of $286.4 million related to VisitPay, compared to $194.1 million related to acquisitions in 2020, as well as inflows in 2020 of $128.3 million related to the disposition
of the EMS business.
38
Cash Flows from Financing Activities
Cash flows from financing activities primarily relate to borrowings and repayments of debt. In conjunction with acquisitions, we typically borrow additional debt to fund the consideration, either by increasing our existing facilities or refinancing with new facilities. We utilize our revolver to ensure we have sufficient cash on hand to support the needs of the business at any given point in time. Cash flows from financing activities also include cash received from exercises of stock options and the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards, as well as other financing activities.
Cash
provided by financing activities increased by $911.6 million from $31.4 million for the year ended December 31, 2021, to $943.0 million for the year ended December 31, 2022. This change is primarily due to larger borrowings made under the Second A&R Credit Agreement compared to the 2021 Credit Agreement (defined below) and a $463.4 million decrease to debt repayments in 2022 compared to 2021. In addition, there were no inducement or deferred acquisition payments made during the year ended December 31, 2022, compared to $105.0 million paid for the inducement of the conversion of our preferred stock and a $12.5 million deferred payment related to the RevWorks acquisition during the year ended December 31, 2021. These increases were partially offset by higher amounts of
cash required to pay tax withholding obligations upon surrender of shares upon vesting of equity awards.
Cash provided by financing activities decreased by $106.5 million, from $137.9 million for the year ended December 31, 2020, to $31.4 million for the year ended December 31, 2021. This change is primarily due to additional cash uses in 2021 including $105.0 million used to pay for the inducement of the conversion of our preferred stock and $56.5 million used for repurchases of stock under our stock repurchase programs, offset by lower amounts of cash required to pay tax withholding obligations upon surrender of shares upon vesting of equity awards.
Debt and Financing Arrangements
On June
21, 2022, we entered into a Second A&R Credit Agreement with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the Company’s second amended and restated senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of the $691.3 million existing senior secured term loan A facility (the “Existing Term A Loan”), a $540.0 million senior secured incremental term loan A facility (the “Incremental Term A Loan,” and together with the Existing Term A Loan, the “Term A Loans”), a $500.0 million senior secured term loan B facility (the “Term B Loan,” and together with the Term A Loans, the “Senior Term Loans”), and a $600.0 million Senior Revolver. The Existing Term A Loan requires quarterly payments. Commencing December 31, 2022,
we are also required to repay the Incremental Term A Loan and Term B Loan in quarterly principal installments. The Senior Secured Credit Facilities bear interest at a floating rate, which was 6.57% for the Term A Loans and Senior Revolver and 7.32% for the Term B Loan as of December 31, 2022. See Note 11, Derivative Financial Instruments, to our consolidated financial statements included in this Amendment for discussion on our interest rate hedging transactions.
As of December 31, 2022 and 2021, we had drawn $100.0 million and had $499.1 million remaining, and drawn $80.0 million and had $369.5 million remaining, respectively, on our Senior Revolver.
The proceeds from the new Senior Secured Credit Facilities were or will be used,
in addition to cash on hand, (1) to refinance, in full, all existing indebtedness under the Amended and Restated Credit Agreement, dated as of July 1, 2021, by and among Old R1 RCM and certain of its subsidiaries, Bank of America, N.A., as administrative agent, and the lenders named therein (the “2021 Credit Agreement”), and amend and restate all commitments thereunder (the “Refinancing”), (2) to pay certain fees and expenses incurred in connection with the entry into the Second A&R Credit Agreement and the Refinancing, (3) to fund the Cloudmed Acquisition and a holding company reorganization, and to pay the fees, premiums, expenses and other transaction costs incurred in connection therewith, and (4) to finance our working capital needs for general corporate purposes.
39
The
Second A&R Credit Agreement contains a number of financial and non-financial covenants. We are 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 Second A&R Credit Agreement as of December 31, 2022.
See Note 10, Debt, to our consolidated financial statements included in this Amendment for additional information.
Item 8.
Consolidated
Financial Statements and Supplementary Data
The financial statements required by this Item are located beginning on page F-1 of this Amendment.
Item 9A.
Controls and Procedures
This Item 9A includes information concerning the controls and controls evaluation referred to in the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Exchange Act included in this Amendment
as Exhibits 31.1 and 31.2.
Management’s Report on Internal Control over Financial Reporting
Management has responsibility for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
On June 21, 2022, we completed the Cloudmed Acquisition. We are now integrating
processes, employees, technologies, systems, and operations of Cloudmed into the Company. As permitted by the rules and regulations of the SEC, we have excluded Cloudmed from our assessment of our internal control over financial reporting as of December 31, 2022. Management will continue to evaluate internal controls as we complete the integration of the acquisition. Cloudmed represented 5% of the Company’s total assets as of December 31, 2022 (exclusive of intangible assets and goodwill valued through purchase accounting that were included in our assessment of our internal control over financial reporting as of that date) and 14% of the
Company’s total net services revenue for the year ended December 31, 2022.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making its assessment, management has utilized the criteria set forth by the COSO of the Treadway Commission in Internal Control-Integrated Framework (2013). On February 16, 2023, we filed the Original Report. At the time, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, had performed an evaluation and concluded that our internal control over financial reporting was effective as of December
31, 2022. Subsequent to that evaluation, we identified a material weakness in internal control over financial reporting as of December 31, 2022 relating to the design and operating effectiveness of controls over business combinations impacting the accounting for acquiree compensation arrangements. The ineffective operation of these controls resulted in errors in prior period financial statements that required the Company to restate its consolidated financial statements as of and for the years ended December 31, 2022 and 2021,for each of the quarters within 2022 and 2021 and for the quarters ended June 30, 2023 and March
31, 2023.
As a result of the material weakness described above, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that, as of December 31, 2022, our internal control over financial reporting was not effective. The Company’s internal control over financial reporting as of December 31, 2022has been audited by Ernst & Young LLP as stated in their report which appears herein.
40
Evaluation
of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Amendment, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
as of December 31, 2022. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective.
Remediation of Material Weakness in Internal Control over Financial Reporting
Management is actively engaged in the implementation of remediation measures to address the internal control deficiencies that resulted in the material weakness in internal control over financial reporting as of December 31, 2022. The Company’s remediation actions are being overseen by the Audit Committee of the Board of Directors, and include, but are not limited to, the following:
•Adding
appropriately qualified internal and external advisory resources to review and assess material future contemplated business combinations and related transactions to identify arrangements that should be considered for recording outside of the business combination transaction purchase accounting, including all acquiree-related or similar compensation arrangements;
•Enhancing review of acquisition-related documents, including but not limited to draft acquisition agreements, underlying compensation arrangements and funds flow documentation, with both internal and external legal and human resources specialists; and
•Updating the description and detailed attributes of key internal controls over business combinations and related transactions, including review and approval by our Chief Financial Officer, Corporate Controller, and Chief Accounting
Officer.
We will continue to modify our remediation plan and may implement additional measures as we complete the redesign and operation of our internal controls in this area. We believe that, once implemented, these additional internal control activities will strengthen our internal control over financial reporting and remediate the material weakness; however, remediation will not be confirmed until management has completed the requisite remediation activities and tested the design and operation of such controls, which is expected to be complete prior to the Company’s filing of the Annual Report on Form 10-K for the year ending December 31, 2023.
Changes in Internal Control over Financial Reporting
Other
than as described above, there have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d - 15(f) of the Exchange Act, that occurred during the quarterly period ending December 31, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of R1 RCM Inc.
Opinion
on Internal Control Over Financial Reporting
We have audited R1 RCM Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, R1 RCM Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
As
indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Revint Holdings, LLC (Cloudmed), which is included in the 2022 consolidated financial statements of the Company and constituted 5% of total assets as of December 31, 2022, and 14% of net services revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Cloudmed.
In our report dated February
16, 2023, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. Management has subsequently identified a deficiency in controls related to the design and operating effectiveness of controls over business combinations relating to the accounting for acquiree compensation arrangements, and has further concluded that such deficiency represented a material weakness as of December 31, 2022. As a result, management has revised its assessment, as presented in the accompanying Management’s Report on Internal Control over Financial Reporting; to conclude that the Company’s
internal control over financial reporting was not effective as of December 31, 2022. Accordingly, our present opinion on the effectiveness of internal control over financial reporting as of December 31, 2022, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness
in the design and operating effectiveness of controls over business combinations relating to the accounting for acquiree compensation arrangements that existed as of December 31, 2022.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes. This
material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated February 16, 2023, except for Notes 1 and 23, as to which the date is December 4, 2023, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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.
42
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
February 16, 2023, except for the effect of the material weakness described in the fourth paragraph above, as to which the date is December 4, 2023.
43
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.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
48
*
Management
contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K.
+
Certain portions of this exhibit have been redacted pursuant to Item 601(b)(2)(ii) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon request.
^
Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit
to the SEC upon request.
49
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.
Report
of Independent Registered Public Accounting Firm
To the Stockholders and the 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, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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,
2022, 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 16, 2023, except for the effect of the material weakness described in the fourth paragraph of that report, as to which the date is December 4, 2023, expressed an adverse opinion thereon.
Restatement of 2022 and 2021 Financial Statements
As discussed in Notes 1 and 23 to the consolidated financial statements, the 2022 and 2021 consolidated financial statements have been restated to correct a misstatement.
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 included 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) relate 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 to 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 recognized
but 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 unbilled incentive fees at year end and the assessment of the estimated constraint applied to the incentive fee revenues, if any.
To test the appropriateness of the timing of recognition and measurement of incentive fee revenues at year end, our audit procedures included, among others, obtaining and reviewing the customer contracts and any related amendments, and independently confirming the unbilled incentive fee amounts recognized at year end directly with external customers. In addition, we compared historically estimated and recognized incentive fees to the actual amounts billed and collected in
subsequent periods to assess the accuracy of management’s estimation process.
Cloudmed business combination – valuation of developed technology
Description of the Matter
As described in Note 3 to the consolidated financial statements, the Company completed its acquisition of all the outstanding equity interests of Revint Holdings, LLC (Cloudmed) for consideration of approximately $3.3 billion on June
21, 2022. The transaction was accounted for as a business combination. The Company’s accounting for the acquisition included determining the fair value of acquired identified developed technology intangible assets of $1,025.0 million.
Auditing the Company’s accounting for the acquired developed technology intangible assets involved complex auditor judgment due to the estimation required in Management’s determination of fair value. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair value to the key assumptions included in the valuation. The Company used a discounted cash flow
model to measure the fair value of the developed technology intangible assets. The significant assumptions used to estimate the fair 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.
F-3
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 Cloudmed acquisition including, among others, management's process to establish the significant assumptions and measure the acquired developed technology intangible asset. 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 developed 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 Cloudmed 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.
As described in Note 2 to the consolidated financial statements, a majority of revenue arising from the recently-acquired Cloudmed business relates
to services provided to identify and deliver opportunities for the Company’s healthcare provider customers for incremental reimbursement from their respective payors. As the majority of the ultimate revenue earned for the services provided will be dependent on the amount of incremental reimbursements collected by Cloudmed’s customers in a future period, the variable consideration must be estimated to reflect the Company’s expectations about the amount it will be entitled to receive from its customers. As the revenue recognized is not finalized and billed until a future period, accounting for revenue in the Cloudmed business results in the recognition of a contract asset. At the date of the Cloudmed acquisition
the acquired contract asset was $92.4 million and the balance was $115.9 million at December 31, 2022. Auditing the Company's contract asset involved challenging judgment because the calculation involves certain subjective management assumptions, notably the realization rate to estimate the total amount that the Company’s customers are likely to collect from their payors after the services have been provided. The Company’s variable
consideration is estimated based on the Company’s historical experience at the customer and service line level.
How We Addressed the Matter in Our Audit
To test the appropriateness of the contract asset, at acquisition and at the balance sheet date, our audit procedures included, among others, obtaining and reviewing the customer agreements, evaluating the significant assumptions used by management (see above) and testing the accuracy and completeness of the underlying data used in management's calculation. This
included testing management's estimate of their customers’ expected incremental reimbursements from the payors through inspection of source documentation such as evidence of actual subsequent collections. In addition, we evaluated the estimates made based on the Company’s historical experience and performed sensitivity analyses to evaluate the impact to the recognized contract asset that would result from changes in the significant assumptions.
