UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended December 31, 2019June 30, 2020

OR

For the transition period from                    to                    

Commission file number001-38961

Change Healthcare Inc.

(Exact Name of Registrant as Specified in its Charter)

(615) 932-3000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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” inRule 12b-2 of the Exchange Act. (Check one):    

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 inRule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the numberNumber of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:outstanding on August 4, 2020: 304,297,254

Change Healthcare Inc.

Table of ContentsTABLE OF CONTENTS

Part I. Financial Information

Item 1. Financial Statements

Change Healthcare Inc.

CondensedConsolidated Statements of Operations

(unaudited and amounts in thousands, except share and per share amounts)

See accompanying notes to condensedconsolidated financial statements.

Change Healthcare Inc.

CondensedConsolidated Statements of Comprehensive Income (Loss)

(unaudited and amounts in thousands)

See accompanying notes to condensedconsolidated financial statements.

Change Healthcare Inc.

CondensedConsolidated Balance Sheets

(unaudited and amounts in thousands, except share and per share amounts)

See accompanying notes to condensedconsolidated financial statements.

Change Healthcare Inc.

CondensedConsolidated Statements of Stockholders’ Equity

(unaudited and amounts in thousands, except share and per share amounts)

See accompanying notes to condensedconsolidated financial statements.

Change Healthcare Inc.

CondensedConsolidated Statements of Cash Flows

(unaudited and amounts in thousands)

See accompanying notes to condensedconsolidated financial statements.

Change Healthcare Inc.

Notes to CondensedConsolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

1. Nature of Business and Organization

Organization

Change Healthcare Inc. (the “Company”, “our” or “we”), is an independent healthcare technology company, focused on accelerating the transformation of the healthcare system through the power of our Healthcare Platform. We provide data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. Our platform and comprehensive suite of software, analytics, technology-enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.

We are a Delaware corporation wasoriginally formed on June 22, 2016, to initially hold an equity investment in Change Healthcare LLC (the “Joint Venture”), a joint venture between the Company and McKesson Corporation (“McKesson”). As of December 31, 2019, the Company and McKesson each owned approximately 41% and 59%, respectively, of the membership interest in the Joint Venture, subject to adjustment based on exercise of equity-based awards or other changes in the number of the Joint Venture’s membership units outstanding.

The Transactions

In June 2016, the Company, the Joint Venture, Change Healthcare Holdings, LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Performance, Inc. (“Legacy CHC”) and its stockholders—including affiliates of The Blackstone Group, Inc. (formerly known as the Blackstone Group L.P.) (“Blackstone”) and Hellman & Friedman LLC entered into an Agreement of Contribution and Sale (the “Contribution Agreement”) with McKesson (together with the Company, the “Members”). Under the terms of the Contribution Agreement, the parties agreed to form the Joint Venture, a joint venture that combined the majority of the McKesson Technology Solutions businesses, excluding McKesson’s Enterprise Information Solutions business and RelayHealth Pharmacy Network (such contributed businesses, “Core MTS”), with substantially all of the assets and operations of Legacy CHC, but excluding Legacy CHC’s pharmacy claims switching and prescription routing businesses (such excluded business, the “eRx Network” and the businesses contributed by Legacy CHC, together with Core MTS, the “Contributed Businesses”). The creation of the Joint Venture, including the contribution of the Contributed Businesses and related transactions, is collectively referred to as the “Transactions”. The Transactions closed on March 1, 2017.

Amendment of Certificate of Incorporation

Effective June 26, 2019 and in contemplation of itsour initial public offering of common stock, the Companywe amended itsthe certificate of incorporation to effect a 126.4 for 1 stock split for all previously issued shares of common stock, to increase the authorized number of common stock, and to authorize shares of preferred stock. Following this amendment, the authorized shares include 9,000,000,000 shares of common stock (par value $.001 per share), 1one share of Class X stock (par value $.001 per share), and 900,000,000 shares of preferred stock (par value $.001 per share). All issued or outstanding shares or related share-based payment arrangement disclosures included herein have been retrospectively adjustedAs a result of the Merger (defined below), the Class X Stock is no longer available for the stock split.issuance.

Initial Public Offering

Effective July 1, 2019, the Companywe completed itsour initial public offering of 49,285,713 shares of common stock and a concurrent offering of 5,750,000 of tangible equity units (“TEUs”) for net proceeds of $608,679 and $278,875, respectively. The proceeds

McKesson Exit

On March 10, 2020, McKesson completed a split-off of the offering of common stock were subsequently contributed toits interest in the Joint Venture inthrough an exchange offer of its common stock for 49,285,713 additional unitsshares of PF2 SpinCo, Inc, a Delaware corporation and wholly owned subsidiary of McKesson (“SpinCo”). Immediately following consummation of the Joint Venture, which togetherexchange offer, SpinCo was merged with the Company’s existing holdings represents an approximately 41%and into Change Healthcare Inc. (the “Merger”). As a result, McKesson no longer owns any voting or economic interest in the Joint Venture. The proceeds ofPrior to the offering of TEUs were used to acquire TEUs ofMerger, we accounted for our investment in the Joint Venture that substantially mirrorunder the termsequity method of accounting. Subsequent to the Merger, we own 100% of Change Healthcare LLC, and as a result, consolidate the financial statements of Change Healthcare LLC.

COVID-19 Considerations

On March 11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the U.S., federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the TEUs includedillness. These measures have led to weakened conditions in many sectors of the offering. The Joint Venture,economy, including a decline in turn, usedhealthcare transaction volumes that are integral to our business.

We experienced, and expect to continue to experience, an adverse impact on our financial results as a result of COVID-19. However, we are not presently aware of events or circumstances arising from COVID-19 that would require us to revise the proceeds received fromcarrying value of our assets or liabilities, nor do we expect the Companyimpact of COVID-19 to repay $805,000 of its indebtedness under the Term Loan Facility without penalty in July 2019.cause us to be unable to comply with our debt covenants or meet our contractual obligations.

2. Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form10-Q andRule 10-01 ofRegulation S-X of the Securities and Exchange Commission (“SEC”) Guidelines, Rules and Regulations and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. All intercompany accounts and transactions have been eliminated in the unaudited condensedconsolidated financial statements.

Change Healthcare Inc.

Notes to CondensedConsolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

Accounting EstimatesBusiness Combinations

The preparation of financial statementsWe recognize the consideration transferred (i.e., purchase price) in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience, currenta business factors and various other assumptions that the Company believes are necessary to consider in order to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of expenses and disclosure of contingent assets and liabilities. The Company is subject to uncertainties suchcombination, as well as the impact of future events, economic, environmentalacquired business’ identifiable assets, liabilities and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparationnoncontrolling interests at their acquisition date fair value. The excess of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and asconsideration transferred over the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in the reported results of operations; and if material, the effects of changes in estimates are disclosed in the notes to the financial statements. Estimates and assumptions by management affect: the carryingfair value of the Company’s investments; the provisionidentifiable assets, liabilities and benefit for income taxes and related deferred tax accounts; contingencies; and the value attributed to equity awards. Additionally, the Company’s financial statements are impacted by estimates and assumptions made by management that affect the financial statementsnoncontrolling interest, if any, is recorded as goodwill. Any excess of the Joint Venture, including: the allowance for doubtful accounts; the fair value assigned toof the identifiable assets acquired and liabilities assumed in business combinations; tax receivable agreement obligations;over the fair value of interest rate cap agreement obligations; measurementconsideration transferred, if any, is generally recognized within earnings as of the components of tangible equity units; contingent consideration; loss accruals; the carrying value of long-lived assets (including goodwill and intangible assets); the classification and measurement of assets held for sale; the amortization period of long-lived assets (excluding goodwill); the carrying value, capitalization and amortization of software development costs; the provision and benefit for income taxes and related deferred tax accounts; certain accrued expenses; revenue recognition; contingencies; and the value attributed to equity awards.

Tangible Equity Units

In connection with the initial public offering, the Company completed an offering of tangible equity units (TEUs). Each TEU comprises an amortizing note and purchase contract, both of which are freestanding instruments and separate units of account. The amortizing notes were issued at par and are classified as debt on the accompanying condensed consolidated balance sheet, with scheduled principal payments over the next twelve months reflected in current maturities of long-term debt. The purchase contracts are accounted for as prepaid forward contracts and classified as equity. The TEU proceeds and issuance costs were allocated to the amortizing notes and purchase contracts on a relative fair value basis. See Note 10 for further discussion.

Other Investmentsacquisition date.

The Company holds investments in tangible equity units issued by the Joint Venture with terms that substantially mirror the TEUs issued by the Company. Each TEU comprises an amortizing note and forward purchase contract, both of which are freestanding instruments and separate units of account. The Company accounts for its investment in each component at fair value. Unrealized gains and losses resulting from changes in the fair value of the investmentconsideration transferred, assets, liabilities and noncontrolling interests is estimated based on one or a combination of income, cost or market approaches as determined based on the nature of the asset or liability and the level of inputs available (i.e., quoted prices in debt securitiesan active market, other observable inputs or unobservable inputs). To the extent our initial accounting for a business combination is incomplete at the end of a reporting period, provisional amounts are includedreported for those items which are incomplete.

In conjunction with business combinations, we generally recognize goodwill attributable to the assembled workforce and expected synergies among the operations of the acquired entities and our existing operations. Goodwill is generally deductible for federal income tax purposes when a business combination is treated as an asset purchase and is generally not deductible for federal income tax purposes when a business combination is treated as a componentstock purchase. See Note 4, Business Combinations.

Allowance for Credit Losses

The allowance for credit losses of other comprehensive income. Unrealized gains$29,174 and losses resulting from changes in$22,360 at June 30, 2020 and March 31, 2020, respectively, were primarily based on historical credit loss experience, current conditions and adjustments for certain asset-specific risk characteristics. The following table summarizes activity related to the fairallowance for credit losses:

Change Healthcare Inc.

Notes to CondensedConsolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

Recently Adopted Accounting Pronouncements

Financial Instruments: Credit Losses

In April 2019, the Joint Venture2020, we adopted Financial Accounting Standards CodificationBoard (“ASC”FASB”) 606,Revenue from ContractsAccounting Standards Update (“ASU”) No. 2016-13, as amended by ASU No. 2018-19, which requires that a financial asset (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires us to pool assets with Customers, which replaces most prior generalsimilar risk characteristics and industry specific revenue recognition guidance with a principles-based comprehensive revenue recognition framework on aconsider current economic conditions when estimating losses. We adopted this standard using the modified retrospective basis. Under this revised framework, a company will recognize revenue to depict the transfer of promised goodsapproach and services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. As the Company’s operations consist principally of an investment in the Joint Venture, its financial statements reflect no revenue and, accordingly, the Company recognized no direct impact on its financial statements from the adoption of this update. However, upon adoption, the Joint Venture recognizedrecorded a cumulative effect adjustment to its Members’ deficit. As a resultretained earnings of $417 as of April 1, 2020.

Fair Value Measurements

In April 2020, we adopted FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. See Note 10, Fair Value Measurements.

Hosting Arrangement Implementation Costs

In April 2020, we adopted FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update also requires that the effects of such capitalized costs be classified in the same respective caption in the statement of operations, balance sheet and cash flows as the underlying hosting arrangement. We adopted this standard prospectively beginning April 1, 2020. This adoption did not have a material impact on our financial statements for the three months ended June 30, 2020.

Leases

In April 2020, we adopted FASB ASU No. 2016-02, which created Topic 842 – Leases (“ASC 842”). The standard generally requires that all lease obligations be recognized on the balance sheet at the present value of the adoption of ASC 606remaining lease payments with a corresponding right-of-use asset. In July 2018, the FASB issued ASU No. 2018-11 which provides companies with the option to the Joint Venture’s Members’ equity (deficit), the Company was required to recognize a proportionate amount ofapply this cumulative effect adjustment to its April 1, 2019the opening balance of retained earnings as well.in the period of adoption.

Upon adoption, we elected the transition “practical expedients” permitting us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. Additionally, we elected the practical expedient to not separate lease and non-lease components for equipment lease agreements.

We adopted ASC 842 using the modified retrospective approach and recorded right-of-use assets of $111,815 and lease liabilities of $125,331, primarily related to operating leases. The effect is disclosed within a separate captionrecognition of the accompanying condensedright-of-use assets in combination with our previously recorded prepaid rent balances resulted in no requirement to adjust the opening balance of retained earnings. Our accounting for finance leases remains substantially unchanged. Adoption of ASC 842 did not materially impact our consolidated statement of stockholders’ equity.operations and had no impact on our consolidated statement of cash flows. See Note 8, Leases, for additional information.

London Interbank Offered Rate (LIBOR) Reform

In March 2020, the FASB issued ASU No. 2020-04, which created Topic 848 – Reference Rate Reform. ASU No. 2020-04 contains optional practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts which may be elected over time as activities occur. Among other things, the ASU intends to ease the transition from LIBOR to an alternative reference rate. During the first quarter of fiscal year 2021, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impacts of ASU No. 2020-04 and may apply other elections as reference rate reform activities progress.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASUNo. 2016-13, as amended by ASUNo. 2018-19, which requiresNone that a financial asset (or group of financial assets) measured at amortized cost be presented at the net amountare expected to be collected basedhave a material impact on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This update is scheduled to be effective for the Company beginning April 1, 2021, with early adoption permitted beginning April 1, 2019. The Company is currently assessing the potential effects this update may have on its condensed consolidatedour financial statements.

In August 2018, the FASB issued ASU2018-13, which modifies the disclosure requirements for fair value measurements. ASU2018-13 is effective for public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for either the entire standard or only the provisions that eliminate or modify requirements. The Company is currently assessing the potential effects this update may have on its financial statement disclosures.

3. Equity Method Investment in Change Healthcare LLC

Exchange of Equity Method Investments

In connection with the Transactions, the Company exchanged its 45.615% investment in Legacy CHC for 30% of the membership units of the Joint Venture. The Joint Venture used proceeds from the issuance of debt to acquire the remaining 54.385% of Legacy CHC. The Company accounted for this exchange of investments as anon-monetary transaction at their respective carrying values. Prior to the Transactions, the investors of Legacy CHC accounted for their investments at fair value. As a result, the book basis and fair value of the Company’s investment in Legacy CHC were generally the same such that no gain was recognized as a result of the Transactions.

The fair value of the Joint Venture was determined at March 1, 2017 using a combination of the income and the market valuation approaches. Under the income approach, a discounted cash flow model (“DCF”) was used in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. The discount rate used for cash flows reflects capital market conditions and the specific risks associated with the business. Under the market approach, valuation multiples of reasonably similar publicly traded companies or guideline companies are applied to the operating data of the subject business to derive the estimated fair value. These valuation approaches are considered a Level 3 fair value measurement. Fair value determination requires complex assumptions and judgment by management in projecting future operating results, selecting guideline companies for comparisons, determining appropriate market value multiples, selecting the discount rate to measure the risks inherent in the future cash flows and assessing the business’s life cycle and the competitive trends impacting the business, including considering technical, legal, regulatory, or economic barriers to entry. Any material changes in key assumptions, including failure to meet business plans, deterioration in the financial market, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may affect such estimates.

Additional Ownership Interest

Following the initial public offering, the Company contributed the proceeds of the offering of common stock to the Joint Venture in exchange for 49,285,713 additional units of the Joint Venture, which represented approximately 11% of additional ownership interest. As a result of the additional ownership interest acquired, the Company measured additional basis differences at July 1, 2019 based on the fair value of the Joint Venture’s assets and liabilities as of the date of the initial public offering, and using valuation approaches substantially similar to those used as of the date of the Transactions.

Change Healthcare Inc.

Notes to CondensedConsolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

3. Revenue Recognition

We generate most of our solutions revenue by using technology solutions (generally Software as a Service (“SaaS”)) to provide services to our customers that automate and simplify business and administrative functions for payers, providers, pharmacies, and channel partners and through the licensing of software, software systems (consisting of software, hardware and maintenance support) and content.

We recognize revenue when the customer obtains control of the good or service through satisfying a performance obligation by transferring the promised good or service to the customer.

Principal Revenue Generating Products and Services

Hosted solutions and SaaS - We enter into arrangements whereby we provide the customer access to a Company-owned software solution, which are generally marketed under annual and multi-year arrangements. The customer is only provided “access” (not a license) to the software application. In these arrangements, the customer does not purchase equipment nor does the customer take physical possession of the software. The related revenue is recognized ratably over the contracted term. For fixed fee arrangements, revenue recognition begins after set-up and implementation are complete. For per-transaction fee arrangements, revenue is recognized as transactions are processed beginning on the service start date. Revenue for hosted solutions and SaaS, which is included in solutions revenue, is generated by the Software and Analytics, Network Solutions, and Technology-Enabled Services segments.

Transaction processing services - We provide transaction processing (such as claims processing) services to hospitals, pharmacies and health systems via a cloud-based (SaaS) platform. The promised service is to stand ready to process transactions for our customers over the contractual period on an as needed basis. Revenue related to these services is recognized over time as transactions are processed and the revenue is recognized over the individual days in which the services are performed. Revenue is recognized as solutions revenue in the Software and Analytics, Network Solutions, and Technology-Enabled Services segments, with the exception of revenue related to postage that is generated through the delivery of certain of these services. Postage revenue is discussed below and is separately presented on the consolidated statement of operations. Any fixed annual fees and implementation fees are recognized ratably over the contract period.

Contingent fee services - We provide services to customers in which the transaction price is contingent on future occurrences, such as savings generated or amounts collected on behalf of our customers through the delivery of services. In some cases, we perform services in advance of invoicing the customer, thereby creating a contract asset. Revenue in these arrangements is estimated and constrained until we determine that it is probable a significant revenue reversal will not occur, and variable consideration is allocated to the performance obligation for which we earn a contingent fee. We use the expected value method when estimating variable consideration, as we have a large number of contracts with similar characteristics and consider a portfolio of data from other similar contracts to form our estimate of expected value. Revenue for contingent fee services, which is included in solutions revenue, is generated by the Software and Analytics and Technology-Enabled Services segments.

Content license subscriptions and time-based software - Our content license subscriptions and time-based software arrangements provide a license to use a software for a specified period of time. At the end of the contractual period, the customer either renews the license for an additional term or ceases to use the software. Software licenses are typically delivered to the customer with functionality that allows the customer to benefit from the software on its own or together with readily available resources. As contracts for these solutions generally do not price individual components separately, we allocate the transaction price to the license and ongoing support performance obligations based on standalone selling price, primarily determined by historical value relationships between licenses and ongoing support and updates. Revenue allocated to content license subscriptions and time-based software license agreements is generally recognized at the point-in-time of delivery of the license or the content update upon transfer of control of the underlying license to the customer. Generally, software implementation fees are recognized over the implementation period through an input measure of progress method. Revenue allocated to maintenance and support is recognized ratably over the period covered by the agreements, as passage of time represents a faithful depiction of the transfer of these services. In some cases, software arrangements provide licenses to several software applications that are highly integrated with the implementation services and software updates and cannot function separately. The bundle is a single performance obligation since the individually promised goods and services are not distinct in the context of the contract because the related implementation services significantly modify and customize the software and the updates provided to the integrated software solution are critical to the software’s utility. The related revenue is recognized on a straight-line basis, ratably over the contractual term due to the frequency and criticality of the updates throughout the license period. Revenue for content license subscriptions and time-based software, which is included in solutions revenue, is generated by the Software and Analytics segment.

Perpetual software licenses - Our perpetual software arrangements provide a license for a customer to use software in perpetuity. Software licenses are typically delivered to the customer with functionality from which the customer can benefit from the license on its own or together with readily available resources. Perpetual software arrangements are recognized at the time of delivery or through an input measure of progress method over the installation period if the arrangements require significant production or modification or customization of the software. Contracts accounted for through an input measure of progress method are generally measured based on the ratio of labor hours incurred to date to total estimated labor hours to be incurred. Software implementation fees are recognized as the work is performed or under the input method for perpetual software. Hardware revenues are generally recognized upon delivery. Maintenance is recognized ratably over the term of the agreement as passage of time represents a faithful depiction of the transfer of these services. License, implementation, hardware and maintenance revenue for these arrangements, which is included in solutions revenue, is generated by the Software and Analytics and Network Solutions segments.

Change Healthcare Inc.

Notes to Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

Professional services - We provide training and consulting services to our customers, and the services may be fixed fee or time and materials based. Consulting services that fall outside of the standard implementation services vary depending on the scope and complexity of the service requested by the customer. Consulting services are deemed to be capable of being distinct from other products and services, and the services are satisfied either at a point of time or over time based on delivery and are recognized as solutions revenue in the Software and Analytics and Technology-Enabled Services segments. Training services are usually provided as an optional service to enhance the customer’s experience with a software product or provides additional education surrounding the general topic of the solution. Training services are capable of being distinct from other products and services. We treat training services as a distinct performance obligation, and those services are satisfied at a point of time and recognized as solutions revenue in the Software and Analytics and Technology-Enabled Services segments.

Postage Revenues

Postage revenues are the result of providing delivery services to customers in our payment and communication solutions. Postage revenues are generally billed as a pass-through cost to our customers. The service is part of a combined performance obligation with the printing and handling services provided to the customer because the postage services are not distinct within the context of the contract. We present Postage Revenue separately from Solutions Revenue on the consolidated statements of operations as doing so makes the financial statements more informative for the users. The revenue related to the combined performance obligation of the postage, printing, and handling service is recognized as the transactions are processed, and the revenue is recognized over the individual days in which the services are performed.

Contract Balances

We generally recognize a contract asset when revenue is recognized in advance of invoicing on a customer contract, unless the right to payment for that revenue is unconditional (i.e. requiring no further performance and only the passage of time). If a right to payment is determined to meet the criteria to be considered ‘unconditional’, then we will recognize a receivable.

We did not recognize any impairment loss on accounts receivable or contract assets during the three months ended June 30, 2020. Change Healthcare Inc. did not have accounts receivable prior to the Merger.

We record deferred revenues when billings or payments are received from customers in advance of our performance. Deferred revenue is generally recognized when transfer of control to customers occurs. The deferred revenue balance is driven by multiple factors, including the frequency of renewals, invoice timing, invoice duration and fair value adjustments as a result of the Merger. As of June 30, 2020, we expect 94% of the deferred revenue balance to be recognized in one year or less, and approximately $113,032 of the beginning period balance was recognized during the three months ended June 30, 2020.

Costs to Obtain or Fulfill a Contract

At June 30, 2020, we had capitalized costs to obtain a contract of $3,922 in prepaid and other current assets and $5,769 in other noncurrent assets. At June 30, 2020, we had capitalized costs to fulfill a contract of $3,209 in prepaid and other current assets and $5,511 in other noncurrent assets. Amortization of such capitalized costs to obtain and to fulfill were immaterial for the three months ended June 30, 2020. Change Healthcare Inc. did not have costs to obtain or fulfill a contract prior to the Merger.

Remaining Performance Obligations

The aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts includes deferred revenue and other revenue yet to be recognized from non-cancellable contracts. As of June 30, 2020, the total remaining performance obligations approximated $1,481,330, of which approximately 49% is expected to be recognized over the next twelve months, and the remaining 51% thereafter.

In this balance, we do not include the value of unsatisfied performance obligations related to those contracts for which we recognize revenue at the amount for which we have the right to invoice for services performed. Additionally, this balance does not include revenue related to performance obligations that are part of a contract with an original expected duration of one year or less. Lastly, this balance does not include variable consideration allocated to the individual goods or services in a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Examples includes variable fees associated with transaction processing and contingent fee services.

Change Healthcare Inc.

Notes to Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

Disaggregated Revenue

We disaggregate the revenue from contracts with customers by operating segment as we believe doing so best depicts how the nature, amount, timing and uncertainty of revenues are affected by economic factors. See Note 19, Segment Reporting, for the total revenue disaggregated by operating segment for the three months ended June 30, 2020.

In addition to disaggregating revenue by operating segment, we disaggregate revenue between revenue that is recognized over time and revenue that is recognized at a point in time. Approximately 92% of revenue was recognized over time and approximately 8% of revenue was recognized at a point in time for the three months ended June 30, 2020.

4. Business Combinations

Fiscal Year 2021 Transactions

eRx Network Holdings, Inc.

On May 1, 2020, we exercised our option to purchase and completed the acquisition of 100% of the ownership interest in eRx Network Holdings, Inc. (“eRx”), a leading provider in comprehensive, innovative and secure data-driven solutions for pharmacies. At the time of the acquisition, all outstanding eRx equity awards were canceled and holders of eRx stock options and vested eRx stock appreciation rights were able to elect to receive consideration in the form of a cash payment or vested stock appreciation rights of the Company. See Note 17, Incentive Compensation Plans, for additional information.

Prior to the acquisition, we held an option to purchase eRx which we accounted for as an equity investment. Therefore, our acquisition of eRx was accounted for as a business combination achieved in stages under the acquisition method in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”). Accordingly, we remeasured our business purchase option to fair value and recognized a loss of $6,000 which is recorded within Other, net on our consolidated statement of operations.

The following table summarizes information related to this acquisition as of the acquisition date. The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the eRx acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement.

Change Healthcare Inc.

Notes to Consolidated Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

PDX, Inc.

On June 1, 2020, we completed the purchase of 100% of the ownership interest in PDX, Inc. (“PDX”), a company focused on delivering patient centric and innovative technologies for pharmacies and health systems. We accounted for this transaction as a business combination using the acquisition method.

The preliminary values of the consideration transferred, assets acquired and liabilities assumed in the PDX acquisition, including the related tax effects, were derived using the market-based approach and are subject to change upon the receipt of a final valuation and working capital settlement. After customary working capital adjustments, transaction fees and other adjustments, the total consideration fair value at the acquisition date was $198,472. The following table summarizes the allocation of consideration transferred: