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Comprehensive Income (Unaudited)
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Narrative (Details)
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Liabilities Assumed (Details)
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Information (Details)
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Assets (Details)
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Balances (Details)
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form i10-Q
(Mark One)
i☑QUARTERLY
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 Number)
i434 W. Ascension Way
i84123
i6th
Floor
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
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. iYesþ No ☐
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesþ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
ý
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
As
of August 1, 2022, the registrant had i416,071,269 shares of common stock, par value $0.01 per share, outstanding.
Current
portion of customer liabilities - related party
i6.5
i7.9
Accrued
compensation and benefits
i108.8
i97.0
Current
portion of operating lease liabilities
i22.2
i13.5
Current
portion of long-term debt
i41.5
i17.5
Other
accrued expenses
i87.9
i59.1
Total
current liabilities
i362.7
i254.2
Non-current
portion of customer liabilities
i5.6
i3.3
Non-current
portion of customer liabilities - related party
i14.7
i15.4
Non-current
portion of operating lease liabilities
i103.8
i53.4
Long-term
debt
i1,749.2
i754.9
Non-current
deferred tax liabilities
i86.7
i4.2
Other
non-current liabilities
i16.9
i17.2
Total
liabilities
i2,339.6
i1,102.6
Stockholders’
equity:
Common stock, $ii0.01/ par
value, i750,000,000 shares authorized, i436,986,859 shares issued and i416,000,966
shares outstanding at June 30, 2022; i500,000,000 shares authorized, i298,320,928 shares issued and i278,226,242
shares outstanding at December 31, 2021
Net services revenue ($i223.0 millionand $i439.7 million for the three and six months ended June 30, 2022, respectively, and $i218.4 million
and $i433.9 million for the three and six months ended June 30, 2021, respectively, from related party)
$
i391.9
$
i353.4
$
i777.6
$
i696.0
Operating
expenses:
Cost of services
i310.1
i287.0
i606.6
i554.2
Selling,
general and administrative
i30.9
i29.0
i59.8
i54.6
Other
expenses
i88.9
i9.8
i106.0
i22.8
Total
operating expenses
i429.9
i325.8
i772.4
i631.6
Income
(loss) from operations
(i38.0)
i27.6
i5.2
i64.4
Net
interest expense
i6.9
i3.4
i11.6
i7.3
Income
(loss) before income tax provision (benefit)
(i44.9)
i24.2
(i6.4)
i57.1
Income
tax provision (benefit)
(i24.5)
i5.8
(i15.4)
i12.9
Net
income (loss)
$
(i20.4)
$
i18.4
$
i9.0
$
i44.2
Net
income (loss) per common share:
Basic
$
(i0.07)
$
i0.07
$
i0.03
$
(i2.16)
Diluted
$
(i0.07)
$
i0.06
$
i0.03
$
(i2.16)
Weighted
average shares used in calculating net income (loss) per common share:
Basic
i294,658,635
i268,251,790
i286,746,902
i253,850,972
Diluted
i294,658,635
i320,832,913
i328,169,238
i253,850,972
Consolidated
statements of comprehensive income (loss)
Net income (loss)
$
(i20.4)
$
i18.4
$
i9.0
$
i44.2
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
(i1.2)
(i0.1)
(i1.1)
i0.4
Foreign
currency translation adjustments
(i3.2)
(i0.6)
(i4.6)
(i1.0)
Total
other comprehensive loss, net of tax
$
(i4.4)
$
(i0.7)
$
(i5.7)
$
(i0.6)
Comprehensive
income (loss)
$
(i24.8)
$
i17.7
$
i3.3
$
i43.6
Basic:
Net
income (loss)
$
(i20.4)
$
i18.4
$
i9.0
$
i44.2
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
Net
income (loss) available/allocated to common shareholders - basic
$
(i20.4)
$
i18.4
$
i9.0
$
(i548.1)
Diluted:
Net
income (loss)
$
(i20.4)
$
i18.4
$
i9.0
$
i44.2
Less
dividends on preferred shares
i—
i—
i—
(i592.3)
Net
income (loss) available/allocated to common shareholders - diluted
$
(i20.4)
$
i18.4
$
i9.0
$
(i548.1)
See
accompanying notes to consolidated financial statements.
5
R1 RCM Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)
Customer
liabilities and customer liabilities - related party
(i15.2)
i6.4
Net
cash (used in) provided by operating activities
(i65.5)
i128.5
Investing
activities
Purchases of property, equipment, and software
(i42.7)
(i18.4)
Acquisition
of Cloudmed, net of cash acquired
(i847.7)
i—
Proceeds
from disposal of assets
i0.4
i2.6
Net
cash used in investing activities
(i890.0)
(i15.8)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i1,016.6
i—
Borrowings
on revolver
i30.0
i—
Payment
of debt issuance costs
(i1.0)
i—
Repayment
of senior secured debt
(i8.8)
(i12.9)
Repayments
on revolver
(i20.0)
i—
Payment
of contingent consideration liability
i—
(i4.8)
Inducement
of preferred stock conversion
i—
(i105.0)
Payment
of equity issuance costs
(i2.0)
i—
Exercise
of vested stock options
i2.5
i5.7
Purchase
of treasury stock
(i0.6)
i—
Shares
withheld for taxes
(i25.1)
(i4.5)
Other
(i0.1)
i—
Net
cash provided by (used in) financing activities
i991.5
(i121.5)
Effect
of exchange rate changes in cash, cash equivalents and restricted cash
(i2.6)
(i0.6)
Net
increase (decrease) in cash, cash equivalents and restricted cash
i33.4
(i9.4)
Cash,
cash equivalents and restricted cash, at beginning of period
i130.1
i174.8
Cash,
cash equivalents and restricted cash, at end of period
$
i163.5
$
i165.4
Supplemental
disclosures of cash flow information
Property, equipment and software purchases not paid
$
i24.6
$
i17.1
See
accompanying notes to consolidated financial statements.
8
R1 RCM Inc.
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share data)
1.iBusiness
Description and Basis of Presentation
Business Description
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.
Cloudmed Acquisition
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.), 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”), Revint Holdings, LLC (“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, par value $i0.01 per share, of the
Company (“Company Common Stock”), 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 “Transactions”). For further details on the total consideration paid, refer to Note 2, 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 revenue cycle management (“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.
9
i
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect
the Company’s financial position as of June 30, 2022, the results of operations of the Company for the three and six months ended June 30, 2022 and 2021, and the cash flows of the Company for the six months ended June 30, 2022 and 2021. These financial statements include the accounts of R1 RCM Inc. and its wholly-owned subsidiaries, including Cloudmed and its subsidiaries
since the date of the acquisition. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31,
2022.
When preparing financial statements in conformity with GAAP, the Company makes a number of significant estimates, assumptions, and judgments in the preparation of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company’s 2021 Form 10-K.
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 $i88.0 million
and contract liabilities of $i3.3 million as part of the Cloudmed Acquisition.
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.
/
2. 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.
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:
10
Fair Value
Stock consideration transferred to the Sellers (1)
$
i2,389.5
Cash
consideration (2)
i879.8
Replacement awards issued to Cloudmed equity award holders (3)
i11.3
Total
consideration
i3,280.6
(1) The stock consideration fair value includes a preliminary discount for lack of marketability factor related to an i18
month lock-up period for the Sellers.
(2) Cash consideration includes the repayment of Cloudmed’s pre-existing credit facility that was settled 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 restricted stock units (“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 7, Debt).
The purchase price has been provisionally allocated to assets acquired and liabilities assumed based on their established fair value as of the acquisition date. Given the date of the acquisition, 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 valuation of all assets and liabilities acquired. Some of the more significant amounts that are not yet finalized relate to the fair value of intangible assets (including goodwill), contract assets, contract liabilities, 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.
iThe
preliminary fair value of assets acquired and liabilities assumed is:
11
Purchase Price Allocation
Total purchase consideration
$
i3,280.6
Allocation
of consideration to assets acquired and liabilities assumed:
The
intangible assets preliminarily identified in conjunction with the Cloudmed Acquisition are as follows:
Useful Life
Gross Carrying Value
Customer Relationships
i18
years
$
i318.0
Technology
i7
years
$
i1,052.0
Favorable leasehold interests
Life of lease
$
i0.1
/
The
goodwill recognized is primarily attributable to 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 thethree and sixmonths endedJune 30, 2022are net sales of$ii13.3/ million
and net loss before income taxes of $ii0.4/ millionrelated to the operations of Cloudmed since the acquisition date of June 21, 2022.
During 2021, the Company acquired the following business:
Company Name
Description of the Business
Description of the Acquisition
iVinci Partners, LLC d/b/a VisitPay (“VisitPay”)
Provider
of digital payment solutions
Purchased all outstanding equity interests
During the six months ended June 30, 2022, there were no significant purchase accounting adjustments to the fair value of assets acquired or the liabilities assumed in connection with the VisitPay acquisition as disclosed in Note 3 of the Company’s 2021 Form 10-K.
12
In 2020, the
Company purchased certain assets relating 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. There is ione
remaining deferred payment of $i12.5 million that is 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 June 30, 2022.
The itwo
deferred payments related to the RevWorks acquisition are contractual obligations of the Company; however, they are potentially effectively 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. At the time of the acquisition, the
Company recorded an asset for the fair value of the contingently refundable consideration of $i22.3 million. As of June 30, 2022, the entire amount of the contingently refundable consideration of $i25.0 million
is included in prepaid expenses and other current assets on the Consolidated Balance Sheet.
Pro Forma Results
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 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.
3. iIntangible
Assets
i
The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets at June 30, 2022 and December 31, 2021:
Intangible
asset amortization expense was $i11.7 million and $i18.8 million for the three and six months ended June 30,
2022, respectively, and $i4.3 million and $i8.7 million for the three and six months ended June 30,
2021, respectively.
iEstimated annual amortization expense related to intangible assets with definite lives as of June 30, 2022 is as follows:
13
Remainder
of 2022
$
i98.2
2023
i196.3
2024
i194.5
2025
i192.9
2026
i192.9
2027
i192.9
Thereafter
i549.0
Total
$
i1,616.7
4.
iGoodwill
i
Changes in the carrying amount of goodwill for the six months ended June 30, 2022 were:
Revenue
is measured based on consideration specified in a contract with a customer, and presented net of any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contact term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.
Disaggregation of Revenue
i
In
the following table, revenue is disaggregated by source of revenue:
(1)
Other revenue primarily consists of physician advisory services (“PAS”), practice management services, software subscription revenue, and service fees related to Entri, Cloudmed, and VisitPay.
(1)
Current contract liabilities include $i7.6 million and $i7.8 million
classified in the current portion of customer liabilities and $i2.3 million and $i2.5 million classified in the current portion of customer
liabilities - related party as of June 30, 2022 and December 31, 2021, respectively.
(2) Non-current contract liabilities include $i5.6 million and $i3.3 million
classified in the non-current portion of customer liabilities and $i14.7 million and $i15.4 million classified in the non-current
portion of customer liabilities - related party as of June 30, 2022 and December 31, 2021, respectively.
Refer to Note 2, Acquisitions, for the preliminary contract assets acquired and contract liabilities assumed as part of the Cloudmed Acquisition.
The Company recognized revenue of $i91.4
million and $i96.1 million during the six months ended June 30, 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 six months ended June 30, 2022 and 2021, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.
Transaction Price Allocated to the Remaining Performance Obligation
i
The
following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The estimated revenue does not include amounts of variable consideration that are constrained.
Net operating fees
Incentive fees
Remainder
of 2022
$
i65.7
$
i22.8
2023
i98.7
i1.5
2024
i81.8
i—
2025
i31.7
i—
2026
i31.1
i—
2027
i30.1
i—
Thereafter
i116.4
i—
Total
$
i455.5
$
i24.3
/
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.
15
Estimates of revenue expected to be recognized in future periods exclude unexercised customer options to purchase services within the
Company’s PAS contracts that do not represent material rights to the customer.
The Company does not disclose information about remaining performance obligations with an original expected duration of one year or less and has elected an exemption to the disclosure requirements related to estimate variable consideration and an exemption where 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.
(1)
As of June 30, 2022, the Company had $i90.0 million in borrowings, $i0.9 million
letters of credit outstanding, and $i509.1 million of availability under the Senior Revolver.
Second Amended and Restated Senior Secured Credit Facilities
On June 21, 2022, the Company, Old R1 RCM, 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”), consisting 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 secured revolving credit facility (the “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 June 30, 2022 was i3.78%for the Term A Loans and Senior Revolver andi4.53%
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 assets 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.
17
The Second A&R Credit Agreement contains a number of financial and non-financial covenants. The
Company was in compliance with all of the covenants in the Second A&R Credit Agreement as of June 30, 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.
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, 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 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 amounts presented as of December 31, 2021 were incurred under the 2021 Amended and Restated Credit Agreement.
Debt Maturities
i
Scheduled
maturities of the Company’s long-term debt are summarized as follows:
Scheduled Maturities
Remainder of 2022
$
i16.8
2023
i53.9
2024
i67.0
2025
i67.0
2026
i708.3
2027
i430.2
Thereafter
i473.7
Total
$
i1,816.9
/
For
further details on the Company’s 2021 Amended and Restated Credit Agreement, refer to Note 10 of the Company’s 2021 Form 10-K.
8. iDerivative Financial Instruments
The
Company utilizes cash flow hedges to manage its currency risk arising from its global delivery resources. As of June 30, 2022, the Company has recorded $i0.7 million of unrealized losses in accumulated other comprehensive loss related to foreign currency hedges. The
Company estimates that $i0.7 million of losses reported in accumulated other comprehensive loss are expected to be reclassified into earnings within the next 12 months. Amounts reclassified into cost of services were a net loss of $i0.1 million
and a net gain $i0.1 million during the three and six months ended June 30, 2022, respectively, and a net gain of $i0.2 million
and $i0.6 million during the three and six month periods ended June 30, 2021, respectively. As of June 30, 2022, the Company’s currency forward contracts have maturities extending no later than March 31, 2023, and had total notional
amounts of $i55.2 million.
18
The Company also utilizes cash flow hedges to reduce variability in interest cash flows from its outstanding debt. As of June 30, 2022, the
Company has recorded $i0.1 million of unrealized gains in accumulated other comprehensive loss related to interest rate swaps. The Company estimates that $i0.1 million
of gains reported in accumulated other comprehensive loss are expected to be reclassified into earnings within the next 2 months. Amounts reclassified into interest expense were a net loss of $i0.2 million and $i0.5 millionduring the three and six months ended June 30, 2022, respectively and a net loss of $i0.3 million and $i0.8 million
during the three and six month periods ended June 30, 2021, respectively. As of June 30, 2022, the Company’s interest rate swaps extend no later than August 31, 2022, and had total notional amounts of $i100.0 million.
The
Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. 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.
Shortly after June 30, 2022, the Company entered into the following itwo
arrangements. The Company entered into $i500.0 million of additional interest rate swaps with a fixed rate of i3.01% and maturities
extending through June 30, 2025. In addition, the Company has 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.
9.iShare-Based
Compensation
The share-based compensation expense relating to the Company’s stock options, RSUs, and performance-based restricted stock units (“PBRSUs”) for the three months ended June 30, 2022 and 2021 was $i11.6 million and $i23.8 million,
respectively, with related tax benefits of approximately $i2.1 million and $i4.9
million, respectively. The share-based compensation expense relating to the Company’s stock options, RSUs, and PBRSUs for the six months ended June 30, 2022 and 2021 was $i21.7 million and $i36.5 million,
respectively, with related tax benefits of approximately $i3.9 million and $i7.1 million,
respectively.
The Company accounts for forfeitures as they occur. Excess tax benefits and shortfalls for share-based payments are recognized in income tax expense (benefit) and included in operating activities. The Company recognized $i2.4
million and $i4.3 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2022 and 2021, respectively. The Company recognized $i4.9 million
and $i6.6 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the six months ended June 30, 2022 and 2021, respectively.
i
Total
share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows:
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 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.
Stock options
i
A
summary of the options activity during the six months ended June 30, 2022 is shown below:
Shares
surrendered for taxes for the six months ended June 30, 2022
i155,355
i725,570
Cost
of shares surrendered for taxes for the six months ended June 30, 2022 (in millions)
$
i3.5
$
i18.7
Shares
surrendered for taxes for the six months ended June 30, 2021
i170,033
i—
Cost
of shares surrendered for taxes for the six months ended June 30, 2021 (in millions)
$
i4.5
$
i—
/
20
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, scored revenue 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 i14,838,452.
10. 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 three and six months ended June 30, 2022
and 2021.
Customer
employee transition and restructuring expenses (3)
i—
i—
(i0.4)
i—
Facility-exit
charges (4)
i1.2
i1.4
i6.0
i2.9
Other
(5)
i1.3
i6.2
i3.9
i9.7
Total
other expenses
$
i88.9
$
i9.8
$
i106.0
$
i22.8
(1)
Severance expense related to restructuring and business reorganization events.
(2) Costs related to evaluating, pursuing, and integrating acquisitions, performing portfolio and capital structure analyses and transactions, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, severance and retention amounts associated with integration activities, and changes to contingent consideration related to acquisitions. For the three and six months ended June 30, 2022, the balance includes $i74.4 million
and $i81.1 million, respectively, of expenses related to the Cloudmed Acquisition. The balance also includes $i6.9 million
and $i10.0 million of costs related to the establishment of a new offshore global business services center located in the Philippines for the three and six months ended June 30, 2022, respectively. This establishment is the first new country entry by the Company in approximately i15
years.
(3) As part of the transition of customer personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse the customer, or directly pay affected employees, for severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
(4) 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.
21
(5) For the three and six months ended June 30, 2022, other includes $i0.6 million and $i1.1 million,
respectively, of expenses related to the COVID-19 pandemic. For the three and six months ended June 30, 2021, other includes $i2.7 million and $i4.4 million,
respectively, of expenses related to the COVID-19 pandemic.
11.iIncome Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within
the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates. The global intangible low-taxed income (“GILTI”) provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to account for GILTI tax in the period in which it is incurred.
The Company recognized income tax expense for the
three months ended March 31, 2022 and income tax benefit for the six months ended June 30, 2022 on the year-to-date pre-tax loss. The deviation from the federal statutory tax rate of ii21/% is
primarily attributable to recognizing the provisions for state taxes, GILTI, non-deductible expenses, and discrete items.
The Company recognized income tax expense for the three and six months ended June 30, 2021 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of ii21/%
is primarily attributable to recognizing the provisions for state taxes, GILTI, non-deductible compensation, and discrete items.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since 2018 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.
At December 31, 2021, the Company had gross deferred tax assets of $i123.7 million, of which $i54.7
million related to net operating loss (“NOL”) carryforwards. The Company expects to be profitable, allowing the Company to utilize its NOL carryforwards and other deferred tax assets.
12.iEarnings
(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.
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 and shares issuable upon vesting of RSUs and PBRSUs.
iBasic
and diluted net income (loss) per common share are calculated as follows:
Net
income (loss) available/(allocated) to common shareholders - basic
$
(i20.4)
$
i18.4
$
i9.0
$
(i548.1)
Diluted
EPS:
Net income (loss)
$
(i20.4)
$
i18.4
$
i9.0
$
i44.2
Less
dividends on preferred shares (1)
i—
i—
i—
(i592.3)
Net
income (loss) available/(allocated) to common shareholders - diluted
$
(i20.4)
$
i18.4
$
i9.0
$
(i548.1)
Basic
weighted-average common shares
i294,658,635
i268,251,790
i286,746,902
i253,850,972
Add:
Effect of dilutive equity awards
i—
i6,551,978
i5,838,531
i—
Add:
Effect of dilutive warrants
i—
i46,029,145
i35,583,805
i—
Diluted
weighted average common shares
i294,658,635
i320,832,913
i328,169,238
i253,850,972
Net
income (loss) per common share (basic)
$
(i0.07)
$
i0.07
$
i0.03
$
(i2.16)
Net
income (loss) per common share (diluted)
$
(i0.07)
$
i0.06
$
i0.03
$
(i2.16)
(1)
The 2021 dividend on preferred shares includes amounts related to the conversion of the preferred shares. See Note 16 of the Company’s 2021 Form 10-K for more information.
Because of their anti-dilutive effect, i22,558,278 and i90,583
common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2022, respectively. Additionally, for the three months ended June 30, 2022, TCP-ASC ACHI Series LLLP’s (“TCP-ASC” or the “Investor”) and IHC Health Services, Inc.’s (“Intermountain”) exercisable warrants to acquire up to ii40.5/ million
and ii1.5/ million
shares, respectively, of the Company’s common stock have been excluded from the diluted earnings per share calculation because they were anti-dilutive.
For the three and six months ended June 30, 2021, i386,079 and i14,606,241common share equivalents, respectively, have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. Additionally, for the six months ended June 30, 2021, the Investor’s and Intermountain’s exercisable warrants to acquire up to i40.5 million and i1.5 million
shares, respectively, of the Company’s common stock have been excluded from the diluted earnings per share calculation because they were anti-dilutive.
13.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.
23
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 Health (“Ascension”), and TowerBrook Capital Partners (“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 contains 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 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 customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties, and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in
2013 in the federal district court in Chicago and presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. Both the Company’s and plaintiff’s motions for summary judgment were denied in December 2020, and the parties have completed damage and expert discovery. Additional dispositive motions are expected to extend through 2022, with trial, if necessary, in June 2023.
14. iRelated
Party Transactions
This note encompasses transactions between Ascension and its affiliates, including AMITA Health, and the Company pursuant to the Master Professional Services Agreement, including all supplements, amendments, and other documents entered into in connection therewith. For further details on the Company’s agreements with Ascension, see Note 1 and Note 19 of the Company’s 2021 Form 10-K. In conjunction with the Cloudmed Acquisition, New Mountain Capital LLC became a new related party. There were no material transactions with New Mountain Capital LLC during the three months ended June 30, 2022.
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. 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.
24
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 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.
15.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 end-to-end management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only iione/
operating and reportable segment.
i
Customers comprising greater than 10% of net services revenue are as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
Customer Name
2022
2021
2022
2021
Ascension and its affiliates
i57
%
i62
%
i57
%
i62
%
Intermountain
Healthcare
i13
%
i13
%
i14
%
i14
%
/
The
loss of customers within the Ascension health system or Intermountain network could have a material adverse impact on the Company’s operations.
As of June 30, 2022 and December 31, 2021, the Company had a concentration of credit risk with Ascension accounting for i12% and i17%
of accounts receivable, respectively.
16.iSupplemental Financial Information
i
The
following table summarizes the allocation of depreciation and amortization expense related to property, equipment and software between cost of services and selling, general and administrative expenses:
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “R1,”“the Company,”“we,”“our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes.
This Quarterly Report on Form 10-Q contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. You should not place undue reliance on these statements. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. The words “anticipate,”“believe,”“designed,”“estimate,”“expect,”“forecast,”“intend,”“may,”“plan,”“predict,”“project,”“target,”“will” or “would” and similar expressions or variations 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 the acquisition of Cloudmed, our strategic initiatives, our capital plans, our costs, our ability to successfully implement new technologies, our future financial performance, and our
liquidity. 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 are not limited to, geopolitical, economic, and market conditions, including heightened
inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain, and any disruptions in European economies as a result of the conflict in Ukraine; 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;our ability to integrate Cloudmed’s business into our operations in a timely and efficient manner; failure to realize the anticipated benefits of the Cloudmed acquisition; volatility in our stock price, including in connection with the integration and results of Cloudmed; competition within the market; breaches or failures of our information security measures or unauthorized access to 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 ongoing impact of the COVID-19 pandemic on our business, operating results, and financial condition; and the factors discussed elsewhere in this Quarterly Report on Form 10-Q, and those set forth in Part I, Item 1A of our 2021 Form 10-K and our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Our
Business
We are a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare providers. Our services help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for our customers.
26
We achieve these results for our customers by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections from patients and payers. We do so by leveraging our extensive healthcare
domain experience, innovative technology and intelligent automation, and process excellence. We assist our 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 our customers.
Our primary offerings consist of end-to-end or modular RCM services for health systems, hospitals, and physician groups. We deploy our end-to-end offering through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions, and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff
and processes, and supplement them with our infused management, subject matter specialists, proprietary technology solutions, and other resources. Under the operating partner model, we record higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are our employees and more third-party vendor contracts are controlled by us. Under the co-managed model, the majority of the revenue cycle personnel and third-party vendor contracts remain with the customer and those costs are netted against our co-managed revenue. For the six months ended June 30, 2022 and 2021, substantially all of our net operating and incentive fees from end-to-end RCM services were generated
under the operating partner model.
Our modular offerings allow customers to engage us for specific components of RCM services, such as revenue intelligence solutions (which were enhanced through the acquisition of Revint Holdings, LLC (“Cloudmed”)), automation solutions, patient experience (R1 EntriTM), physician advisory services (“PAS”), clinical documentation integrity (“CDI”), coding management, revenue integrity solutions (“RIS”), business office services, and practice management (“PM”). Our patient experience offering, R1 EntriTM, unifies scheduling, clearance, intake, and payments into one welcoming experience.
Once implemented, our technology solutions, processes, and
services are deeply embedded in our customers’ day-to-day revenue cycle operations. We believe our service offerings are adaptable to meet an evolving healthcare regulatory environment, technology standards, and market trends.
We operate our business as a single segment configured with our significant operations and offerings organized around the business of providing revenue cycle operations for healthcare providers.
Macroeconomic Environment and Coronavirus Pandemic
Adverse macroeconomic conditions, including but not limited to heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, and challenges in the supply chain could impact macro-level consumer spending trends affecting the amount of volumes processed on our platform, and
resulting in fluctuations to our revenue streams. Certain of our customers may be negatively impacted by these events. In addition, our business and customers continue to face challenges relating to a tight labor market and increased turnover rates.
The impact the the 2019 Novel Coronavirus (“COVID-19”) pandemic will have on our consolidated results of operations for the remainder of 2022 continues to remain uncertain. While patient volumes have continued to recover and are largely in line with pre-COVID-19 levels, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted, including as a result of macro-economic impacts to the global supply chain, labor shortages, and inflationary pressures. However, we continue to assess its impact on our business and continue to actively manage our response. For further
details on the potential impact of COVID-19 on our business, refer to “Risk Factors,” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
27
Cloudmed Acquisition
On June 21, 2022, we completed the acquisition of Cloudmed pursuant to the Transaction Agreement and Plan of Merger, dated as of January 9, 2022, (the “Cloudmed Acquisition”). The
purchase price was $3.3 billion. We funded the cash consideration component of the purchase price and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness.
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. We believe this transaction will enable us to further our 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 revenue cycle management and technology-driven
revenue intelligence.
CONSOLIDATED 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)
(44.9)
24.2
(69.1)
(286)
%
(6.4)
57.1
(63.5)
(111)
%
Income
tax provision (benefit)
(24.5)
5.8
(30.3)
(522)
%
(15.4)
12.9
(28.3)
(219)
%
Net
income (loss)
$
(20.4)
$
18.4
$
(38.8)
(211)
%
$
9.0
$
44.2
$
(35.2)
(80)
%
Adjusted
EBITDA (1)
$
87.2
$
78.8
$
8.4
11
%
$
176.5
$
159.2
$
17.3
11
%
(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.
28
Use of Non-GAAP Financial Information
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, strategic initiatives costs, and other items which are detailed in Note 10, Other Expenses, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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;
•Share-based compensation expense;
•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 represents 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, and performance-based restricted stock units granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 9, Share-Based Compensation, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
(2) 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 10, Other Expenses, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the detail of the amounts included in other expenses.
Net services revenue increased by $38.5 million, or 11%, from $353.4 million for the three months ended June 30, 2021, to $391.9 million for the three months ended June 30, 2022.The increase was driven primarily by net operating fees from new end-to-end customers, a recovery in patient volumes, and revenue from recent acquisitions, including a $13.3 million contribution from Cloudmed.
Cost of Services
Costs of services primarily consists of wages and benefits
of personnel that perform services for our customers and any related supplies, equipment, or facility costs utilized by these employees. It also includes cost of services provided to our customers by vendors directly contracted by R1 or assigned to R1 at contract inception. Cost of servicesincreased by $23.1 million, or 8%, from $287.0 million for the three months ended June 30, 2021, to $310.1 million for the three months ended June 30, 2022. The increase in cost of services was primarily driven by the onboarding of new customers and recent acquisitions, which are reflective of current revenue growth.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses increased by $1.9 million, or 7%, from $29.0 million for the three months ended June 30, 2021, to $30.9 million for the three months ended June 30, 2022. The increase was driven by costs related to recent acquisitions, sales and marketing spend to support business growth, and increased travel expenses as COVID-19-related restrictions are lifted.
Other Expenses
Other expenses increased by $79.1 million, or 807%, from $9.8 million for the three months ended June 30, 2021, to $88.9 million for the three months ended June 30, 2022. The increase was primarily due to expenses associated with the recent Cloudmed Acquisition. See Note 10, Other Expenses,
to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the details of the costs included in this total for the comparative periods.
30
Income Taxes
Income tax benefit improved by $30.3 million from a $5.8 million income tax provision for the three months ended June 30, 2021, to a $24.5 million income tax benefit for the three months ended June 30, 2022, primarily due to pre-tax loss. Our effective tax rate (including discrete items) was approximately 55% and 24% for the three months ended June 30, 2022 and
2021, respectively.Our tax rate is also affected by discrete items that may occur in any given year but are not necessarily consistent from year to year.
Net services revenue increased by $81.6 million, or 12%, from $696.0 million for the six months ended June 30, 2021, to $777.6 million for the six months ended June 30, 2022. The increase was driven primarily by net operating fees from new end-to-end customers, a recovery in patient volumes, and contributions
from recent acquisitions, including Cloudmed and VisitPay.
Cost of Services
Costs of services primarily consists of wages and benefits of personnel that perform services for our customers and any related supplies, equipment, or facility costs utilized by these employees. It also includes cost of services provided to our customers by vendors directly contracted by R1 or assigned to R1 at contract inception. Cost of servicesincreased by $52.4 million, or 9%, from $554.2 million for the six months ended June 30, 2021, to $606.6 million for the six months ended June 30, 2022. The increase in cost of services was primarily driven by the onboarding
of new customers and recent acquisitions, which are reflective of current revenue growth.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.2 million, or 10%, from $54.6 million for the six months ended June 30, 2021, to $59.8 million for the six months ended June 30, 2022. The increase was driven by costs related to recent acquisitions, sales and marketing spend to support business growth, and increased travel expenses as COVID-19-related restrictions are lifted.
Other Expenses
Other expenses increased by $83.2 million, or 365%, from $22.8 million for the six months ended June 30, 2021,
to $106.0 million for the six months ended June 30, 2022. The increase was primarily due to expenses associated with the recent Cloudmed Acquisition. See Note 10, Other Expenses, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the details of the costs included in this total for the comparative periods.
Income Taxes
Income tax benefit improved by $28.3 million from a $12.9 million income tax provision for the six months ended June 30, 2021, to a $15.4 million income tax benefit for the six months ended June 30, 2022, primarily due to pre-tax loss. Our effective tax rate (including discrete items) was approximately241% and23% for the six months ended June 30, 2022 and 2021, respectively. Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
31
CRITICAL ACCOUNTING ESTIMATES
Management considers an accounting estimate to be critical if the accounting estimate requires management to make particularly difficult, subjective, or complex judgments about matters that are inherently uncertain. A summary
of our critical accounting estimates is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Estimates” of our 2021 Form 10-K. There have been no material changes to the critical accounting estimates disclosed in our 2021 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new accounting guidance, see Note 1, Business Description and Basis of Presentation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
LIQUIDITY
AND CAPITAL RESOURCES
Our primary sources of liquidity include our cash flows from operations and borrowings under our second amended and restated senior credit agreement (the “Second A&R Credit Agreement”).As of June 30, 2022 and December 31, 2021, we had total available liquidity of $672.6 million and $499.6 million, respectively, reflecting our cash and cash equivalents as well as remaining availability under our senior secured revolving credit facility (the “Senior Revolver”).
Our liquidity is influenced by many factors, including timing of revenue and corresponding cash collections, the amount and timing of investments in strategic initiatives, 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. In addition, we plan to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers’ existing technologies in connection with our strategic initiatives.
We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our global business services infrastructure and capabilities, 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 incur costs associated with implementation and transition costs to onboard new customers.
We expect 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 at least 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 materially increased as a result of the Cloudmed Acquisition.
As of June 30, 2022, we had outstanding debt of $1.8 billion with contractual payments extending through 2029, with $41.5 million payable within 12 months. Future interest payments associated with our debt total $358.9 million, with $73.0 million payable within the next 12 months.
32
Leases
Our significant leasing activity encompasses leases for real estate, including corporate offices, operational facilities, and global business services centers. As of June 30, 2022, we had fixed lease payments of $156.8 million, with $29.4 million payable within 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 June 30, 2022, we had purchase obligations related to software and service contracts of $148.8 million, with $55.4 million payable within 12 months.
As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $163.5 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
$
(65.5)
$
128.5
Net cash used in investing activities
$
(890.0)
$
(15.8)
Net cash provided by (used in)
financing activities
$
991.5
$
(121.5)
Cash Flows from Operating Activities
Cash used in operating activities increased by $194.0 million from cash provided of $128.5 million for the six months ended June 30, 2021, to cash used of $65.5 million for the six months ended June 30, 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, and
decreased net income of $35.2 million.
Cash Used in Investing Activities
Cash used in investing activities primarily includes our investments in property, equipment and software and our inorganic growth initiatives. Outflows for significant acquisitions are typically offset by cash inflows from financing activities related to obtaining new debt.
Cash used in investing activities increased by $874.2 million from $15.8 million for the six months ended June 30, 2021, to $890.0 million for the six months ended June 30, 2022. The increase in cash usage is primarily due to the Cloudmed Acquisition, which utilized cash of approximately $847.7 million for the six months ended June 30, 2022, and the
timing of payments for property, equipment and software.
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.
33
Cash
provided by financing activities increased by $1.1 billion from cash used of $121.5 million for the six months ended June 30, 2021, to cash provided of $991.5 million for the six months ended June 30, 2022. This change is primarily due to 2022 borrowings made under the Second A&R Credit Agreement, partially offset by higher amounts of cash required to pay tax withholding obligations upon surrender of shares upon vesting of equity awards in 2022. In addition, there were no inducement payments made during the six months ended June 30, 2022, compared to $105.0 million used during the six months ended June 30, 2021 to pay for the inducement of the conversion of our preferred stock
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 3.78%for the Term A Loans and Senior Revolver and4.53% for the Term B Loan as of June 30, 2022.
As of June 30, 2022, we had drawn $90.0 million and had $509.1 million of remaining availability 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, 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.
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 June 30, 2022.
See Note 7, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
Item 3.
Qualitative
and Quantitative Disclosures about Market Risk
Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of June 30, 2022, we have hedged $100.0 million of our $1.8 billion outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the 2021 Amended and Restated Credit Agreement. The remaining $1.7 billion outstanding is subject to average variable rates of 3.78%for the Term A Loans and Senior Revolver and4.53% for the Term B Loan as of June 30, 2022. Assuming
the current level of borrowings, a one percentage point increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $17.2 million.
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In July 2022, we entered into $500.0 million of additional interest rate swaps with a fixed rate of 3.01% and maturities extending through June 30, 2025.
Our interest income is primarily generated from variable rate interest earned on operating cash accounts.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes
in the Indian rupee because a portion of our operating expenses are incurred by our subsidiary in India and are denominated in Indian rupees. We do not generate significant revenues outside of the United States. For each of the six months ended June 30, 2022 and 2021, 9% of our expenses were denominated in foreign currencies, respectively. As of June 30, 2022 and 2021, we had net assets of $75.5 million and $59.7 million in foreign entities, respectively. Before the impact of our foreign currency hedging activities discussed below, the reduction in earnings from a 10% change in foreign currency spot rates would be $7.5 million and $6.4 million at June 30, 2022 and 2021, respectively.
For designated cash flow hedges, gains and losses currently recorded in accumulated other comprehensive loss will be reclassified into earnings at the time when certain anticipated intercompany charges are accrued as cost of services. As of June 30, 2022, it was anticipated that approximately $0.5 million of losses, net of tax, currently recorded in accumulated other comprehensive loss will be reclassified into cost of services within the next 12 months.
We use sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our hedge portfolio. The sensitivity of the hedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical
changes in value of the hedge position and does not reflect the offsetting gain or loss on the underlying exposure. A 10% change in the levels of foreign currency exchange rates against the U.S. dollar (or other base currency of the hedge if not a U.S. dollar hedge) with all other variables held constant would have resulted in a change in the fair value of our hedge instruments of approximately $5.0 million as of June 30, 2022.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
as of June 30, 2022. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART
II
Item 1.
Legal Proceedings
Other than the litigation described in Note 13, Commitments and Contingencies, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, we are presently not a party to any material litigation or regulatory proceeding and are not aware of any pending or threatened litigation or regulatory proceeding against us which, individually or in the aggregate, could have a material adverse effect on our business, operating results, financial condition,
or cash flows.
Item 1A.
Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A of our 2021 Annual Report on Form 10-K. Except as set forth below, there have been no material changes in our risk factors from those disclosed in our 2021 Form 10-K.
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 provide our customers with the same level of service after the Cloudmed Acquisition, we will need 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. In addition, Cloudmed is still in the process of integrating certain of its recent acquisitions. 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 expect the combined company to result in financial and operational benefits, 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 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.
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.
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The Cloudmed Acquisition could cause us to lose key personnel, which could materially affect our business and require us to incur substantial costs to recruit replacements for lost personnel.
As a result of the Cloudmed Acquisition, current and prospective R1 employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect our ability to attract and retain key management and operational
personnel. Any failure to attract and retain key personnel could have a material adverse effect on our business.
The trading price of our common stock has been volatile and may continue to be volatile.
Since March 1, 2020, our common stock has traded at a price per share as high as $31.28 and as low as $7.12. Market prices for securities of companies that have undergone significant acquisitions may be volatile. 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 ourcommon stock to fluctuate include: fluctuations in ourquarterly 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, if the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or operating results.
Our consolidated indebtedness has increased substantially following completion
of the Cloudmed Acquisition. This increased level of indebtedness could adversely affect us, including by decreasing our business flexibility.
Our consolidated indebtedness as of December 31, 2021 was approximately $775.6 million. In conjunction with the Cloudmed Acquisition, we entered into the Second A&R Credit Agreement, which increased our consolidated indebtedness by $1.0 billion. The increased indebtedness could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. The increased level of indebtedness could also reduce funds available for capital expenditures, share repurchases and dividends, and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of common stock during the periods indicated:
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Period
Number
of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
Includes
the surrender of shares of our common stock related to employees’ tax withholding upon vesting of restricted stock or option exercise. See Note 9, Share-Based Compensation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
(2)
On October 22, 2021, the Board authorized the repurchase of up to $200.0 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 $500.0 million. The average price paid per share of common stock repurchased under the 2021 Repurchase Program is the execution price, including commissions paid
to brokers. The timing and amount of any shares repurchased under the 2021 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2021 Repurchase Program may be suspended or discontinued at any time.
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Item 6.
Exhibits
The
following are filed or incorporated by reference as a part of this Quarterly Report on Form 10-Q:
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)
*
Furnished
herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