Current
portion of customer liabilities - related party
i7.4
i7.9
Accrued
compensation and benefits
i109.0
i96.6
Current
portion of operating lease liabilities
i18.0
i13.5
Current
portion of long-term debt
i53.9
i17.5
Accrued expenses and other current liabilities
i70.5
i59.3
Total
current liabilities
i349.7
i253.0
Non-current portion of customer liabilities
i5.0
i3.3
Non-current
portion of customer liabilities - related party
i13.7
i15.4
Non-current
portion of operating lease liabilities
i94.4
i53.4
Long-term
debt
i1,732.6
i754.9
Non-current
deferred tax liabilities
i200.8
i4.2
Other non-current
liabilities
i23.1
i17.2
Total liabilities
i2,419.3
i1,101.4
Stockholders’
equity:
Common stock, $ii0.01/ par
value, i750,000,000 shares authorized, i439,950,125 shares issued and i416,597,885
shares outstanding at December 31, 2022; i500,000,000 shares authorized, i298,320,928 shares issued and i278,226,242
shares outstanding at December 31, 2021
Net services revenue ($i881.0
million, $i893.5 million and $i808.8 million from related party for the years ended December 31,
2022, 2021, and 2020, respectively)
$
i1,806.4
$
i1,474.6
$
i1,270.1
Operating
expenses:
Cost of services
i1,446.9
i1,160.9
i1,021.1
Selling,
general and administrative
i172.5
i122.0
i101.3
Other
expenses
i189.8
i55.5
i69.6
Total
operating expenses
i1,809.2
i1,338.4
i1,192.0
Income
(loss) from operations
(i2.8)
i136.2
i78.1
Gain
on business disposition
i—
i—
i55.7
Net
interest expense
(i64.0)
(i18.9)
(i17.3)
Income
(loss) before income tax provision (benefit)
(i66.8)
i117.3
i116.5
Income
tax provision (benefit)
(i3.5)
i30.0
i1.3
Net
income (loss)
$
(i63.3)
$
i87.3
$
i115.2
Net
income (loss) per common share:
Basic
$
(i0.18)
$
(i1.90)
$
i0.40
Diluted
$
(i0.18)
$
(i1.90)
$
i0.32
Weighted
average shares used in calculating net income (loss) per common share:
Basic
i352,337,767
i266,183,565
i115,729,645
Diluted
i352,337,767
i266,183,565
i174,573,270
Consolidated
statements of comprehensive income (loss)
Net income (loss)
$
(i63.3)
$
i87.3
$
i115.2
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i9.2
i2.1
(i1.7)
Foreign
currency translation adjustments
(i7.3)
(i0.9)
(i0.3)
Total
other comprehensive income (loss), net of tax
$
i1.9
$
i1.2
$
(i2.0)
Comprehensive
income (loss)
$
(i61.4)
$
i88.5
$
i113.2
Basic:
Net income (loss)
$
(i63.3)
$
i87.3
$
i115.2
Less
dividends on preferred shares
i—
(i592.3)
(i22.4)
Less
income allocated to preferred shareholders
i—
i—
(i46.3)
Net
income (loss) available/allocated to common shareholders - basic
$
(i63.3)
$
(i505.0)
$
i46.5
Diluted:
Net
income (loss)
$
(i63.3)
$
i87.3
$
i115.2
Less
dividends on preferred shares
i—
(i592.3)
(i22.4)
Less
income allocated to preferred shareholders
i—
i—
(i36.9)
Net
income (loss) available/allocated to common shareholders - diluted
$
(i63.3)
$
(i505.0)
$
i55.9
See
accompanying notes to consolidated financial statements.
Customer
liabilities and customer liabilities - related party
(i11.2)
i18.0
(i20.8)
Net
cash (used in) provided by operating activities
(i9.9)
i256.5
i59.9
Investing
activities
Purchases of property, equipment, and software
(i93.5)
(i51.7)
(i49.3)
Payment
for business acquisitions, net of cash acquired
(i847.7)
(i286.4)
(i194.1)
Proceeds
from sale of Emergency Medical Services business, net of cash disposed
i—
i—
i128.3
Other
(i8.3)
i6.0
i—
Net
cash used in investing activities
(i949.5)
(i332.1)
(i115.1)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i1,016.6
i698.6
i190.6
Borrowings
on revolver
i50.0
i120.0
i50.0
Payment
of debt issuance costs
(i1.0)
(i1.9)
i—
Repayment
of senior secured debt
(i25.5)
(i488.9)
(i23.4)
Repayments
on revolver
(i30.0)
(i110.0)
(i20.0)
Payment
of contingent consideration liability
i—
(i4.8)
i—
Deferred
payment related to acquisition of RevWorks
i—
(i12.5)
i—
Inducement
of preferred stock conversion
i—
(i105.0)
i—
Payment
of equity issuance costs
(i2.0)
i—
i—
Exercise
of vested stock options
i4.6
i8.9
i18.4
Purchase
of treasury stock
(i39.3)
(i56.5)
i—
Shares
withheld for taxes
(i30.2)
(i16.3)
(i71.9)
Other
(i0.2)
(i0.2)
(i5.8)
Net
cash provided by financing activities
i943.0
i31.4
i137.9
Effect
of exchange rate changes in cash
(i3.6)
(i0.5)
(i0.4)
Net
(decrease) increase in cash, cash equivalents, and restricted cash
(i20.0)
(i44.7)
i82.3
Cash,
cash equivalents, and restricted cash at beginning of period
i130.1
i174.8
i92.5
Cash,
cash equivalents, and restricted cash at end of period
$
i110.1
$
i130.1
$
i174.8
Supplemental
disclosures of cash flow information
Accrued dividends payable to preferred stockholders
$
i—
$
i—
$
i5.8
Property,
equipment and software purchases not paid
$
i26.9
$
i19.5
$
i11.0
Assets
obtained in exchange for common stock
$
i24.3
$
i7.0
$
i—
Interest
paid
$
i61.0
$
i17.3
$
i15.8
Income
taxes paid
$
i8.6
$
i5.2
$
i4.2
Income
taxes refunded
$
i—
$
i0.2
$
i0.4
See
accompanying notes to consolidated financial statements.
F-9
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
1. iDescription
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 patient registration, insurance and benefit verification, scheduling, 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 domain experience, innovative technology and intelligent automation, 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 largest 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’s employees are the revenue cycle personnel providing services and the Company typically controls third party vendors either through direct contracts or the assumption of the customer’s vendor contracts. As a result, under the operating partner model the Company records higher expenses as well as higher revenues related to the negotiated cost to collect. Under the co-managed model, the revenue cycle personnel and third party vendors remain with the customer
and those costs do not impact the Company’s financial results. For the years ended December 31, 2022, 2021, and 2020, substantially allof 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 solutions, allowing customers to engage the Company
to address specific revenue cycle improvement opportunities, such as revenue intelligence solutions (which were enhanced through the acquisition of Revint Holdings, LLC (“Cloudmed”)), automation solutions, revenue integrity solutions, PM, accounts receivables and denials recovery, PAS, CDI, coding management, business office services, and patient experience.
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.
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 “2016 Transaction”). As part of the 2016 Transaction, the Company amended and restated its Master Professional Services Agreement (“A&R MPSA”) with Ascension Health (“Ascension”) effective February 16, 2016 with an initial term of iten
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.
On June 21, 2022, pursuant to the Transaction Agreement and Plan of Merger (the “Transaction Agreement”), dated as of January 9, 2022, among R1 RCM Inc. (f/k/a Project Roadrunner Parent Inc.), R1 RCM Holdco Inc. (f/k/a R1 RCM Inc.), now a wholly-owned subsidiary of the
Company (“Old R1 RCM”), Project Roadrunner Merger Sub Inc., formerly a wholly-owned subsidiary of the Company (“R1 Merger Sub”), Cloudmed, CoyCo 1, L.P. (“CoyCo 1”), CoyCo 2, L.P. (“CoyCo 2” and, together with CoyCo 1, the “Sellers”), and, solely for certain purposes set forth therein, NMC Ranger Holdings, LLC, the Company purchased Cloudmed, a leader in Revenue Intelligence™ solutions for healthcare providers, and affiliated entities (collectively, the “Cloudmed entities”), through (i) a merger of R1 Merger Sub with and into Old R1 RCM with Old R1 RCM as the surviving entity, which resulted in Old R1 RCM becoming a wholly-owned subsidiary of the Company (the “Holding
Company Reorganization”) and (ii) the Sellers contributing i100% of the equity of a blocker parent corporation of the Cloudmed entities in exchange for an aggregate of i135,929,742
shares of common stock, of the Company subject to certain adjustments following the closing as set forth in the Transaction Agreement (the “Cloudmed Acquisition,” and together with the Holding Company Reorganization, the “2022 Transactions”). In October 2022, the Company finalized those adjustments, resulting in an additional i55,846
shares issued to the Sellers. For further details on the total consideration paid, refer to Note 3, Acquisitions.
Cloudmed’s revenue intelligence platform combines cloud-based data architecture and deep domain expertise with intelligent automation to analyze large volumes of medical records, payment data, and complex medical insurance models to identify opportunities to deliver additional revenue to customers. The Company believes this transaction will enable the Company to further its ability to deliver transformative value to healthcare providers through a more fulsome platform of differentiated capabilities by creating a scaled leader across both end-to-end RCM and technology-driven revenue intelligence.
Holding
Company Reorganization
Pursuant to the Transaction Agreement, immediately prior to the completion of the Cloudmed Acquisition, Old R1 RCM implemented the Holding Company Reorganization, which resulted in the Company owning all of the capital stock of Old R1 RCM. Each share of Old R1 RCM’s common stock that was issued and outstanding immediately prior to the Holding Company Reorganization was automatically exchanged into an equivalent corresponding share of Company Common Stock, having the same designations, rights, powers, and preferences and the qualifications, limitations, and restrictions as the corresponding share of common stock of Old R1 RCM being converted. Accordingly, upon consummation of the Holding Company Reorganization, all Old R1 RCM stockholders became stockholders of the
Company. Immediately prior to the consummation of the Holding Company Reorganization, the name of Old R1 RCM was changed to “R1 RCM Holdco Inc.” and the name of the Company was changed to “R1 RCM Inc.”The Company is the successor issuer to Old R1 RCM pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The shares of Company Common Stock, as successor to Old R1 RCM, began trading on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “RCM” on June 22, 2022.
Emergency Medical Services Disposition
As part of our portfolio
analysis and strategic initiatives, the Company disposed the emergency medical services (“EMS”) business on October 30, 2020 for $i140.0 million, inclusive of a $i5.0 million
hold-back amount subject to the completion of certain transition services, to be paid approximately ione year from the date of the disposition (the “EMS Disposition”). The total sale price net of costs to sell was $i132.7 million,
which included 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 $i7.1 million. The gain recognized on the EMS Disposition was $i55.7 million.
F-11
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
Restatement and Revision of Previously Issued Consolidated Financial Statements
The
Company has restated its consolidated financial statements as of and for each of the years ended December 31, 2022 and 2021, which includes unaudited consolidated financial statements as of and for each of the quarters within 2022 and 2021. In addition, as part of the restatement, the Company has revised the consolidated financial statements for the year ended December 31, 2020, to correct errors which were immaterial to that period. See Note 23, Restatement and Revision of Previously Issued Consolidated Financial Statements, and Note 24, Quarterly Financial Data (Unaudited), for more information about the prior period errors.
In addition to Note 23 and Note 24, the following footnotes
have been updated to reflect the restatements made to the consolidated financial statements:
•3. Acquisitions
•5. Goodwill
•9. Customer Liabilities
•13. Share-Based Compensation
•14. Other Expenses
•15. Income Taxes
•17. Earnings (Loss) Per Share
•22. Supplemental Financial Information
2.iSummary 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
Revenue Recognition
The Company’s largest source of revenue is its operating partner arrangement to provide end-to-end RCM services. The Company also generates revenue through modular RCM solutions, where customers will engage the Company for only specific components of its end-to-end RCM service offering on a fixed-fee or volumetric basis.
Revenue Cycle Management
RCM services fees are primarily variable and performance related, and are generally viewed as a series of distinct services in which there are identifiable
increments within a long-term service contract. Variable consideration for end-to-end RCM services are allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company’s efforts to satisfy its performance obligation. Fees for physician group RCM services include variable consideration contingent on customer collections, and inputs to the Company’s revenue estimates typically include historical service fees and historical customer collection amounts. RCM services fees consist of net operating fees, incentive fees, and modular
and other fees.
ii.corresponding
costs of customers’ revenue cycle operations which the Company pays pursuant to its RCM agreements, including salaries and benefits for the customers’ RCM personnel, and related third-party vendor costs; plus
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 ithree 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.
Incentive Fees
Incentive fees are structured to reflect quarterly or annual performance and are evaluated on a contract-by-contract basis. The
Company estimates incentive fee revenue based on contractually agreed-upon financial or operating metrics. The Company recognizes revenue related to incentive fees ratably as the performance obligation for RCM services is satisfied, to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. Incentive fees are typically billed and paid on a quarterly basis.
Modular and Other
The Company recognizes revenue related to modular and other RCM fees as RCM services are provided. Fees are typically variable in nature and revenue is recognized as services are provided
or when any uncertainty associated with the variable fee is subsequently resolved. 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.
The Company recognizes revenue from PAS in the period in which the service is performed. The Company’s PAS arrangements typically consist of an obligation to provide specific services to customers upon request. These services are provided under a fixed
price per unit arrangement. Fees for the Company's PAS arrangements are typically billed on a monthly basis with 30 to 60 day payment terms.
PM services arrangements include a single performance obligation, constituting a series, to manage and administer various non-clinical aspects of a customer’s physician practice, which may be comprised of numerous physical office locations. Consideration for PM services is typically variable in nature and allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company’s effort to satisfy its
performance obligation. PM services fees are invoiced on a monthly basis and payment terms are typically 30 days.
Bundled Services
Modular RCM solutions 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 three to iten
years (subject to the parties’ respective termination rights) but varies from customer to customer. Modular RCM agreements generally vary in length between one and ithree years.
F-13
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
For
bundled arrangements, the Company accounts for individual services as a separate performance obligation if a service is separately identifiable from other items in the bundled arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Revenue for the individual services is recognized ratably as services are performed, which is materially within the same accounting period for the services in the bundle. PAS are provided at a customer’s election but do not represent material rights as the services are priced at standalone selling price throughout the life of the agreement.
Cost of Services
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, rent, share-based compensation, amortization of intangible assets, assumed vendor contracts for onboarded customers, and other costs.
Costs associated with generating the Company’s net services revenue are expensed as incurred, with the exception of deferred contract costs, which are certain costs
associated with the initial phases of customer contracts and the related transition of customer hospitals and physician groups that 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:
The
associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the years ended December 31, 2022 and 2021, total amortization was $i8.3 million and $i4.6 million,
respectively, and there were iino/ associated impairment losses.
i
Comprehensive
Income (Loss)
Comprehensive income (loss) is the net income (loss) of the Company combined with other changes in stockholders’ equity 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.
F-14
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
Cloud Computing Arrangements
The
Company capitalizes qualifying set-up and implementation costs related to the Company’s cloud computing arrangements. The deferred costs are amortized over the term of the associated cloud computing arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the Company expects to benefit from access to the cloud computing arrangement.
Capitalized cloud computing implementation costs are presented in prepaid expenses and other current assets and other assets on the Consolidated Balance Sheets. As of December 31, 2022 and 2021, the
Company had net capitalized cloud computing implementation costs of $i6.8 million and $i8.6 million,
respectively.
i
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.
The Company capitalizes qualifying internal and third-party costs and hardware and software costs related to the Company’s software development
activities. The Company amortizes the capitalized software development costs over their estimated life on a straight-line basis.
i
The major classifications of property, equipment and software and their expected useful lives are as follows:
Buildings
and land
i30 years and indefinite
Computers and other equipment
i3 years
Leasehold
improvements
Shorter of i10 years or lease term
Office furniture
i5 years
Software
i3
to i5 years
/i
Property, equipment and software consist of the following:
Property,
equipment and software, net, located internationally was $i20.3 million and $i13.9 million as of December 31, 2022 and 2021, 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:
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 iiino//
material impairment of property, equipment, software, deferred contract costs, or other acquired intangible assets for the years ended December 31, 2022, 2021, and 2020. For the years ended December 31, 2022, 2021, and 2020, we impaired ROU assets and related leasehold improvements related to leased facilities which we exited. See Note 8, Leases, and Note 14, Other, for more information.
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.
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:
•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, 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 and liabilities
such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, accounts payable, accrued service costs, accrued compensation and benefits, and certain other current assets and accrued expenses, approximate their fair values, due to their short-term nature. See Note 11, Derivative Financial Instruments, for a discussion of the fair value of the Company’s forward currency derivative contracts and interest rate swaps.
F-16
R1 RCM Inc.
Notes to
Consolidated Financial Statements
(Dollars in millions, except per share data)
The Company believes the carrying value of the senior revolver and term loans (see Note 10, Debt) approximates fair value as they are variable rate bank debt.
Other than the items discussed above, the Company does iino/t
have any financial assets or liabilities that are required to be measured at fair value on a recurring basis.
i
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.
i
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.
i
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. As of December 31, 2022 and 2021, the Company had net assets $i81.5 million and $i51.0
million in foreign entities, respectively. 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).
i
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. For the year ended December 31, 2022, the number of options granted (i24,344)
was immaterial.
/
F-17
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
As part of the transactions contemplated by the Transaction Agreement, equity awards held by certain employees of Cloudmed (“Former Class P Units”) were modified, through a series of transactions, into awards (“Management Units”) of CoyCo 2. Certain Former Class P Units that were subject to performance-based
vesting conditions did not become vested upon the closing of the Cloudmed Acquisition (“Unvested Units”). The Management Units issued by CoyCo 2 are treated as share-based compensation under ASC 718, Compensation - Stock Compensation.
The Unvested Units are not awards of the Company and the participants will receive no additional shares of the Company upon satisfaction of the vesting criteria described in Note 13, Share-Based Compensation. However, GAAP requires the Company recognize the cost of share-based compensation granted by an investor (CoyCo 2) to the Company’s employees
and service providers for services that benefit the Company’s operations (hereafter, “CoyCo 2 share-based compensation expense”), and a corresponding capital contribution because the costs are incurred on the Company’s behalf. A Monte Carlo simulation was used to estimate the fair value of the Unvested Units.
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.
i
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.
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 formerly but no longer in issue (as defined in Note 12) participates in dividends alongside the Company’s common stock (per their participating dividends), the preferred stock would constitute participating securities under ASC 260-10, Earnings Per Share, 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 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, restricted stock units (“RSUs”), performance-based
restricted stock units (“PBRSUs”), and shares issuable upon conversion of preferred stock.
i
Recently Issued Accounting Standards and Disclosures
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 requires companies to apply Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities obtained in a business combination. The ASU amendments will generally result in the recognition of contract assets and contract liabilities by the acquirer at amounts consistent with those recorded by the acquiree
immediately before the acquisition date. The Company prospectively adopted ASU 2021-08 effective April 1, 2022 and preliminarily recognized contract assets of $i92.4 million and contract liabilities of $i3.3 million
as part of the Cloudmed Acquisition.
/
F-18
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual sale restriction on an equity security should not be considered in measuring
the security’s fair value. The Company will adopt ASU 2022-03 prospectively effective January 1, 2024 and is currently evaluating the impact of the standard on its consolidated financial statements.
3. iAcquisitions
Assets acquired and liabilities
assumed in a business combination are recorded at their estimated fair value on the date of the acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. Costs relating to acquiree compensation arrangements that are considered separate transactions and do not qualify for inclusion as part of the business combination are expensed on the date of the acquisition and recorded as a component of other expenses.
Cloudmed
On
June 21, 2022, the Company completed the acquisition of Cloudmed for a purchase price of $i3.3 billion. iThe
following table summarizes the fair value of the total consideration paid:
Fair Value
Stock consideration transferred to the Sellers (1)
$
i2,390.5
Cash
consideration (2)
i879.8
Replacement awards issued to Cloudmed equity award holders (3)
i11.3
Total
consideration
$
i3,281.6
(1) The stock consideration fair value includes ai12.5%
discount for lack of marketability factor related to an i18-month lock-up period during which the Sellers may not sell their Company common stock.
(2) Cash consideration includes the repayment of Cloudmed’s pre-existing credit facility that was paid off at closing and was not assumed by the Company.
(3) Represents the pre-acquisition service portion of the fair value of i1,536,220
replacement RSUs issued to Cloudmed equity award holders at closing.
The Company funded the cash consideration component and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 10, Debt).
The purchase price has been provisionally allocated to assets acquired and liabilities assumed based on their fair value as of the acquisition date. The fair value estimate of assets acquired and liabilities assumed is pending the completion of various elements, including gathering further information about the identification and completeness of all assets and liabilities acquired,
the finalization of an independent appraisal and valuation of the fair value of the assets acquired and liabilities assumed, and final review by the Company’s management. Some of the more significant amounts that are not yet finalized relate to the fair value of intangible assets (including goodwill), contract assets, and income and non-income related taxes. Accordingly, management considers the balances shown in the following table to be preliminary, and there could be adjustments to the consolidated financial statements, including changes in our amortization expense related to the valuation of intangible assets acquired and their respective useful lives, among other adjustments.
F-19
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
The preliminary fair value of assets acquired and liabilities assumed is:
Purchase
Price Allocation
Total purchase consideration
$
i3,281.6
Allocation of consideration to assets acquired and liabilities assumed:
The
intangible assets identified in conjunction with the Cloudmed Acquisition and their preliminary fair values are as follows:
Useful Life
Gross Carrying Value
Customer Relationships
i18
years
$
i318.0
Technology
i7 years
$
i1,025.0
Tradename
i5
years
$
i23.5
Favorable leasehold interests
Life of lease
$
i0.1
/
The
goodwill recognized is primarily attributable to growth and cost reduction synergies that are expected to be achieved from the integration of Cloudmed. None of the goodwill is expected to be deductible for income tax purposes.
Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2022 are net sales of $i260.0 million
and net loss before income taxes of $i18.5 million related to the operations of Cloudmed since the acquisition date of June 21, 2022.
F-20
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Measurement period adjustments
The Company had various measurement period adjustments due to an updated valuation report and additional information received since the Cloudmed Acquisition. The significant adjustments during the three months ended December 31, 2022 included a $i3.5 million
decrease to intangible assets related to updated assumptions and information included in the valuation report,an increase to the deferred income tax liability of $i103.4 millionrelated to updated tax return information, and an offset of these changes to goodwill. In conjunction with the adjustments, the
Company adjusted amortization expense in the three months ended December 31, 2022.
VisitPay
On July 1, 2021, the Company completed the acquisition of iVinci Partners, LLC d/b/a VisitPay (“VisitPay”), a provider of digital payment solutions, pursuant to an Agreement and Plan of Merger dated as of May 3, 2021 (the “VisitPay Acquisition”). The purchase price for the VisitPay Acquisition was $i297.1 million.
The Company funded the purchase price for the VisitPay Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 10, Debt).
The purchase price has been allocated to assets acquired and liabilities assumed based on their established fair value as of the acquisition date.
The fair value of assets acquired and liabilities assumed is:
Purchase
Price Allocation
Total purchase consideration
$
i297.1
Allocation of consideration to assets acquired and liabilities assumed:
Cash
and cash equivalents
$
i10.7
Accounts receivable
i4.7
Prepaid
expenses and other current assets
i0.4
Property, equipment and software
i0.3
Operating
lease right-of-use assets
i1.7
Intangible assets
i117.3
Goodwill
i170.9
Accounts
payable
(i0.5)
Current portion of customer liabilities
(i1.1)
Accrued
compensation and benefits
(i0.7)
Current portion of operating lease liabilities
(i0.4)
Other
accrued expenses
(i2.0)
Non-current portion of customer liabilities
(i1.0)
Non-current
portion of operating lease liabilities
(i1.3)
Deferred income tax liabilities
(i1.9)
Net
assets acquired
$
i297.1
The intangible assets identified in conjunction with the VisitPay Acquisition are as follows:
F-21
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Useful Life
Gross Carrying Value
Customer Relationships
i10
years
$
i2.3
Technology
i11 years
$
i114.0
Tradename
i3
years
$
i1.0
The goodwill recognized was primarily attributable to synergies that are expected to be achieved from the integration of VisitPay. The goodwill recognized in the acquisition was partially deductible for income tax purposes.
Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year
ended December 31, 2021 are net sales of $i9.6 million and net loss before income taxes of $i16.7 million
related to the operations of VisitPay since the acquisition date of July 1, 2021.
Prior Acquisitions
In 2020, the Company purchased certain assets related to the RevWorks services business from Cerner Corporation. In accordance with the purchase agreement, the Company paid the first deferred payment of $i12.5 million
in the third quarter of 2021. The remaining deferred payment of $i12.5 million was payable on the second anniversary of the closing date (August 2022) and is included in other accrued expenses on the Consolidated Balance Sheet as of December 31, 2022 as it had not been paid as of such date.
The itwo
deferred payments related to the RevWorks acquisition were contractual obligations of the Company; however, they are refundable to the Company if certain RevWorks customer revenue targets defined in the purchase agreement for the first itwo years following the acquisition are not achieved. The parties are currently engaged in arbitration to finalize the remaining deferred payment and contingently refundable consideration
amounts. The contingently refundable consideration is stated at an amount approximating the amount expected to be realized.
Pro Forma Results (Unaudited)
i
The following table summarizes, on a pro forma basis, the combined results of the Company as though the Cloudmed Acquisition had occurred as of January 1, 2021 and the VisitPay Acquisition had occurred as of January
1, 2020. These pro forma results are not necessarily indicative of the actual consolidated results had the acquisitions occurred as of those dates or of the future consolidated operating results for any period. Pro forma results are:
Adjustments
were made to earnings to adjust depreciation and amortization to reflect the fair value of identified assets acquired, to adjust share-based compensation expense for awards granted in connection with the acquisitions, to record the effects of extinguishing the debt of the acquired companies and replacing it with the debt of the Company, to adjust timing of acquisition related costs incurred by the Company, and to record the income tax effect of these adjustments.
F-22
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
4. iIntangible Assets
The following table provides the gross carrying value and accumulated amortization for each major class of definite-lived intangible assets at December 31, 2022 and December 31, 2021:
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, customer relationships, tradename, and favorable leasehold interests.
Intangible asset amortization expense was $i117.4 million, $i22.9
million, and $i18.1 million for the years ended December 31, 2022, 2021, and 2020 respectively. Amortization expense for intangible assets is included in cost of services on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The Company has no indefinite-lived
intangible assets.
i
Estimated annual amortization expense related to intangible assets with definite lives as of December 31, 2022 is as follows:
2023
$
i197.2
2024
i195.3
2025
i193.7
2026
i193.7
2027
i191.2
Thereafter
i543.4
Total
$
i1,514.5
/
5.
iiGoodwill/
Goodwill represents the difference between the purchase price of acquired companies and the related fair value
of the net assets acquired, which applies the acquisition method of accounting.
F-23
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
Changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2022
were:
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, an impairment charge would be recorded. The Company has determined there to be ione
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 ino impairment of goodwill for the year ended December 31, 2022.
6. iRevenue
Recognition
Disaggregation of Revenue
i
In the following table, revenue is disaggregated by source of revenue:
(1)
Modular and other revenue primarily consists of service fees related to Cloudmed and revenue integrity solutions, PM services, PAS, and software subscription revenue.
(1)
Current contract liabilities include $i7.6 million and $i7.8 million classified in the current portion of customer liabilities
and $i2.1 million and $i2.5 million classified in the current portion of customer liabilities - related party as of December 31, 2022 and 2021,
respectively.
(2) Non-current contract liabilities include $i5.0 million and $i3.3 million
classified in the non-current portion of customer liabilities and $i13.7 million and $i15.4 million classified in the non-current portion of customer liabilities - related party as of December 31,
2022 and 2021, respectively.
The contract assets, net balance will increase or decrease based on the timing of invoices and recognition of revenue. Prior to the Cloudmed Acquisition, the Company did not have significant contract assets. Significant changes in the carrying amount of contract assets, net for the six months ended December 31, 2022 were as follows:
(1) Other primarily includes measurement period adjustments to the contract assets acquired from the Cloudmed Acquisition.
A contract
asset is recorded when the Company has recognized revenue but does not yet have the right to invoice. 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 $i94.8
million and $i98.0 million during the years ended December 31, 2022 and 2021, which amounts were included in contract liabilities on January 1 of the respective periods. These revenue amounts include $i85.8
million and $i88.1 million for the years ended December 31, 2022 and 2021, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.
Refer to Note 3, Acquisitions, for the preliminary contract
assets acquired and contract liabilities assumed as part of the Cloudmed Acquisition.
F-25
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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. The estimated revenue does not include amounts of variable consideration that are constrained.
Net operating fees
Incentive fees
2023
$
i115.4
$
i27.0
2024
i82.5
i—
2025
i39.3
i—
2026
i38.2
i—
2027
i34.1
i—
Thereafter
i124.9
i—
Total
$
i434.4
$
i27.0
/
The
amounts presented in the table above include variable fee estimates of the Company’s physician groups RCM services contracts, fixed fees, and forecasted incentive fees. Fixed fees are typically recognized ratably as the performance obligation is satisfied and forecasted incentive fees 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.
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 solutions 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. iPAS 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 solutions 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.
7.iAccounts Receivable and Allowance for Credit Losses
Accounts receivable is comprised of unpaid balances pertaining to modular solutions and end-to-end RCM customers, net receivable balances for end-to-end RCM customers after considering cost reimbursements owed to such customers, including related accrued balances, and amounts due from physician RCM and PM customers.
F-26
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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 business and industry 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.
During the year ended December 31, 2022, the Company increased the allowance for credit losses related to a physician customer by$i9.6 milliondue to the customer facing financial challenges and its resulting inability to make a contractually required payment during the year. As a result of reviewing the potential expected outcomes related to this customer, the Company holds an allowance for credit losses of$i10.1 millionrelated to an overall receivable balance of$i32.6 million
as of December 31, 2022.
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.
i
Movements in the allowance for credit losses related to accounts receivable are as follows:
The
Company acquired contract assets through the Cloudmed Acquisition. As of December 31, 2022, there was an allowance of credit losses of $i2.2 million against total contract assets.
8.
iLeases
The Company determines if an arrangement is a lease at inception. The Company has operating leases for corporate offices, operational facilities, global business services centers, and certain equipment. Operating leases with terms greater than one year at commencement are included in operating lease ROU assets and operating lease liabilities (current and non-current) on the Consolidated Balance Sheets.
Operating
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. For leases with an initial term of 12 months or less, expense is recognized on a straight-line basis over the lease term.
F-27
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Leases have remaining lease
terms of up to i11 years, some of which include options to extend the leases for up to i10 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.
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
i27.0
$
i22.8
ROU
assets obtained or acquired in exchange for operating lease obligations (1)
i67.7
i20.3
/
(1)
This amount includes ROU assets acquired from the Cloudmed Acquisition. For details on the preliminary ROU assets acquired and liabilities assumed, refer to Note 3, Acquisitions.
The Company presents all non-cash charges related to any modification or reassessment events triggering remeasurement, and obtaining new leases for non-cash consideration that result in adjustments to the lease liability or ROU asset as non-cash transactions. As part of evaluating its footprint, the Company exited certain leased facilities. During the three months ended December 31, 2022, the Company recorded
ROU asset and related leasehold improvement impairments of $i17.0 million as a result of decisions to exit various leases acquired as part of the Cloudmed Acquisition.
i
Maturities of lease liabilities as of December 31,
2022 are as follows:
Operating Leases
2023
$
i24.6
2024
i23.9
2025
i22.6
2026
i16.8
2027
i10.7
Thereafter
i40.7
Total
i139.3
Less:
Imputed
interest
i26.9
Present value of lease liabilities
$
i112.4
/
F-28
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
9. iCustomer 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) customer deposits (consisting of amounts due as a refund to the Company’s customers on base fees and incentive fees), (iv) refund liabilities (amounts potentially 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).
(1)
Current and non-current portion of customer liabilities include amounts for a related party. See Note 19, Related Party Transactions, for further discussion.
/
10. iDebt
i
The
carrying amounts of debt consist of the following:
(1)
As of December 31, 2022, the Company had $i100.0 million in borrowings, $i0.9 million letters of credit outstanding,
and $i499.1 million of availability under the senior secured revolving credit facility (“Senior Revolver”).
/
Second Amended and Restated Senior Secured Credit Facilities
On July 1, 2021, the
Company and certain of its subsidiaries entered into an amended and restated senior credit agreement (the “A&R Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, and governing credit facilities consisting of a $i700.0 million senior secured term loan facility and a $i450.0 million
senior revolver.
F-29
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The proceeds from the A&R Credit Agreement, in addition to cash on hand, were used to refinance, in full, all debt under the existing credit agreement, which consisted of a $i325.0
million senior secured term loan facility and a $i100.0 million senior secured revolving credit facility, and to fund the VisitPay acquisition. For the year ended December 31, 2021, the carrying amounts of debt presented in the table above were incurred under the A&R Credit Agreement.
On June 21, 2022, the Company and certain of its subsidiaries
entered into a second amended and restated senior credit agreement (the “Second A&R Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the Company’s second amended and restated senior secured credit facilities (the “Senior Secured Credit Facilities”), was executed and consisted of the $i691.3 million existing senior secured term loan A facility (the “Existing Term A Loan”), a $i540.0 million
senior secured incremental term loan A facility (the “Incremental Term A Loan,” and together with the Existing Term A Loan, the “Term A Loans”), a $i500.0 million senior secured term loan B facility (the “Term B Loan,” and together with the Term A Loans, the “Senior Term Loans”), and a $i600.0 million
Senior Revolver. In conjunction with entering into the Second A&R Credit Agreement, the Company incurred $i7.2 million and capitalized $i6.4 million
of debt issuance costs.
The Incremental Term A Loan has a ifive-year maturity and the Term B Loan has a iseven-year maturity. The Existing Term A Loan and Senior Revolver mature on July 1, 2026. The Second A&R Credit Agreement provides that the
Company may make ione 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.
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 i0.50% per annum, and (c) the Term Secured Overnight Financing Rate (“SOFR”) for an interest period of one-month beginning on such day plus i100
basis points, plus between i0.25% and i1.50% dependent on the Company’s total net leverage ratio (provided that the Term SOFR rate applicable to the Term A Loans shall
not be less than i0.00% per annum, and the Term SOFR rate applicable to the Term B Loan shall not be less than i0.50% per annum); or (ii) the Term SOFR rate (provided that the Term SOFR rate applicable to the Term A Loans shall not be less than
i0.00% per annum, and the Term SOFR rate applicable to the Term B Loan shall not be less than i0.50% per annum), plus between i1.25%
and i2.50%, dependent on the Company’s total net leverage ratio. The interest rate as of December 31, 2022 was i6.57%
for the Term A Loans and Senior Revolver and i7.32% for the Term B Loan. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between i0.20%
and i0.40% of the average daily unutilized commitments thereunder dependent on the Company’s total net leverage ratio.
The Second A&R Credit Agreement requires the Company to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year ending December 31, 2023, i50%
(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) i100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property or casualty events, subject to certain exceptions and thresholds,
and (iii) i100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Second A&R Credit Agreement.
The Second A&R Credit Agreement contains several financial and non-financial covenants. The Company was in compliance with all of the covenants in the Second A&R Credit Agreement as of December 31, 2022. The obligations
under the Second A&R Credit Agreement are secured by a pledge of i100% 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 certain domestic subsidiaries.
F-30
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The proceeds from the new Senior Secured Credit Facilities were or will be used, in addition to cash on hand, (1) to refinance, in full, all existing indebtedness under the A&R Credit Agreement, and amend and restate all commitments thereunder (the “Refinancing”), (2) to pay certain fees and expenses
incurred in connection with the entry into the Second A&R Credit Agreement and the Refinancing, (3) to fund the 2022 Transactions, and to pay the fees, premiums, expenses, and other transaction costs incurred in connection therewith, and (4) to finance working capital needs of the Company and its subsidiaries for general corporate purposes.
Debt Maturities
i
Scheduled
maturities of the Company’s long-term debt for each of the five years succeeding December 31, 2022 and thereafter are summarized as follows:
Scheduled Maturities
2023
$
i53.9
2024
i67.0
2025
i67.0
2026
i718.3
2027
i430.2
Thereafter
i473.7
Total
$
i1,810.1
/
11.
iiDerivative Financial Instruments/
The
Company actively manages the risk of changes in foreign currency exchange rates and change in interest rates through non-deliverable 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. Positions are monitored using techniques such as market value and sensitivity analyses. The Company does not enter into derivative transactions for speculative purposes.
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 during the period in which the hedged transaction impacts earnings. 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 Company utilizes cash flow hedges to manage its currency risk arising from its global business services centers. As of December 31, 2022, the Company has recorded $i0.4
million of unrealized losses in accumulated other comprehensive income related to foreign currency hedges. The Company estimates that $i0.4 million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. Amounts reclassified into cost of services were a net loss of $i1.4
million and a net gain of $i1.4 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company’s foreign currency forward contracts have maturities extending no later than December 31,
2023, and had total notional value of $i126.4 million. As of December 31, 2021, the total notional amount of the Company’s foreign currency forward contracts was $i84.3
million.
F-31
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The Company also utilizes cash flow hedges to reduce variability in interest cash flows from its outstanding debt. As of December 31, 2022, the Company has recorded $i13.7
million of unrealized gains in accumulated other comprehensive income related to interest rate swaps. The Company estimates that $i8.7 million of gains reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. Amounts reclassified into interest expense were a net loss of $i0.2
million and $i1.5 million for the years ended December 31, 2022 and 2021. As of December 31, 2022, the Company’s interest rate swaps extend no later than June 30, 2025 and had total notional amounts of $i500.0 million.
As of December 31, 2021, the total notional amount of the Company’s interest rate swaps was $i100.0 million.
i
The
location and fair value of derivative instruments designated as hedges in the Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 are as follows:
As
of December 31, 2022 and December 31, 2021, the accumulated gain, net of tax, recognized in accumulated other comprehensive loss was $i9.9 millionand $i0.7 million,
respectively.
The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of December 31, 2022, the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges.
On July 5, 2022, the Company entered into an agreement with a third party regarding the potential purchase of a business that would expand the service capabilities of the
Company. This agreement is effective through approximately the end of 2023 and allows the other party to sell the business to the Company for $i150.0 million, subject to the negotiation of a definitive agreement and the satisfaction of agreed upon closing conditions, including the requirement that the purchase price be deemed to be fair value at the time of the potential transaction. The parties, assuming an agreement is reached, would also need to reach agreement as to whether
the purchase price would be paid in cash or shares of common stock of the Company.
F-32
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
12.iStockholders’
Equity
Preferred Stock and Warrants
As of December 31, 2022 and 2021, the Company had ii5,000,000/
shares of authorized preferred stock, with a par value of $ii0.01/. 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 2016 Transaction, the Company issued to TCP-ASC ACHI Series LLLP (“TCP-ASC”), a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook: (i) i200,000
shares of its i8.00% Series A Convertible Preferred Stock, par value $i0.01 per share (the “Series A Preferred Stock” or “Preferred Stock”), for an aggregate price of $i200
million and (ii) an exercisable warrant to acquire up to i60 million shares of its common stock with an exercise price of $i3.50
per common share and a term of iten years. The Series A Preferred Stock was immediately convertible into shares of common stock. As of December 31, 2022 and 2021, the Company had iizero/
shares of Series A Preferred Stock outstanding. The Series A Preferred Stock was converted to common stock on January 15, 2021. See Note 16, i8.00% Series A Convertible Preferred Stock, for additional information.
On January 23, 2018, the Company issued an exercisable warrant to acquire up to i1.5 million
shares of its common stock with an exercise price of $i6.00 per common share to IHC Health Services, Inc (“Intermountain”).
As of December 31, 2022 and 2021, ii42.0/ million
total warrants were outstanding for TCP-ASC and Intermountain.
Common Stock
Each outstanding share of the Company’s common stock, par value $i0.01 per share, is entitled to ione
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. iiNo/
dividends were declared or paid on the common stock during 2022 or 2021.
Treasury Stock
On November 13, 2013, the Board authorized a repurchase of up to $i50.0 million of the Company’s common stock in the open market or in privately negotiated transactions (the “2013 Repurchase Program”). Between October
1, 2021 and October 27, 2021, the Company finalized authorized repurchases under the 2013 Repurchase Program. On October 22, 2021, the Board adopted a new repurchase program and authorized the repurchase of up to $i200.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the “2021 Repurchase Program”). On January
9, 2022, the Board increased the authorization under the 2021 Repurchase Program to an aggregate amount of up to $i500.0 million. The timing and amount of any shares repurchased under the 2021 Repurchase Program will be determined by the Company’s management based on its evaluation of market conditions and other factors. The 2021 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, 2022 and 2021, i2,080,518 and i2,629,257
shares were repurchased, respectively. iiNo/ shares have been retired. As of December 31, 2022
and 2021, the Company held in treasury i10,031,168 and i7,950,650 shares of repurchased stock, respectively.
Treasury
stock also includes repurchases of Company stock related to employees’ tax withholding upon vesting of restricted shares. For the years ended December 31, 2022 and 2021, the Company repurchased i1,174,754 and i796,908
shares related to employees’ tax withholding upon vesting of restricted shares, respectively. See Note 13, Share-Based Compensation, for additional information.
F-33
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
13.iShare-Based
Compensation
The Company maintains ithree stock incentive plans: the Amended and Restated Stock Option Plan (the “2006 Plan”), the Third Amended and Restated Stock 2010 Incentive Plan (the “2010 Amended Plan,” together with the 2006 Plan, the “Plans”), and the R1 RCM Inc. 2022 Inducement Plan (the “Inducement Plan”). In December 2016, the
Company’s stockholders approved the Second Amended and Restated 2010 Stock Incentive Plan, which authorized the issuance of an additional i17 million shares of the Company’s common stock pursuant to awards. On May 20, 2021, the Company’s
stockholders approved the Third Amended and Restated 2010 Stock Incentive Plan, which amended and restated the Company’s Second Amended and Restated 2010 Stock Incentive Plan and authorized the issuance of an additional i9.6 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 i55,974,756 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, Restricted Stock Awards, RSUs, and other share-based awards. As of December 31, 2022, i7,348,028 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 iten years of their grant date. Generally all employee options and RSUs vest ratably between one and ifour
years.
On June 21, 2022, the Board adopted the Inducement Plan to accommodate equity grants to new employees of the Company hired in connection with the 2022 Transactions. Under the Inducement Plan, the Company may grant RSUs (including PBRSUs) with respect to up to a total of i6,225,000
shares of common stock to new employees. Pursuant to Rule 5635(c)(4) of the NASDAQ Listing Rules, the Inducement Plan was adopted without stockholder approval. The Inducement Plan only provides for the grant of RSUs (including PBRSUs), and its terms are otherwise substantially similar to the 2010 Amended Plan, including with respect to treatment of equity awards in the event of a “change in control” as defined under the Inducement Plan. In accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules, awards under the Inducement Plan can only be made to individuals not previously employees or non-employee directors of the Company (or following such individuals’ bona fide period of non-employment with the Company), as an inducement material to the individuals’ entry into employment with the
Company or in connection with a merger or acquisition, to the extent permitted by Rule 5635(c)(3) of the NASDAQ Listing Rules. As of December 31, 2022, i259,372 shares were available for future grants of awards under the Inducement Plan. However, to the extent that previously granted awards under the Inducement Plan expire, terminate or are otherwise surrendered, canceled or forfeited, the number of shares available
for future awards under the Inducement Plan will increase.
For the years ended December 31, 2022, 2021, and 2020, the Company recognized $i9.8 million, $i12.7
million, and $i37.3 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 their grant dates. The volatility for the options was calculated based on an analysis of historical
volatility. The Company assesses current performance on performance-based PBRSUs by reviewing historical performance to date, along with any adjustments which have been approved to the reported performance, and changes to the 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. A Monte Carlo simulation was used to estimate the fair value of the Unvested Units, which are being amortized over a period of i4
years on a straight-line basis. The volatility for the Unvested Units was calculated based on an analysis of historical and implied volatility.
F-34
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
The
following table sets forth the significant assumptions used in the calculation of share-based compensation expense during 2022, 2021, and 2020:
(1)
Included in the share-based compensation expense above is $i5.1 million of CoyCo 2 share-based compensation expense for the year ended December 31, 2022. See further discussion below. In addition to the share-based compensation expense recorded above, $i0.2 million,
$i0.7 million, and $i0.1
million of share-based compensation expense was capitalized to deferred contract costs for the years ended December 31, 2022, 2021, and 2020, respectively. See Note 2, Summary of Significant Accounting Policies, for further discussion.
F-35
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Stock options
i
The
following table sets forth a summary of all option activity under all plans for the years ended December 31, 2022, 2021, and 2020:
Shares
Weighted- Average Exercise Price
Weighted- Average Remaining Contractual Term (in years)
The
weighted-average grant date fair value of options granted during the years ended December 31, 2022, 2021, and 2020 was $i9.55, $i9.34,
and $i4.41 per share, respectively. The total intrinsic value of the options exercised in the years ended December 31, 2022, 2021, and 2020 was $i26.5
million, $i38.2 million, and $i30.5
million, respectively. The total fair value of options vested during the years ended December 31, 2022, 2021, and 2020 was $i0.1 million, $i1.4
million, and $i2.2 million, respectively.
Restricted stock units and performance-based restricted stock units
i
The
following table sets forth a summary of all RSU and PBRSU activity during the years ended December 31, 2022, 2021, and 2020:
Cost
of shares surrendered for taxes for the year ended December 31, 2020 (in millions)
i1.4
i64.2
Upon
consummation of the Holding Company Reorganization, outstanding restricted units of Cloudmed were replaced by an aggregate i1,536,220 RSUs of the Company. The Company also issued an aggregate of i3,173,184
inducement RSUs and PBRSUs to certain employees of Cloudmed under Nasdaq Listing Rule 5635(c)(4) pursuant to its newly adopted 2022 Inducement Plan.
The Company’s RSU and PBRSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSUs and PBRSUs in lieu of their payment of the required personal employment-related taxes. Shares surrendered for payment of personal employment-related taxes are held in treasury.
Outstanding PBRSUs vest 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, modular sales revenue, 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 i0% and i200%
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 i13,753,594.
F-37
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
CoyCo 2, L.P. Limited Partnership Units
Former Class P Units were originally issued to employees of Cloudmed and its affiliates (“Participants”) in connection with and as a part of the compensation and incentive arrangements between Cloudmed and such Participants prior to the consummation of the Cloudmed Acquisition. A portion of the Former Class P Units immediately vested upon the closing of the Cloudmed Acquisition. In connection with the Cloudmed Acquisition, Cloudmed caused the Former Class P Units, including the Unvested Units, to be converted into Management Units. At the time of the closing of the Cloudmed Acquisition, i97,875
Unvested Units were converted into i514,986 Management Units.
In general, Unvested Units vest upon the achievement of certain performance criteria, including achievement by the Sellers’ owner, New Mountain Capital, L.L.C. (“New Mountain”), of (i) specified multiples of Base Equity Value (“BEV”) (i.e., generally the aggregate equity value of New Mountain’s investment
in Cloudmed as of the original grant date), or (ii) specified Multiples on Invested Capital (“MIC”) with respect to New Mountain Capital’s pre-Cloudmed Acquisition investment in Cloudmed, and subject to continued service with the Company and its affiliates, including Cloudmed through the applicable vesting date.
14. iOther Expenses
Other
expenses are incurred in connection with acquisition and integration costs, various exit activities, transformation initiatives, and organizational changes to improve our business alignment and cost structure.iThe following table summarizes the other expenses (income) recognized for the years ended December 31, 2022, 2021, and 2020:
Global
business services center expansion project in the Philippines (5)
i26.7
i1.8
i—
Customer
employee transition and restructuring expenses (6)
i—
i4.5
(i0.2)
Facility-exit
charges (7)
i7.9
i3.4
i17.5
Other
(8)
i10.1
i18.2
i14.3
Total
other expenses
$
i189.8
$
i55.5
$
i69.6
(1)
These costs relate to restructuring and business reorganization events.
(2) These are costs, including legal, consulting, insurance premiums, and bank fees, that are directly related to the closing of business acquisitions and include changes to contingent consideration. Costs also include
compensation expenses incurred in connection with the close of the transactions.
(3) These costs reflect efforts to integrate acquisitions from a systems, processes, and people perspective and to achieve synergies expected from the transaction. Costs include consulting fees, IT vendor spend, severance, early lease termination of Cloudmed facilities, and certain payroll costs.
(4) These costs relate to performing portfolio and capital structure analyses and transactions and other business transformation projects
(including large scale system projects) as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, severance, and retention amounts.
(5) These costs include legal and consulting fees related to the establishment of the Company’s inaugural global business services center in the Philippines as well as severance costs for personnel whose roles are being relocated. The entry into the Philippines is the first new organic global business services center country expansion by the Company in approximately i15
years.
F-38
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(6) As part of the transition of customer personnel to the Company under certain operating partner model contracts, the Company agreed to reimburse the customer, or directly pay affected employees, for severance and retention
costs related to certain employees who were not transitioned to the Company, or whose jobs were relocated after the employee transitioned to the Company.
(7) As part of evaluating its footprint, the Company has exited certain leased facilities. Costs include asset impairment charges, early termination fees, and other costs related to exited leased facilities (excluding early lease termination of Cloudmed facilities, which is included in (3) above).
(8) For the years ended December 31, 2022, 2021, and 2020,
other includes $i2.5 million, $i11.3 million, and $i10.9 million,
respectively, of expenses related to the COVID-19 pandemic.
15.iIncome Taxes
i
The
domestic and foreign components of income (loss) before income taxes consist of the following:
For
the years ended December 31, 2022, 2021, and 2020, the Company’s current and deferred income tax expense (benefit) attributable to income (loss) from operations are as follows:
At
December 31, 2022, the Company had cumulative U.S. federal and state net operating loss (“NOL”) carryforwards of approximately $i180.7 million and $i221.4
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 2024.
F-40
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
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.
The Company has recorded valuation allowances at December 31, 2022 and 2021 of $i7.1
million and $i6.4 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. The December 31, 2022 valuation allowance includes $i3.4 million attributable to research and development credits and $i2.2 million
for a capital loss.
The 2022, 2021, and 2020 foreign current tax provision includes $i3.2 million, $i3.0 million, and $i2.4
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 $i4.9 million, $i4.7
million, and $i4.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. The tax holidays are set to expire between March 31, 2024 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, 2022, 2021, and 2020 were iiino//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 2018 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 isix years. Certain income tax returns since fiscal year 2009 for the Company’s India subsidiaries
are currently open for final determination.
F-41
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
16. ii8.00%
Series A Convertible Preferred Stock /
At the close of the 2016 Transaction on February 16, 2016 (as described in Note 1), the Company issued to TCP-ASC: (i) i200,000 shares of Preferred Stock, for an aggregate price of $i200
million, and (ii) a warrant with a term of iten years to acquire up to i60 million shares of common stock at an exercise price of $i3.50
per share, on the terms and subject to the conditions set forth in the Warrant Agreement (“Warrant”).
On January 15, 2021, TCP-ASC converted all of its i294,266 shares of Preferred Stock into i117,706,400
shares of common stock of the Company into which the shares were convertible pursuant to the Certificate of Designation of the Preferred Stock, and, in consideration therefor, the Company (i) issued i21,582,800 additional shares of common stock to TCP-ASC, and (ii) paid TCP-ASC $i105.0 million
in cash. On January 19, 2021, the Company filed a Certificate of Elimination of i8.00% Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware to eliminate the Certificate of Designations of the i8.00%
Series A Convertible Preferred Stock. The consideration paid to induce the conversion was recorded as a dividend of $i592.3 million and reduced income available to common shareholders in our earnings per share calculation. The dividend was calculated as the cash paid of $i105.0 million
plus the fair value on the conversion date of the additional i21,582,800 shares of common stock issued as consideration for the conversion.
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 i8%
per annum (preferred dividend) multiplied by the liquidation preference per share, initially $i1,000 per share adjusted for any unpaid cumulative preferred dividends. As of December 31, 2020, the Company had accrued dividends of $i5.8
million associated with the Preferred Stock, of which $i5.8 million was paid in additional shares and $i940 was paid in cash in January 2021. For the year ended December 31, 2020, the dividends paid, or accrued, in additional shares of Preferred
Stock totaled $i22.4 million.
i
The following summarizes the Preferred Stock activity for the years ended December 31, 2021 and 2020:
Basic net income (loss) per share is computed by dividing net income (loss), 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 participated in dividends alongside the Company’s common stock (per their participating dividends), the preferred stock constituted participating securities under ASC 260-10, Earnings Per Share, and were applied
to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) were allocated to common shares and participating securities based on their respective rights to receive dividends.
F-42
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Diluted net income (loss) per share is calculated by adjusting the denominator used in the basic net income (loss) 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 RSUs and PBRSUs, and shares issuable upon conversion of preferred stock.
i
Basic and diluted net income (loss) per common share are calculated as follows:
Net
income (loss) available/(allocated) to common shareholders - basic
$
(i63.3)
$
(i505.0)
$
i46.5
Diluted
EPS:
Net income (loss)
$
(i63.3)
$
i87.3
$
i115.2
Less
dividends on preferred shares (1)
i—
(i592.3)
(i22.4)
Less
income allocated to preferred shareholders
i—
i—
(i36.9)
Net
income (loss) available/(allocated) to common shareholders - diluted
$
(i63.3)
$
(i505.0)
$
i55.9
Basic
weighted-average common shares
i352,337,767
i266,183,565
i115,729,645
Add:
Effect of dilutive equity awards
i—
i—
i12,731,424
Add:
Effect of dilutive warrants
i—
i—
i46,112,201
Diluted
weighted average common shares
i352,337,767
i266,183,565
i174,573,270
Net
income (loss) per common share (basic)
$
(i0.18)
$
(i1.90)
$
i0.40
Net
income (loss) per common share (diluted)
$
(i0.18)
$
(i1.90)
$
i0.32
(1)
The 2021 dividend on preferred shares includes amounts related to the conversion of the preferred shares. See Note 16, i8.00% Series A Convertible Preferred Stock, for more information.
/
Because of their anti-dilutive effect, i20,090,009,
i12,875,730, i97,244 common share equivalents comprised of
stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the years ended December 31, 2022, 2021, and 2020, respectively. Additionally, for the years ended December 31, 2022 and 2021, warrants to acquire up to ii42.0/ million
shares of the Company’s common stock have been excluded from the diluted earnings per share calculation because they were anti-dilutive.
18.iCommitments 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.
F-43
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions,
except per share data)
On April 13, 2021 and April 19, 2021, respectively, certain purported stockholders of the Company filed itwo complaints in the Delaware Court of Chancery regarding the Company’s January 15, 2021 recapitalization
transaction with TCP-ASC. Both complaints allege that TCP-ASC, Ascension, and TowerBrook controlled the Company and breached their fiduciary duties by using that alleged control to force the Company to overpay in redeeming TCP-ASC’s preferred stock as part of the recapitalization transaction. The plaintiffs seek an unspecified amount of damages against TCP-ASC, Ascension, and TowerBrook. The plaintiffs also allege that the Company and TCP-ASC entered into amendments to the Investor Rights Agreement that the plaintiffs contend contain provisions that are void under the
Company’s charter, bylaws, and the Delaware General Corporation Law. The cases have since been consolidated into a single action. All defendants have answered the Complaint and discovery has commenced.
On February 18, 2022, plaintiffs filed a supplement to their complaint, naming certain additional defendants and asserting additional claims related to the Company’s agreement to acquire Cloudmed, which was announced on January 10, 2022. The additional claims assert that: (i) TCP-ASC, Ascension, and Towerbrook, along with the Company’s
directors (“Individual Defendants”), breached their fiduciary duties by causing the Company to enter into and approving the Cloudmed acquisition, respectively, which plaintiffs claim will perpetuate TCP-ASC’s, Ascension’s, and Towerbrook’s control over the Company and entrench the Individual Defendants by virtue of certain agreements entered into as part of the transaction, including a Second Amended Investor Rights Agreement with TCP-ASC (the “Seconded Amended Investor Rights Agreement”) and an Investor Rights Agreement
with Cloudmed (the “Cloudmed Investor Rights Agreement”); and (ii) Cloudmed’s stockholders aided and abetted such breaches. Plaintiffs also allege that certain provisions in the Cloudmed Investor Rights Agreement and the Second Amended Investor Rights Agreement are void under the Company’s charter, bylaws, and the Delaware General Corporation law.The plaintiffs seek a declaratory judgment and an unspecified amount of damages, as well as attorneys’ fees and costs. The
Company believes it has meritorious defenses to all claims against it and intends to vigorously defend itself against these claims.
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 customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties, and plaintiff’s attorneys’ fees. The Third Amended
Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. Both the Company’s and plaintiff’s motions for summary judgment were denied in December 2020, and the parties have completed damage and expert discovery. Additional dispositive motions are expected to extend into 2023, with trial, if necessary, in mid-to-late 2023. The Company believes it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims.
19.
iRelated Party Transactions
As a result of the closing of the 2016 Transaction with Ascension Health Alliance on February 16, 2016 and Ascension Health Alliance’s ownership interest in TCP-ASC, 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, Description of Business, and Note 16, i8.00% Series A Convertible Preferred Stock, for further discussion about the agreements with Ascension. In conjunction with the Cloudmed Acquisition, New Mountain became a new related party. There were no material transactions with New Mountain subsequent to the Cloudmed Acquisition.
F-44
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
i
Net services revenue from services provided to Ascension, as well as corresponding accounts receivable and customer liabilities are presented in the Consolidated Statements of Operations and Comprehensive Income (Loss) and the Consolidated Balance Sheets. Customer liabilities for Ascension consist of the following:
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.
On May 27, 2021 and May 28, 2021, the Company issued i16,750,000
shares of common stock to TCP-ASC upon the cashless exercise of a portion of the Warrant to purchase i19,535,145 shares of common stock at an exercise price of $i3.50
per share-based upon a market value of $i24.54 to $i24.64 per share as determined under the terms of the Warrant.
20.iSegments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with the way that management operates and views the business. All of the Company’s significant operations are organized around the single business of providing management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures,
the Company has only iione/ operating and reportable
segment.
i
Customers comprising greater than 10% of net services revenue are as follows:
Year
Ended December 31,
Customer Name
2022
2021
2020
Ascension and its affiliates
i49%
i61%
i64%
Intermountain
Healthcare
i12%
i14%
i14%
/
The
loss of customers within the Ascension health system or Intermountain network would have a material adverse impact on the Company’s operations.
As of December 31, 2022 and 2021, the Company had a concentration of credit risk with Ascension, representing i10% and i17% of
accounts receivable, respectively. See Note 19, Related Party Transactions, for more information about the Company’s relationship with Ascension.
F-45
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
21.iRetirement
Plan
The Company maintains 401(k) retirement plans that are intended to be tax-qualified defined contribution plans under Section 401(k) of the Internal Revenue Code. In general, all employees are eligible to participate. In conjunction with acquisitions, the Company may integrate or maintain the acquiree’s 401(k) plan.
For the years ended December 31, 2022, 2021, and 2020, Company contributions to the 401(k) plans were $i13.3
million, $i9.1 million, and $i3.6 million, respectively.
In response to the COVID-19 pandemic, the
Company announced several temporary cost reduction actions, including the suspension of matching contributions to the 401(k) plans effective May 29, 2020 for exempt associates and June 5, 2020 for hourly associates. However, participants were able to continue making salary deferral contributions to the 401(k) plans. The 401(k) match was reinstated on a prospective basis for both plans effective as of the first paycheck in January 2021.
22. iSupplemental
Financial Information
i
Prepaid expenses and other current assets is comprised of the following:
Total accrued expenses and other current liabilities
$
i70.5
$
i59.3
/
23.
iRestatement and Revision of Previously Issued Consolidated Financial Statements
In connection with the preparation of the consolidated financial statements as of and for the three and nine months ended September 30, 2023, the Company identified errors related to the accounting for certain acquiree compensation costs incurred in connection with acquisitions in 2022, 2021, and 2020 that the Company was required
to recognize as a Company expense immediately upon the closing of the transactions. These costs should have been recorded as other expenses within the Consolidated Statements of Operations and Comprehensive Income (Loss) in the applicable period and were instead recorded within the purchase price allocation and ultimately recorded as goodwill in the Consolidated Balance Sheets in previously issued financial statements.
F-46
R1 RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
As a result of correcting
the accounting for certain acquiree compensation costs incurred in connection with acquisitions in 2022, 2021, and 2020, the Company updated the amount of goodwill that should have been recognized in the prior acquisitions and restated its consolidated financial statements as of and for the years ended December 31, 2022 and 2021, and the consolidated financial statements for each of the interim periods during the years ended December 31, 2022 and 2021. Management concluded that the impact of the above errors as of and for the year ended December 31, 2020, was not material to the consolidated financial statements; however, the consolidated
financial statements for the year ended December 31, 2020 have been revised herein for this matter.
In addition to the errors described above, the Company is correcting certain items that were previously identified and concluded as immaterial, individually and in aggregate, to its consolidated financial statements for the three years ended December 31, 2022. These adjustments primarily consisted of share-based compensation expense for a modified award that was originally recognized in 2022 but should have been recognized in 2021 and operating expenses recognized in 2022 that should have been recognized in 2021 relating to immaterial adjustments to the timing and amounts of accrued expenses and prepaid expenses.
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2022 are summarized in the following table:
Net services revenue ($i881.0
million from related party for the year ended December 31, 2022)
$
i1,806.4
$
i—
$
i1,806.4
Operating
expenses:
Cost of services
i1,445.1
i1.8
i1,446.9
Selling,
general and administrative
i174.8
(i2.3)
i172.5
Other
expenses
i183.5
i6.3
i189.8
Total
operating expenses
i1,803.4
i5.8
i1,809.2
Income
(loss) from operations
i3.0
(i5.8)
(i2.8)
Net
interest expense
(i64.0)
i—
(i64.0)
Loss
before income tax benefit
(i61.0)
(i5.8)
(i66.8)
Income
tax benefit
(i3.4)
(i0.1)
(i3.5)
Net
loss
$
(i57.6)
$
(i5.7)
$
(i63.3)
Net
loss per common share:
Basic
$
(i0.16)
$
(i0.02)
$
(i0.18)
Diluted
$
(i0.16)
$
(i0.02)
$
(i0.18)
Weighted
average shares used in calculating net loss per common share:
Basic
i352,337,767
i—
i352,337,767
Diluted
i352,337,767
i—
i352,337,767
Consolidated
statements of comprehensive loss
Net loss
$
(i57.6)
$
(i5.7)
$
(i63.3)
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i9.2
i—
i9.2
Foreign
currency translation adjustments
(i7.3)
i—
(i7.3)
Total
other comprehensive income, net of tax
$
i1.9
$
i—
$
i1.9
Comprehensive
loss
$
(i55.7)
$
(i5.7)
$
(i61.4)
Basic:
Net
loss
$
(i57.6)
$
(i5.7)
$
(i63.3)
Less
dividends on preferred shares
i—
i—
i—
Less
income allocated to preferred shareholders
i—
i—
i—
Net
loss available/allocated to common shareholders - basic
$
(i57.6)
$
(i5.7)
$
(i63.3)
Diluted:
Net
loss
$
(i57.6)
$
(i5.7)
$
(i63.3)
Less
dividends on preferred shares
i—
i—
i—
Less
income allocated to preferred shareholders
i—
i—
i—
Net
loss available/allocated to common shareholders - diluted
$
(i57.6)
$
(i5.7)
$
(i63.3)
The
effects of the restatement on the Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2022 are summarized in the following table:
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2021 are summarized in the following table:
Net services revenue ($i893.5
million from related party for the year ended December 31, 2021)
$
i1,474.6
$
i—
$
i1,474.6
Operating
expenses:
Cost of services
i1,162.8
(i1.9)
i1,160.9
Selling,
general and administrative
i120.0
i2.0
i122.0
Other
expenses
i46.1
i9.4
i55.5
Total
operating expenses
i1,328.9
i9.5
i1,338.4
Income
from operations
i145.7
(i9.5)
i136.2
Net
interest expense
(i18.9)
i—
(i18.9)
Income
before income tax provision
i126.8
(i9.5)
i117.3
Income
tax provision
i29.6
i0.4
i30.0
Net
income
$
i97.2
$
(i9.9)
$
i87.3
Net
loss per common share:
Basic
$
(i1.86)
$
(i0.04)
$
(i1.90)
Diluted
$
(i1.86)
$
(i0.04)
$
(i1.90)
Weighted
average shares used in calculating net loss per common share:
Basic
i266,183,565
i—
i266,183,565
Diluted
i266,183,565
i—
i266,183,565
Consolidated
statements of comprehensive income
Net income
$
i97.2
$
(i9.9)
$
i87.3
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i2.1
i—
i2.1
Foreign
currency translation adjustments
(i0.9)
i—
(i0.9)
Total
other comprehensive income, net of tax
$
i1.2
$
i—
$
i1.2
Comprehensive
income
$
i98.4
$
(i9.9)
$
i88.5
Basic:
Net
income
$
i97.2
$
(i9.9)
$
i87.3
Less
dividends on preferred shares
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - basic
$
(i495.1)
$
(i9.9)
$
(i505.0)
Diluted:
$
—
Net
income
$
i97.2
$
(i9.9)
$
i87.3
Less
dividends on preferred shares
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - diluted
$
(i495.1)
$
(i9.9)
$
(i505.0)
The
effects of the restatement on the Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2021 are summarized in the following table:
The effects of the revision on the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2020 are summarized in the following table:
Net services revenue ($i808.8 million
from related party for the year ended December 31, 2020)
$
i1,270.8
$
(i0.7)
$
i1,270.1
Operating
expenses:
Cost of services
i1,021.1
i—
i1,021.1
Selling,
general and administrative
i102.4
(i1.1)
i101.3
Other
expenses
i67.3
i2.3
i69.6
Total
operating expenses
i1,190.8
i1.2
i1,192.0
Income
from operations
i80.0
(i1.9)
i78.1
Gain
on business disposition
i55.7
i—
i55.7
Net
interest expense
(i17.3)
i—
(i17.3)
Income
before income tax provision
i118.4
(i1.9)
i116.5
Income
tax provision
i1.3
i—
i1.3
Net
income
$
i117.1
$
(i1.9)
$
i115.2
Net
income per common share:
Basic
$
i0.41
$
(i0.01)
$
i0.40
Diluted
$
i0.33
$
(i0.01)
$
i0.32
Weighted
average shares used in calculating net income per common share:
Basic
i115,729,645
i—
i115,729,645
Diluted
i174,573,270
i—
i174,573,270
Consolidated
statements of comprehensive income
Net income
$
i117.1
$
(i1.9)
$
i115.2
Other
comprehensive loss:
Net change on derivatives designated as cash flow hedges, net of tax
(i1.7)
i—
(i1.7)
Foreign
currency translation adjustments
(i0.3)
i—
(i0.3)
Total
other comprehensive loss, net of tax
$
(i2.0)
$
i—
$
(i2.0)
Comprehensive
income
$
i115.1
$
(i1.9)
$
i113.2
Basic:
Net
income
$
i117.1
$
(i1.9)
$
i115.2
Less
dividends on preferred shares
(i22.4)
i—
(i22.4)
Less
income allocated to preferred shareholders
(i47.3)
i1.0
(i46.3)
Net
income available/allocated to common shareholders - basic
$
i47.4
$
(i0.9)
$
i46.5
Diluted:
Net
income
$
i117.1
$
(i1.9)
$
i115.2
Less
dividends on preferred shares
(i22.4)
i—
(i22.4)
Less
income allocated to preferred shareholders
(i37.7)
i0.8
(i36.9)
Net
income available/allocated to common shareholders - diluted
$
i57.0
$
(i1.1)
$
i55.9
F-56
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the revision on the Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2020 are summarized in the following table:
Adjustments
to reconcile net income to net cash provided by operations:
Depreciation and amortization
i68.7
i—
i68.7
Amortization
of debt issuance costs
i1.0
i—
i1.0
Share-based
compensation
i24.1
i—
i24.1
Gain
on sale of Emergency Medical Services business
(i55.7)
i—
(i55.7)
Loss
on disposal and right-of-use asset write-downs
i17.0
i—
i17.0
Provision
for credit losses
i0.6
i—
i0.6
Deferred
income taxes
(i1.2)
(i0.1)
(i1.3)
Non-cash
lease expense
i7.3
i—
i7.3
Other
i4.7
i—
i4.7
Changes
in operating assets and liabilities:
Accounts receivable and related party accounts receivable
(i56.5)
i0.7
(i55.8)
Prepaid
expenses and other assets
(i12.9)
(i0.1)
(i13.0)
Accounts
payable
(i3.4)
i—
(i3.4)
Accrued
compensation and benefits
(i40.3)
i—
(i40.3)
Lease
liabilities
(i13.6)
i—
(i13.6)
Other
liabilities
i25.3
(i0.1)
i25.2
Customer
liabilities and customer liabilities - related party
(i20.4)
(i0.4)
(i20.8)
Net
cash provided by operating activities
i61.8
(i1.9)
i59.9
Investing
activities
Purchases of property, equipment, and software
(i49.3)
i—
(i49.3)
Payment
for business acquisitions, net of cash acquired
(i196.0)
i1.9
(i194.1)
Proceeds
from sale of Emergency Medical Services business, net of cash disposed
i128.3
i—
i128.3
Net
cash used in investing activities
(i117.0)
i1.9
(i115.1)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i190.6
i—
i190.6
Borrowings
on revolver
i50.0
i—
i50.0
Repayment
of senior secured debt
(i23.4)
i—
(i23.4)
Repayments
on revolver
(i20.0)
i—
(i20.0)
Exercise
of vested stock options
i18.4
i—
i18.4
Shares
withheld for taxes
(i71.9)
i—
(i71.9)
Other
(i5.8)
i—
(i5.8)
Net
cash provided by financing activities
i137.9
i—
i137.9
Effect
of exchange rate changes in cash
(i0.4)
i—
(i0.4)
Net
increase in cash, cash equivalents, and restricted cash
i82.3
i—
i82.3
Cash,
cash equivalents, and restricted cash at beginning of period
i92.5
i—
i92.5
Cash
and cash equivalents, end of year
$
i174.8
$
i—
$
i174.8
Supplemental
disclosures of cash flow information
Accrued dividends payable to preferred stockholders
$
i5.8
$
i—
$
i5.8
Property,
equipment and software purchases not paid
$
i11.0
$
i—
$
i11.0
Assets
obtained in exchange for common stock
$
i—
$
i—
$
i—
Interest
paid
$
i15.8
$
i—
$
i15.8
Income
taxes paid
$
i4.2
$
i—
$
i4.2
Income
taxes refunded
$
i0.4
$
i—
$
i0.4
F-58
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
24. iQuarterly Financial Data (Unaudited)
Description of Quarterly Restatement Tables
In lieu of filing amended Quarterly Reports on Form 10-Q, the tables below present our restated unaudited consolidated financial statements for each of the previously reported quarters during the years ended December
31, 2022 and 2021. The following tables present the impact of the restatement on our previously reported Consolidated Balance Sheets, Statements of Operations and Comprehensive Income (Loss), Statements of Stockholders’ Equity, and Statements of Cash Flows for which the values were derived from our Quarterly Reports on Form 10-Q for the interim periods of 2022 and 2021. For further information on the restatement, refer to Note 23, Restatement and Revision of Previously Issued Consolidated Financial Statements.
Accounts
receivable, net of $i3.8 million allowance
i97.6
i—
i97.6
Accounts
receivable - related party, net of $i0.1 million allowance
i31.8
i—
i31.8
Prepaid
expenses and other current assets
i65.7
i—
i65.7
Total
current assets
i298.6
i—
i298.6
Property,
equipment and software, net
i89.0
(i0.8)
i88.2
Operating
lease right-of-use assets
i59.8
i—
i59.8
Intangible
assets, net
i166.7
i—
i166.7
Goodwill
i375.5
(i1.8)
i373.7
Non-current
deferred tax assets
i68.5
i0.4
i68.9
Non-current
portion of restricted cash equivalents
i0.5
i—
i0.5
Other
assets
i75.9
(i0.6)
i75.3
Total
assets
$
i1,134.5
$
(i2.8)
$
i1,131.7
Liabilities
Current
liabilities:
Accounts payable
$
i22.8
$
i—
$
i22.8
Current
portion of customer liabilities
i23.0
i0.1
i23.1
Current
portion of customer liabilities - related party
i10.6
i—
i10.6
Accrued
compensation and benefits
i61.2
i—
i61.2
Current
portion of operating lease liabilities
i11.8
i—
i11.8
Current
portion of long-term debt
i35.5
i—
i35.5
Accrued
expenses and other current liabilities
i56.6
i—
i56.6
Total
current liabilities
i221.5
i0.1
i221.6
Non-current
portion of customer liabilities - related party
i15.4
i—
i15.4
Non-current
portion of operating lease liabilities
i68.7
i—
i68.7
Long-term
debt
i510.2
i—
i510.2
Other
non-current liabilities
i35.1
i—
i35.1
Total
liabilities
i850.9
i0.1
i851.0
Stockholders’
equity:
Common stock, $i0.01 par value, i500,000,000 shares
authorized, i277,972,263 shares issued and i261,301,541 shares outstanding at March 31, 2021
i2.8
i—
i2.8
Additional
paid-in capital
i562.1
i2.4
i564.5
Accumulated
deficit
(i135.7)
(i5.3)
(i141.0)
Accumulated
other comprehensive loss
(i6.4)
i—
(i6.4)
Treasury
stock, at cost, i16,670,722 shares as of March 31, 2021
(i139.2)
i—
(i139.2)
Total
stockholders’ equity
i283.6
(i2.9)
i280.7
Total
liabilities and stockholders’ equity
$
i1,134.5
$
(i2.8)
$
i1,131.7
F-60
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2021 are summarized in the following table:
Net services revenue ($i215.5 million
for the three months ended March 31, 2021 from related party)
$
i342.6
$
i—
$
i342.6
Operating
expenses:
Cost of services
i267.2
(i0.2)
i267.0
Selling,
general and administrative
i25.6
i2.3
i27.9
Other
expenses
i13.0
i0.9
i13.9
Total
operating expenses
i305.8
i3.0
i308.8
Income
from operations
i36.8
(i3.0)
i33.8
Net
interest expense
i3.9
i—
i3.9
Income
before income tax provision
i32.9
(i3.0)
i29.9
Income
tax provision
i7.1
(i0.2)
i6.9
Net
income
$
i25.8
$
(i2.8)
$
i23.0
Net
loss per common share:
Basic
$
(i2.37)
$
(i0.01)
$
(i2.38)
Diluted
$
(i2.37)
$
(i0.01)
$
(i2.38)
Weighted
average shares used in calculating net loss per common share:
Basic
ii239,290,145/
i—
ii239,290,145/
Diluted
ii239,290,145/
i—
ii239,290,145/
Consolidated
statements of comprehensive income
Net income
$
i25.8
$
(i2.8)
$
i23.0
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i0.5
i—
i0.5
Foreign
currency translation adjustments
(i0.4)
i—
(i0.4)
Total
other comprehensive income, net of tax
$
i0.1
$
i—
$
i0.1
Comprehensive
income
$
i25.9
$
(i2.8)
$
i23.1
Basic:
Net
income
$
i25.8
$
(i2.8)
$
i23.0
Less
dividends on preferred shares
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - basic
$
(i566.5)
$
(i2.8)
$
(i569.3)
Diluted:
Net
income
$
i25.8
$
(i2.8)
$
i23.0
Less
dividends on preferred shares
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - diluted
$
(i566.5)
$
(i2.8)
$
(i569.3)
F-61
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 are summarized in the following table:
Accounts
receivable, net of $i2.2 million allowance
i96.8
i—
i96.8
Accounts
receivable - related party, net of $i0.1 million allowance
i31.9
i—
i31.9
Prepaid
expenses and other current assets
i59.7
i0.1
i59.8
Total
current assets
i353.3
i0.1
i353.4
Property,
equipment and software, net
i89.8
i—
i89.8
Operating
lease right-of-use assets
i56.5
i—
i56.5
Intangible
assets, net
i162.2
i—
i162.2
Goodwill
i375.5
(i1.8)
i373.7
Non-current
deferred tax assets
i62.6
(i0.1)
i62.5
Non-current
portion of restricted cash equivalents
i0.5
i—
i0.5
Other
assets
i77.4
(i0.5)
i76.9
Total
assets
$
i1,177.8
$
(i2.3)
$
i1,175.5
Liabilities
Current
liabilities:
Accounts payable
$
i21.0
$
i—
$
i21.0
Current
portion of customer liabilities
i30.8
(i0.3)
i30.5
Current
portion of customer liabilities - related party
i6.7
i—
i6.7
Accrued
compensation and benefits
i76.6
i—
i76.6
Current
portion of operating lease liabilities
i10.7
i—
i10.7
Current
portion of long-term debt
i38.7
i—
i38.7
Accrued
expenses and other current liabilities
i53.3
i—
i53.3
Total
current liabilities
i237.8
(i0.3)
i237.5
Non-current
portion of customer liabilities - related party
i16.4
i—
i16.4
Non-current
portion of operating lease liabilities
i65.3
i—
i65.3
Long-term
debt
i500.7
i—
i500.7
Other
non-current liabilities
i35.5
i—
i35.5
Total
liabilities
i855.7
(i0.3)
i855.4
Stockholders’
equity:
Common stock, $i0.01 par value, i500,000,000
shares authorized, i295,658,397 shares issued and i278,819,843 shares outstanding at June 30, 2021
i3.0
i—
i3.0
Additional
paid-in capital
i587.2
i2.4
i589.6
Accumulated
deficit
(i117.3)
(i4.4)
(i121.7)
Accumulated
other comprehensive loss
(i7.1)
i—
(i7.1)
Treasury
stock, at cost, i16,838,554 shares as of June 30, 2021
(i143.7)
i—
(i143.7)
Total
stockholders’ equity
i322.1
(i2.0)
i320.1
Total
liabilities and stockholders’ equity
$
i1,177.8
$
(i2.3)
$
i1,175.5
F-63
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2021 are summarized in the following table:
Net services revenue ($i218.4 million and $i433.9 million
for the three and six months ended June 30, 2021, respectively, from related party)
$
i353.4
$
i—
$
i353.4
$
i696.0
$
i—
$
i696.0
Operating
expenses:
Cost of services
i287.0
(i0.5)
i286.5
i554.2
(i0.7)
i553.5
Selling,
general and administrative
i29.0
i—
i29.0
i54.6
i2.3
i56.9
Other
i9.8
(i0.9)
i8.9
i22.8
i—
i22.8
Total
operating expenses
i325.8
(i1.4)
i324.4
i631.6
i1.6
i633.2
Income
from operations
i27.6
i1.4
i29.0
i64.4
(i1.6)
i62.8
Net
interest expense
i3.4
i—
i3.4
i7.3
i—
i7.3
Income
before income tax provision
i24.2
i1.4
i25.6
i57.1
(i1.6)
i55.5
Income
tax provision
i5.8
i0.5
i6.3
i12.9
i0.3
i13.2
Net
income
$
i18.4
$
i0.9
$
i19.3
$
i44.2
$
(i1.9)
$
i42.3
Net
income (loss) per common share:
Basic
$
i0.07
$
i—
$
i0.07
$
(i2.16)
$
(i0.01)
$
(i2.17)
Diluted
$
i0.06
$
i—
$
i0.06
$
(i2.16)
$
(i0.01)
$
(i2.17)
Weighted
average shares used in calculating net income (loss) per common share:
Basic
ii268,251,790/
i—
ii268,251,790/
ii253,850,972/
i—
ii253,850,972/
Diluted
ii320,832,913/
i—
ii320,832,913/
ii253,850,972/
i—
ii253,850,972/
Consolidated
statements of comprehensive income
Net income
$
i18.4
$
i0.9
$
i19.3
$
i44.2
$
(i1.9)
$
i42.3
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
(i0.1)
i—
(i0.1)
i0.4
i—
i0.4
Foreign
currency translation adjustments
(i0.6)
i—
(i0.6)
(i1.0)
i—
(i1.0)
Total
other comprehensive loss, net of tax
$
(i0.7)
$
i—
$
(i0.7)
$
(i0.6)
$
i—
$
(i0.6)
Comprehensive
income
$
i17.7
$
i0.9
$
i18.6
$
i43.6
$
(i1.9)
$
i41.7
Basic:
Net
income
$
i18.4
$
i0.9
$
i19.3
$
i44.2
$
(i1.9)
$
i42.3
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - basic
$
i18.4
$
i0.9
$
i19.3
$
(i548.1)
$
(i1.9)
$
(i550.0)
Diluted:
Net
income
$
i18.4
$
i0.9
$
i19.3
$
i44.2
$
(i1.9)
$
i42.3
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - diluted
$
i18.4
$
i0.9
$
i19.3
$
(i548.1)
$
(i1.9)
$
(i550.0)
F-64
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the six months ended June 30, 2021 are summarized in the following table:
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2021 are summarized in the following table:
Net services revenue ($i227.5 million and $i661.4 million
for the three and nine months ended September 30, 2021, respectively, from related party)
$
i379.7
$
i—
$
i379.7
$
i1,075.7
$
i—
$
i1,075.7
Operating
expenses:
Cost of services
i304.0
(i0.4)
i303.6
i858.2
(i1.1)
i857.1
Selling,
general and administrative
i33.2
(i0.2)
i33.0
i87.8
i2.1
i89.9
Other
i11.4
i9.7
i21.1
i34.2
i9.7
i43.9
Total
operating expenses
i348.6
i9.1
i357.7
i980.2
i10.7
i990.9
Income
from operations
i31.1
(i9.1)
i22.0
i95.5
(i10.7)
i84.8
Net
interest expense
i6.5
i—
i6.5
i13.8
i—
i13.8
Income
before income tax provision
i24.6
(i9.1)
i15.5
i81.7
(i10.7)
i71.0
Income
tax provision
i7.6
(i0.3)
i7.3
i20.5
i—
i20.5
Net
income
$
i17.0
$
(i8.8)
$
i8.2
$
i61.2
$
(i10.7)
$
i50.5
Net
income (loss) per common share:
Basic
$
i0.06
$
(i0.03)
$
i0.03
$
(ii2.03/)
$
(i0.04)
$
(i2.07)
Diluted
$
i0.05
$
(i0.02)
$
i0.03
$
(ii2.03/)
$
(i0.04)
$
(i2.07)
Weighted
average shares used in calculating net income (loss) per common share:
Basic
ii278,655,269/
i—
ii278,655,269/
ii262,209,929/
i—
ii262,209,929/
Diluted
ii320,617,086/
i—
ii320,617,086/
ii262,209,929/
i—
ii262,209,929/
Consolidated
statements of comprehensive income
Net income
$
i17.0
$
(i8.8)
$
i8.2
$
i61.2
$
(i10.7)
$
i50.5
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i0.5
i—
i0.5
i0.9
i—
i0.9
Foreign
currency translation adjustments
i—
i—
i—
(i1.0)
i—
(i1.0)
Total
other comprehensive income (loss), net of tax
$
i0.5
$
i—
$
i0.5
$
(i0.1)
$
i—
$
(i0.1)
Comprehensive
income
$
i17.5
$
(i8.8)
$
i8.7
$
i61.1
$
(i10.7)
$
i50.4
Basic:
Net
income
$
i17.0
$
(i8.8)
$
i8.2
$
i61.2
$
(i10.7)
$
i50.5
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - basic
$
i17.0
$
(i8.8)
$
i8.2
$
(i531.1)
$
(i10.7)
$
(i541.8)
Diluted:
Net
income
$
i17.0
$
(i8.8)
$
i8.2
$
i61.2
$
(i10.7)
$
i50.5
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
i—
(i592.3)
Less
income allocated to preferred shareholders
i—
i—
i—
i—
i—
i—
Net
income (loss) available/allocated to common shareholders - diluted
$
i17.0
$
(i8.8)
$
i8.2
$
(i531.1)
$
(i10.7)
$
(i541.8)
F-67
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 are summarized in the following table:
Treasury
stock, at cost, i20,830,454 shares as of March 31, 2022
(i234.1)
i—
(i234.1)
Total
stockholders’ equity
i366.5
(i9.7)
i356.8
Total
liabilities and stockholders’ equity
$
i1,436.3
$
(i10.5)
$
i1,425.8
F-69
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2022 are summarized in the following table:
Net services revenue ($i216.7 million
for the three months ended March 31, 2022 from related party)
$
i385.7
$
i—
$
i385.7
Operating
expenses:
Cost of services
i296.5
(i2.0)
i294.5
Selling,
general and administrative
i28.9
i0.7
i29.6
Other
expenses
i17.1
i0.8
i17.9
Total
operating expenses
i342.5
(i0.5)
i342.0
Income
from operations
i43.2
i0.5
i43.7
Net
interest expense
i4.7
i—
i4.7
Income
before income tax provision
i38.5
i0.5
i39.0
Income
tax provision
i9.1
i0.2
i9.3
Net
income
$
i29.4
$
i0.3
$
i29.7
Net
income per common share:
Basic
$
i0.11
$
i—
$
i0.11
Diluted
$
i0.09
$
i—
$
i0.09
Weighted
average shares used in calculating net income per common share:
Basic
ii278,747,261/
i—
ii278,747,261/
Diluted
ii321,043,371/
i—
ii321,043,371/
Consolidated
statements of comprehensive income
Net income
$
i29.4
$
i0.3
$
i29.7
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i0.1
i—
i0.1
Foreign
currency translation adjustments
(i1.4)
i—
(i1.4)
Total
other comprehensive loss, net of tax
$
(i1.3)
$
i—
$
(i1.3)
Comprehensive
income
$
i28.1
$
i0.3
$
i28.4
F-70
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the three months ended March 31, 2022 are summarized in the following table:
Treasury
stock, at cost, i20,985,893 shares as of June 30, 2022
(i237.7)
i—
(i237.7)
Total
stockholders’ equity
i2,750.6
(i17.0)
i2,733.6
Total
liabilities and stockholders’ equity
$
i5,090.2
$
(i14.9)
$
i5,075.3
F-72
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022 are summarized in the following table:
Net services revenue ($i223.0 million and $i439.7 million
for the three and six months ended June 30, 2022, respectively, from related party)
$
i391.9
$
i—
$
i391.9
$
i777.6
$
i—
$
i777.6
Operating
expenses:
Cost of services
i310.1
i2.9
i313.0
i606.6
i0.9
i607.5
Selling,
general and administrative
i30.9
(i0.6)
i30.3
i59.8
i0.1
i59.9
Other
i88.9
i7.2
i96.1
i106.0
i8.0
i114.0
Total
operating expenses
i429.9
i9.5
i439.4
i772.4
i9.0
i781.4
Income
(loss) from operations
(i38.0)
(i9.5)
(i47.5)
i5.2
(i9.0)
(i3.8)
Net
interest expense
i6.9
i—
i6.9
i11.6
i—
i11.6
Loss
before income tax benefit
(i44.9)
(i9.5)
(i54.4)
(i6.4)
(i9.0)
(i15.4)
Income
tax benefit
(i24.5)
(i2.2)
(i26.7)
(i15.4)
(i2.0)
(i17.4)
Net
income (loss)
$
(i20.4)
$
(i7.3)
$
(i27.7)
$
i9.0
$
(i7.0)
$
i2.0
Net
income (loss) per common share:
Basic
$
(i0.07)
$
(i0.02)
$
(i0.09)
$
i0.03
$
(i0.02)
$
i0.01
Diluted
$
(i0.07)
$
(i0.02)
$
(i0.09)
$
i0.03
$
(i0.02)
$
i0.01
Weighted
average shares used in calculating net income (loss) per common share:
Basic
ii294,658,635/
i—
ii294,658,635/
ii286,746,902/
i—
ii286,746,902/
Diluted
ii294,658,635/
i—
ii294,658,635/
ii328,169,238/
i—
ii328,169,238/
Consolidated
statements of comprehensive income (loss)
Net income (loss)
$
(i20.4)
$
(i7.3)
$
(i27.7)
$
i9.0
$
(i7.0)
$
i2.0
Other
comprehensive loss:
Net change on derivatives designated as cash flow hedges, net of tax
(i1.2)
i—
(i1.2)
(i1.1)
i—
(i1.1)
Foreign
currency translation adjustments
(i3.2)
i—
(i3.2)
(i4.6)
i—
(i4.6)
Total
other comprehensive loss, net of tax
$
(i4.4)
$
i—
$
(i4.4)
$
(i5.7)
$
i—
$
(i5.7)
Comprehensive
income (loss)
$
(i24.8)
$
(i7.3)
$
(i32.1)
$
i3.3
$
(i7.0)
$
(i3.7)
F-73
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the six months ended June 30, 2022 are summarized in the following table:
The effects of the restatement on the Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 are summarized in the following table:
Net services revenue ($i218.1 million and $i657.8 million
for the three and nine months ended September 30, 2022, respectively, from related party)
$
i496.0
$
(i0.5)
$
i495.5
$
i1,273.6
$
(i0.5)
$
i1,273.1
Operating
expenses:
Cost of services
i403.1
i0.8
i403.9
i1,009.7
i1.7
i1,011.4
Selling,
general and administrative
i60.8
(i2.5)
i58.3
i120.6
(i2.4)
i118.2
Other
i30.1
(i1.6)
i28.5
i136.1
i6.4
i142.5
Total
operating expenses
i494.0
(i3.3)
i490.7
i1,266.4
i5.7
i1,272.1
Income
from operations
i2.0
i2.8
i4.8
i7.2
(i6.2)
i1.0
Net
interest expense
i23.7
i—
i23.7
i35.3
i—
i35.3
Loss
before income tax provision (benefit)
(i21.7)
i2.8
(i18.9)
(i28.1)
(i6.2)
(i34.3)
Income
tax provision (benefit)
i7.8
i2.0
i9.8
(i7.6)
i—
(i7.6)
Net
loss
$
(i29.5)
$
i0.8
$
(i28.7)
$
(i20.5)
$
(i6.2)
$
(i26.7)
Net
loss per common share:
Basic
$
(i0.07)
$
i—
$
(i0.07)
$
(i0.06)
$
(i0.02)
$
(i0.08)
Diluted
$
(i0.07)
$
i—
$
(i0.07)
$
(i0.06)
$
(i0.02)
$
(i0.08)
Weighted
average shares used in calculating net loss per common share:
Basic
ii417,700,782/
i—
ii417,700,782/
ii330,877,880/
i—
ii330,877,880/
Diluted
ii417,700,782/
i—
ii417,700,782/
ii330,877,880/
i—
ii330,877,880/
Consolidated
statements of comprehensive loss
Net loss
$
(i29.5)
$
i0.8
$
(i28.7)
$
(i20.5)
$
(i6.2)
$
(i26.7)
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i9.2
i—
i9.2
i8.1
i—
i8.1
Foreign
currency translation adjustments
(i2.2)
i—
(i2.2)
(i6.8)
i—
(i6.8)
Total
other comprehensive income, net of tax
$
i7.0
i—
$
i7.0
$
i1.3
$
i—
$
i1.3
Comprehensive
loss
$
(i22.5)
i0.8
$
(i21.7)
$
(i19.2)
$
(i6.2)
$
(i25.4)
F-76
R1
RCM Inc.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
The effects of the restatement on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 are summarized in the following table:
Customer
liabilities and customer liabilities - related party
i2.9
i1.0
i3.9
Net
cash used in operating activities
(i39.5)
i—
(i39.5)
Investing
activities
Purchases of property, equipment, and software
(i74.6)
i—
(i74.6)
Acquisition
of Cloudmed, net of cash acquired
(i847.7)
i—
(i847.7)
Proceeds
from disposal of assets
i0.4
i—
i0.4
Net
cash used in investing activities
(i921.9)
i—
(i921.9)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i1,016.6
i—
i1,016.6
Borrowings
on revolver
i30.0
i—
i30.0
Payment
of debt issuance costs
(i1.0)
i—
(i1.0)
Repayment
of senior secured debt
(i13.1)
i—
(i13.1)
Repayments
on revolver
(i30.0)
i—
(i30.0)
Payment
of equity issuance costs
(i2.0)
i—
(i2.0)
Exercise
of vested stock options
i4.6
i—
i4.6
Purchase
of treasury stock
(i12.5)
i—
(i12.5)
Shares
withheld for taxes
(i26.9)
i—
(i26.9)
Other
(i0.2)
i—
(i0.2)
Net
cash provided by financing activities
i965.5
i—
i965.5
Effect
of exchange rate changes in cash
(i3.1)
i—
(i3.1)
Net
increase in cash, cash equivalents, and restricted cash
i1.0
i—
i1.0
Cash,
cash equivalents, and restricted cash at beginning of period
i130.1
i—
i130.1
Cash
and cash equivalents, end of year
$
i131.1
$
i—
$
i131.1
Supplemental
disclosures of cash flow information
Property, equipment and software purchases not paid
$
i27.4
$
i—
$
i27.4
The
effects of the restatement on the Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2021 are summarized in the following table:
The effects of the restatement on the Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2022 are summarized in the following table:
