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RCM R1 RCM

Filed: 4 May 21, 8:57am


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

(Mark One)

☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2021
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from to
COMMISSION FILE NUMBER: 001-34746
R1 RCM INC.
(Exact name of registrant as specified in its charter)
Delaware02-0698101
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
401 North Michigan Avenue60611
Chicago
Illinois
(Address of principal executive offices)(Zip code)
(312) 324-7820
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareRCMNASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerý
Accelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No 
As of April 27, 2021, the registrant had 261,589,352 shares of common stock, par value $0.01 per share, outstanding.






Table of Contents





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


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


(Unaudited)
 March 31,December 31,
 20212020
Assets
Current assets:
Cash and cash equivalents$103.5 $173.8 
Accounts receivable, net of $3.8 million and $3.7 million allowance97.6 91.3 
Accounts receivable, net of $0.1 million and $0.1 million allowance - related party31.8 30.9 
Prepaid expenses and other current assets65.7 59.4 
Total current assets298.6 355.4 
Property, equipment and software, net89.0 93.7 
Operating lease right-of-use assets59.8 57.8 
Intangible assets, net166.7 171.1 
Goodwill375.5 375.3 
Non-current deferred tax assets68.5 73.7 
Non-current portion of restricted cash equivalents0.5 1.0 
Other assets75.9 61.0 
Total assets$1,134.5 $1,189.0 
Liabilities
Current liabilities:
Accounts payable$22.8 $18.2 
Current portion of customer liabilities23.0 16.7 
Current portion of customer liabilities - related party10.6 15.3 
Accrued compensation and benefits61.2 51.9 
Current portion of operating lease liabilities11.8 12.2 
Current portion of long-term debt35.5 32.3 
Other accrued expenses56.6 59.7 
Total current liabilities221.5 206.3 
Non-current portion of customer liabilities - related party15.4 16.3 
Non-current portion of operating lease liabilities68.7 71.0 
Long-term debt510.2 519.7 
Other non-current liabilities35.1 36.3 
Total liabilities850.9 849.6 
8.00% Series A convertible preferred stock, par value $0.01, 0 shares authorized, issued and outstanding as of March 31, 2021; 370,000 shares authorized, 288,497 shares issued and outstanding as of December 31, 2020 (aggregate liquidation value of $294.3)251.5 
Stockholders’ equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 277,972,263 shares issued and 261,301,541 shares outstanding at March 31, 2021; 137,812,559 shares issued and 121,144,038 shares outstanding at December 31, 20202.8 1.4 
Additional paid-in capital562.1 393.7 
Accumulated deficit(135.7)(161.5)
Accumulated other comprehensive loss(6.4)(6.5)
Treasury stock, at cost, 16,670,722 shares as of March 31, 2021; 16,668,521 shares as of December 31, 2020(139.2)(139.2)
Total stockholders’ equity283.6 87.9 
Total liabilities and stockholders’ equity$1,134.5 $1,189.0 
See accompanying notes to consolidated financial statements.
4


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

 
 Three Months Ended March 31,
 20212020
Net services revenue ($215.5 million and $208.4 million for the three months ended March 31, 2021 and 2020, from related party, respectively)$342.6 $320.5 
Operating expenses:
Cost of services267.2 253.9 
Selling, general and administrative25.6 25.5 
Other expenses13.0 8.7 
Total operating expenses305.8 288.1 
Income from operations36.8 32.4 
Net interest expense3.9 3.8 
Income before income tax provision32.9 28.6 
Income tax provision7.1 10.4 
Net income$25.8 $18.2 
Net income (loss) per common share:
Basic$(2.37)$0.06 
Diluted$(2.37)$0.05 
Weighted average shares used in calculating net income (loss) per common share:
Basic239,290,145 114,441,043 
Diluted239,290,145 169,620,178 
Consolidated statements of comprehensive income
Net income$25.8 $18.2 
Other comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax0.5 (4.4)
Foreign currency translation adjustments(0.4)(2.1)
Comprehensive income$25.9 $11.7 

Basic:
Net income$25.8 $18.2 
Less dividends on preferred shares(592.3)(5.4)
Less income allocated to preferred shareholders(6.2)
Net income (loss) available/allocated to common shareholders - basic$(566.5)$6.6 
Diluted:
Net income$25.8 $18.2 
Less dividends on preferred shares(592.3)(5.4)
Less income allocated to preferred shareholders(5.0)
Net income (loss) available/allocated to common shareholders - diluted$(566.5)$7.8 
See accompanying notes to consolidated financial statements.
5


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

 
 Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
 SharesAmountSharesAmount    
Balance at December 31, 2020137,812,559 $1.4 (16,668,521)$(139.2)$393.7 $(161.5)$(6.5)$87.9 
Share-based compensation expense— — — — 12.8 — — 12.8 
Issuance of common stock related to share-based compensation plans6,497 — — — — — — — 
Issuance of common stock324,212 — — — 7.0 — — 7.0 
Exercise of vested stock options539,795 — — — 3.5 — — 3.5 
Acquisition of treasury stock related to share-based compensation plans— — (2,201)— — — — — 
Net change on derivatives designated as cash flow hedges, net of tax of $0.2 million— — — — — — 0.5 0.5 
Foreign currency translation adjustments— — — — — — (0.4)(0.4)
Conversion of preferred shares117,706,400 1.2 — — 250.3 — — 251.5 
Inducement dividend— — — — (592.3)— — (592.3)
Issuance of common stock related to inducement21,582,800 0.2 — — 487.1 — — 487.3 
Net income— — — — — 25.8 — 25.8 
Balance at March 31, 2021277,972,263 $2.8 (16,670,722)$(139.2)$562.1 $(135.7)$(6.4)$283.6 
See accompanying notes to consolidated financial statements.

 Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
 SharesAmountSharesAmount    
Balance at December 31, 2019127,807,546 $1.3 (13,786,266)$(73.6)$372.7 $(277.8)$(4.5)$18.1 
Impact of credit-loss standard adoption, net of tax of $0.3 million
— — — — — (0.8)— (0.8)
Adjusted balance at January 1, 2020127,807,546 $1.3 (13,786,266)$(73.6)$372.7 $(278.6)$(4.5)$17.3 
Share-based compensation expense— — — — 4.8 — — 4.8 
Issuance of common stock related to share-based compensation plans1,720 — — — — — — — 
Exercise of vested stock options553,520 — — — 3.1 — — 3.1 
Dividends paid/accrued— — — — (5.4)— — (5.4)
Acquisition of treasury stock related to share-based compensation plans— — (545)— — — — — 
Net change on derivatives designated as cash flow hedges, net of tax of $1.5 million— — — — — — (4.4)(4.4)
Foreign currency translation adjustments— — — — — — (2.1)(2.1)
Net income— — — — — 18.2 — 18.2 
Balance at March 31, 2020128,362,786 $1.3 (13,786,811)$(73.6)$375.2 $(260.4)$(11.0)$31.5 
See accompanying notes to consolidated financial statements.
6


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


 Three Months Ended March 31,
 20212020
Operating activities
Net income$25.8 $18.2 
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization17.9 15.7 
Amortization of debt issuance costs0.3 0.2 
Share-based compensation12.7 4.8 
Loss on disposal and right-of-use asset write-downs0.6 
Provision for credit losses0.1 0.8 
Deferred income taxes4.9 8.9 
Non-cash lease expense2.9 2.9 
Change in value of contingent consideration0.5 
Changes in operating assets and liabilities:
Accounts receivable and related party accounts receivable(7.3)(12.5)
Prepaid expenses and other assets(19.4)(5.2)
Accounts payable5.2 2.8 
Accrued compensation and benefits9.4 (46.6)
Lease liabilities(4.1)(2.6)
Other liabilities(4.2)16.0 
Customer liabilities and customer liabilities - related party0.7 (2.8)
Net cash provided by operating activities46.0 0.6 
Investing activities
Purchases of property, equipment, and software(9.6)(13.3)
Net cash used in investing activities(9.6)(13.3)
Financing activities
Borrowings on revolver50.0 
Repayment of senior secured debt(6.5)(4.1)
Repayments on revolver(20.0)
Inducement of preferred stock conversion(105.0)
Exercise of vested stock options4.4 3.1 
Finance lease payments(0.6)
Net cash (used in) provided by financing activities(107.1)28.4 
Effect of exchange rate changes in cash, cash equivalents and restricted cash(0.1)(1.2)
Net (decrease) increase in cash, cash equivalents and restricted cash(70.8)14.5 
Cash, cash equivalents and restricted cash, at beginning of period174.8 92.5 
Cash, cash equivalents and restricted cash, at end of period$104.0 $107.0 
Supplemental disclosures of cash flow information
Accrued dividends payable to preferred stockholders$$5.4 
Accrued and other liabilities related to purchases of property, equipment and software$7.9 $18.4 
Accounts payable related to purchases of property, equipment and software$2.4 $3.1 
Interest paid$3.8 $3.2 
Income taxes paid$0.6 $0.9 
See accompanying notes to consolidated financial statements.
7



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

1. Business Description and Basis of Presentation
Business Description
R1 RCM Inc. (the “Company”) is a leading provider of technology-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. For further information regarding the Company's business, including relationships with Ascension Health (“Ascension”) and TowerBrook Capital Partners (“TowerBrook”), refer to Note 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”).

SCI Solutions, Inc. Acquisition

On April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020 (the “Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (the “SCI Acquisition”). At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. Refer to Note 4, Acquisitions for additional details.

RevWorks Acquisition

On August 3, 2020, the Company completed the acquisition of the RevWorks services business pursuant to an asset purchase agreement dated as of June 2, 2020 (the “RevWorks Purchase Agreement”) by and among the Company and Cerner Corporation (the “RevWorks Acquisition”). At the closing of the transaction, the Company purchased certain assets relating to the RevWorks services business, as specified in the RevWorks Purchase Agreement. The combination of R1 and RevWorks is expected to provide enhanced revenue cycle capabilities and expertise to RevWorks clients, helping drive sustainable financial improvements for providers while improving their patients’ overall experience. Refer to Note 4, Acquisitions for additional details.

Emergency Medical Services Disposition

As part of the Company’s portfolio analysis and strategic initiatives, the Company disposed the emergency medical services (“EMS”) business on October 30, 2020 for $140.0 million, inclusive of a $5.0 million hold-back amount subject to the completion of certain transition services, to be paid approximately one year from the date of the disposition (the “EMS Disposition”). The total sale price net of costs to sale was $132.7 million, which included customary adjustments for working capital, indebtedness, cash, and transaction expenses. R1 allocated goodwill to the disposed business based on the relative fair value methodology. The total goodwill allocated to the EMS Disposition was $7.1 million. The gain recognized on the EMS Disposition was $55.7 million.
8



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of March 31, 2021, the results of operations of the Company for the three months ended March 31, 2021 and 2020, and the cash flows of the Company for the three months ended March 31, 2021 and 2020. These financial statements include the accounts of R1 RCM Inc. and its wholly-owned subsidiaries. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2021.
When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's 2020 Form 10-K.
2. Recent Accounting Pronouncements

Recently Issued Accounting Standards and Disclosures

No new accounting pronouncements issued or effective during the fiscal year had, or is expected to have, a material impact on the Company’s consolidated financial statements.
3. Fair Value of Financial Instruments
The Company's accounting policy for fair values, including details of the fair value hierarchy levels, are outlined in Note 4 of the Company's 2020 Form 10-K.
The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits, and certain other accrued expenses, approximate their fair values, due to the short-term nature of these instruments. See Note 21, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts and interest rate swaps.

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

4. Acquisitions

SCI

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

9



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The purchase price for the SCI Acquisition was $190.0 million, subject to customary adjustments for cash, transaction expenses, earn-out consideration, and normalized working capital. The Company funded the purchase price for the SCI Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 11, Debt).
The fair value of assets acquired and liabilities assumed is (in millions):

Purchase Price Allocation
Total purchase consideration$197.0 
Allocation of consideration to assets acquired and liabilities assumed:
Cash and cash equivalents$2.9 
Accounts receivable2.8 
Prepaid expenses and other current assets1.2 
Property, equipment and software0.3 
Operating lease right-of-use assets1.2 
Intangible assets86.1 
Goodwill125.8 
Accounts payable(0.2)
Current portion of customer liabilities(4.0)
Accrued compensation and benefits(1.6)
Current portion of operating lease liabilities(0.5)
Other accrued expenses(0.4)
Non-current portion of operating lease liabilities(0.7)
Other non-current liabilities(5.0)
Deferred income tax liabilities(10.9)
Net assets acquired$197.0 

Other non-current liabilities contained a note payable for $5.0 million. The Company repaid this note in the second quarter of 2020.

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

The purchase price includes an earn-out provision, which is dependent on achieving certain revenue and operational targets in the year following the acquisition. Based on projections at the time of acquisition, the earn-out was valued at $4.8 million. As of March 31, 2021, the Company determined the performance metrics for the earn-out had been met, and expects to pay the full earn-out of $10.0 million in the second quarter of 2021. Changes to the earn-out value were recorded as a component of other expenses.

RevWorks

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

10



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The $30.0 million purchase consideration for the RevWorks Acquisition (inclusive of working capital) consisted of a $5.0 million payment at closing and 2 deferred payments, each of $12.5 million and totaling $25.0 million, which are due and payable on the first and second anniversary of the closing date. The 2 deferred payments are contractual obligations of the Company; however, they are potentially effectively refundable to the Company contingent on the achievement of certain pre-existing customer revenue targets for the RevWorks business that were agreed in the purchase agreement. If such targets are not achieved, this will result in Cerner Corporation (“Cerner”) returning to the Company up to $25.0 million. At the time of the acquisition, the Company recorded a present value liability for the contractual deferred payments of $24.3 million, and recorded an asset for the contingently returnable consideration of $22.3 million, including $11.5 million in prepaid expenses and $10.8 million in other assets on the Consolidated Balance Sheets, which is measured at fair value. The Company reviewed the balances at March 31, 2021 and determined that the fair value remained the same.

The assets acquired in the RevWorks Acquisition consist primarily of customer relationships of approximately $2.8 million and fixed assets. There were no significant pre-closing liabilities of the RevWorks business included in the RevWorks Acquisition. The fair value estimate of assets acquired and liabilities assumed are pending completion of multiple elements, including gathering further information about the identification and completeness of all assets and liabilities acquired.

The goodwill recognized of approximately $3.6 million is primarily attributable to synergies that are expected to be achieved from the integration of RevWorks.

Pro Forma Results

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

Three Months Ended March 31, 2020
Net services revenue$349.6 
Net income$17.3 

Adjustments were made to earnings to adjust depreciation and amortization to reflect fair value of identified assets acquired, to record the effects of extinguishing the debt of SCI and replacing it with the debt of the Company, and to record the income tax effect of these adjustments.

5. Accounts Receivable and Allowance for Credit Losses

Accounts receivable is comprised of unpaid balances pertaining to modular services and end-to-end revenue cycle management (“RCM”) customers, net receivable balances for end-to-end RCM customers after considering cost reimbursements owed to such customers, including related accrued balances, and amounts due from physician RCM and practice management customers.

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

11



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The full effects of COVID-19 on the Company’s customers are uncertain and cannot be predicted. As a result, the Company’s future collection experience may differ from historical collection trends.

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

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

 Three Months Ended March 31,
 20212020
Beginning balance$3.8 $2.8 
Cumulative effect of ASC 326 adoption
1.1 
Provision (recoveries)0.1 0.8 
Ending balance$3.9 $4.7 

6. Property, Equipment and Software
Property, equipment and software consist of the following (in millions):
 March 31, 2021December 31, 2020
Buildings and land$4.6 $4.6 
Computer and other equipment56.6 55.0 
Leasehold improvements23.3 23.2 
Software142.3 135.7 
Office furniture6.4 6.4 
Property, equipment and software, gross233.2 224.9 
Less accumulated depreciation and amortization(144.2)(131.2)
Property, equipment and software, net$89.0 $93.7 
The following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):
 Three Months Ended March 31,
 20212020
Cost of services$12.7 $10.9 
Selling, general and administrative0.8 1.3 
Total depreciation and amortization$13.5 $12.2 

7. Leases

The Company's accounting policy for leases, including the elections made as part of the adoption of ASC 842 effective January 1, 2019, are outlined in Note 8 of the Company's 2020 Form 10-K. The components of lease costs are as follows (in millions):

12



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31,
20212020
Operating lease cost$4.1 $4.9 
Finance lease cost:
Amortization of right-of-use (“ROU”) assets0.1 0.2 
Interest on lease liabilities0.1 
Sublease income(0.6)(0.6)
Total lease cost$3.6 $4.6 

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

Three Months Ended March 31,
20212020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$9.4 $4.9 
Operating cash flows for finance leases0.1 
Financing cash flows for finance leases0.6 
ROU assets obtained in exchange for lease obligations:
Operating leases5.6 1.7 

The Company presents all non-cash transactions related to adjustments to the lease liability or ROU asset as non-cash transactions. This includes all non-cash charges related to any modification or reassessment events triggering remeasurement, and obtaining new leases for non-cash consideration.

Supplemental balance sheet information related to leases are as follows:

March 31, 2021December 31, 2020
Weighted average remaining lease term:
Operating leases7 years7 years
Finance leases3 years2 years
Weighted average incremental borrowing rate:
Operating leases8.99 %8.94 %
Finance leases6.71 %6.62 %

Maturities of lease liabilities as of March 31, 2021 are as follows (in millions):

13



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Operating LeasesFinance Leases
Remainder of 2021$14.0 $0.1 
202216.0 0.1 
202315.2 
202415.3 
202515.2 
202612.0 
Thereafter22.1 
Total109.8 0.2 
Less:
Imputed interest29.3 
Present value of lease liabilities$80.5 $0.2 

8. Intangible Assets

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at March 31, 2021 and December 31, 2020 (in millions):

March 31, 2021December 31, 2020
Gross Carrying ValueAccumulated AmortizationNet Book ValueGross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships$97.7 $(16.2)$81.5 $97.7 $(14.7)$83.0 
Technology101.7 (16.5)85.2 101.7 (13.6)88.1 
Total intangible assets$199.4 $(32.7)$166.7 $199.4 $(28.3)$171.1 

Intangible asset amortization expense was $4.4 million and $3.5 million for the three months ended March 31, 2021 and 2020, respectively.

Estimated annual amortization expense related to intangible assets with definite lives as of March 31, 2021 is as follows (in millions):

Remainder of 2021$12.9 
202217.3 
202317.3 
202415.5 
202514.5 
202614.5 
Thereafter74.7 
Total$166.7 

9. Goodwill

Unless otherwise required, goodwill is tested for impairment annually in the fourth quarter. Changes in the carrying amount of goodwill for the three months ended March 31, 2021 were (in millions):

14



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Goodwill
Balance as of December 31, 2020$375.3 
Measurement period adjustments0.2 
Balance as of March 31, 2021$375.5 

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

Disaggregation of Revenue

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

Three Months Ended March 31,
20212020
Net operating fees$286.1 $280.9 
Incentive fees29.0 16.8 
Other27.5 22.8 
Net services revenue$342.6 $320.5 
    
Contract Balances

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

March 31, 2021December 31, 2020
Receivables (1)$129.4 $122.2 
Contract assets (2)6.7 
Contract liabilities (2)25.7 28.6 

(1) Receivables are included in accounts receivable, net. The balance includes accounts receivable, net - related party.
(2) Contract assets and contract liabilities are included in other current assets and customer liabilities, respectively. The contract liabilities balance contains related party amounts, including $3.9 million and $5.6 million of current customer liabilities and $15.4 million and $16.3 million of non-current customer liabilities for the three months ended March 31, 2021 and year ended December 31, 2020, respectively.

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

The Company recognized revenue of $93.7 million and $86.0 million during the three months ended March 31, 2021 and 2020, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $88.1 million and $85.0 million for the three months ended March 31, 2021 and 2020, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.
15



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in millions). The estimated revenue does not include amounts of variable consideration that are constrained.

Net operating feesIncentive feesOther
Remainder of 2021$83.9 $31.4 $1.7 
202270.0 
202355.0 
202435.0 
202511.7 
20265.6 
Thereafter
Total$261.2 $31.4 $1.7 
    
The amounts presented in the table above include variable fee estimates for the non-cancellable term of the Company's physician groups RCM services contracts, fixed fees which are typically recognized ratably as the performance obligation is satisfied, and incentive fees which are measured cumulatively over the contractually defined performance period.

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

11. Debt

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

March 31, 2021December 31, 2020
Senior Revolver$70.0 $70.0 
Senior Term Loan478.1 484.6 
Unamortized discount and issuance costs(2.4)(2.6)
Total debt545.7 552.0 
Less: Current maturities(35.5)(32.3)
Total long-term debt$510.2 $519.7 

Senior Secured Credit Facilities

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

16



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
On March 20, 2020, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $191.1 million incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.

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

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

On January 13, 2021, the Company entered into Amendment No. 2 and Waiver to Credit Agreement (the “Second Amendment”), pursuant to which the lenders agreed (i) to waive the Company’s obligation to use the $135.0 million of net proceeds from the EMS Disposition for purposes of reinvestments in useful assets of the Company, or to prepay the loans under the Credit Agreement, as otherwise required by the terms of the Credit Agreement, (ii) to amend the restricted payments covenant to permit the Company to make additional cash payments to the Investor in an amount not to exceed $105.0 million in connection with the preferred stock conversion (refer to Note 15. 8.00% Series A Convertible Preferred Stock) and reduce the “Available Amount” from which the Company can make certain investments, debt prepayments, or restricted payments by $105.0 million and (iii) that the excess cash flow sweep will begin with fiscal year ended December 31, 2021 instead of fiscal year ended December 31, 2020.

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of March 31, 2021, the Company had $70.0 million in borrowings, 0 letters of credit outstanding, and $30.0 million of availability under the Senior Revolver.

Borrowings under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an Alternate Base Rate (“ABR”) equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on the Company's Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus between 1.75% and 2.75%, dependent on the Company's Net Leverage Ratio. The interest rate as of March 31, 2021 was 2.36%. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.30% and 0.50% of the average daily unutilized commitments thereunder dependent on the Company's net leverage ratio.

17



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the Company’s junior indebtedness; (xi) change the Company’s lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, the Company is required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of the covenants in the Credit Agreement as of March 31, 2021.

Debt Maturities

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

Scheduled Maturities
Remainder of 2021$25.8 
202238.7 
202345.2 
2024438.4 
Total$548.1 

For further details on the Company's debt, refer to Note 13 of the Company's 2020 Form 10-K.

12. Share-Based Compensation

The share-based compensation expense relating to the Company’s stock options, restricted stock units (“RSUs”), and performance-based restricted stock units (“PBRSUs”) for the three months ended March 31, 2021 and 2020 was $12.7 million and $4.8 million, respectively, with related tax benefits of approximately $2.2 million and $0.7 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 $2.3 million and $0.6 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended March 31, 2021 and 2020, respectively.
Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):
 Three Months Ended March 31,
 20212020
Share-Based Compensation Expense Allocation Details:
Cost of services$7.3 $1.9 
Selling, general and administrative5.4 2.9 
Other
Total share-based compensation expense$12.7 $4.8 
18



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of their grant dates. Monte Carlo simulations are used to estimate the fair value of its market-based PBRSUs. The market-based PBRSUs vest upon satisfaction of both time-based requirements and market targets based on share price. Expected life is based on the market condition to which the vesting is tied. The 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.
The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the three months ended March 31, 2021 and 2020:
 Three Months Ended March 31,
 20212020
Expected dividend yield0%0%
Risk-free interest rate0.4%1.7%
Expected volatility43%43%
Expected term (in years)5.55.5

The risk-free interest rate input is based on U.S. Treasury instruments, and the expected volatility of the share price is based on review of the historical volatility levels of the Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.
Stock options
A summary of the options activity during the three months ended March 31, 2021 is shown below:
OptionsWeighted-
Average
Exercise
Price
Outstanding at December 31, 20206,220,971 $3.68 
Granted1,625 23.49 
Exercised(539,795)6.47 
Canceled/forfeited(1,040)3.85 
Expired
Outstanding at March 31, 20215,681,761 $3.42 
Outstanding, vested and exercisable at March 31, 20214,782,897 $3.41 
Outstanding, vested and exercisable at December 31, 20205,230,690 $3.73 
19



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Restricted stock units and performance-based restricted stock units    
A summary of the RSU and PBRSU activity during the three months ended March 31, 2021 is shown below:
Weighted-
Average Grant
Date Fair Value
RSUsPBRSUsRSUPBRSU
Outstanding and unvested at December 31, 20202,108,447 2,917,071 $9.87 $11.35 
Granted2,719 290,354 23.77 25.09 
Vested(6,497)10.80 
Forfeited(41,381)(646)12.99 5.34 
Outstanding and unvested at March 31, 20212,063,288 3,206,779 $9.82 $12.59 
Shares surrendered for taxes for the three months ended March 31, 20212,201 
Cost of shares surrendered for taxes for the three months ended March 31, 2021 (in millions)
$$
Shares surrendered for taxes for the three months ended March 31, 2020545 
Cost of shares surrendered for taxes for the three months ended March 31, 2020 (in millions)
$$

Outstanding PBRSUs issued prior to April 2019 vest upon satisfaction of both time-based requirements and market targets based on share price. Depending on the percentage level at which the market-based condition is satisfied, the number of shares vesting could be between 0% and 150% of the number of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 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, or other specific performance factors. Depending on the percentage level at which the performance-based conditions are satisfied, the number of shares vesting could be between 0% and 200% of the number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all outstanding PBRSUs is 5,943,470.
13. Other Expenses
Other expenses consist of the following (in millions):
Three Months Ended March 31,
 20212020
Severance and related employee benefits$1.5 $1.1 
Strategic initiatives (1)6.5 3.2 
Facility-exit charges (2)1.5 0.4 
Other (3)3.5 4.0 
Total other expenses$13.0 $8.7 

20



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
(1) 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 months ended March 31, 2021, $0.5 million of contingent consideration changes were included.
(2) As part of evaluating the Company’s footprint, R1 has exited certain leased facilities. Costs include asset impairment charges and other costs related to exited leased facilities.
(3) For the three months ended March 31, 2021 and 2020, includes $1.7 million and $2.6 million, respectively, of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs related to the COVID-19 pandemic.
14. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates. The 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, 2021 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions for state taxes, GILTI, non-deductible compensation, and discrete items.

The Company recognized income tax expense for the three months ended March 31, 2020 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of 21% is primarily attributable to recognizing the provisions for GILTI plus the geographical mix of earnings, permanent differences, and discrete items.
The 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 2017 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years.

At December 31, 2020, the Company had gross deferred tax assets of $146.1 million, of which $81.6 million related to net operating loss (“NOL”) carryforwards. The majority of the Company's carryforwards were generated in 2014 and 2016. The Company expects to be profitable, allowing the Company to utilize its NOL carryforward and other deferred tax assets.

The Company's completed acquisition of SCI and purchase accounting included $10.9 million of net deferred tax liabilities. In this amount is a deferred tax asset related to net operating loss carryforwards of approximately $10.4 million generated since 2002. Since a portion of state net operating loss will not be realizable, partial valuation allowance was established for the net operating loss. Through the SCI Acquisition, the Company also acquired a deferred tax asset related to research and experimentation credits of approximately $3.7 million that management believes will not be realized, and a full valuation allowance was established.
21



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
15. 8.00% Series A Convertible Preferred Stock
On January 15, 2021, TCP-ASC ACHI Series LLLP (“TCP-ASC”), a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the “Investor”), a related party, converted all of its 294,266 shares (the “Current Shares”) of preferred stock into 117,706,400 shares of common stock of the Company into which the Current Shares were convertible pursuant to the Certificate of Designation of the preferred stock, and, in consideration therefor, the Company (i) issued 21,582,800 additional shares of common stock to the Investor, and (ii) paid the Investor $105.0 million in cash. On January 19, 2021, the Company filed a Certificate of Elimination of 8.00% Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware to eliminate the Certificate of Designations of the 8.00% Series A Convertible Preferred Stock. The consideration paid to induce the conversion was recorded as a dividend of $592.3 million and reduced income available to common shareholders in our earnings per share calculation. The dividend was calculated as the cash paid of $105.0 million plus the fair value on the conversion date of the additional 21,582,800 shares of common stock issued as consideration for the conversion.

The following summarizes the preferred stock activity for the three months ended March 31, 2021 (in millions, except per share data):

Preferred Stock
Shares Issued and OutstandingCarrying Value
Balance at December 31, 2020288,497 $251.5 
Dividends paid/accrued dividends5,769 
Conversion of preferred stock(294,266)(251.5)
Balance at March 31, 2021$

16. Earnings (Loss) Per Share
Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the preferred stock, by the weighted average number of common shares outstanding during the period. As the preferred stock participates in dividends alongside the Company’s common stock (per their participating dividends), the preferred stock would constitute participating securities under ASC 260-10 and are applied to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the three months ended March 31, 2021 and 2020, the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by potentially dilutive securities outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of RSUs and PBRSUs, and shares issuable upon conversion of preferred stock.
Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
22



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Three Months Ended
March 31,
 20212020
Basic EPS:
Net income$25.8 $18.2 
Less dividends on preferred shares (1)(592.3)(5.4)
Less income allocated to preferred shareholders(6.2)
Net income (loss) available/(allocated) to common shareholders - basic$(566.5)$6.6 
Diluted EPS:
Net income$25.8 $18.2 
Less dividends on preferred shares (1)(592.3)(5.4)
Less income allocated to preferred shareholders(5.0)
Net income (loss) available/(allocated) to common shareholders - diluted$(566.5)$7.8 
Basic weighted-average common shares239,290,145 114,441,043 
Add: Effect of dilutive equity awards11,893,514 
Add: Effect of dilutive warrants43,285,621 
Diluted weighted average common shares239,290,145 169,620,178 
Net income (loss) per common share (basic)$(2.37)$0.06 
Net income (loss) per common share (diluted)$(2.37)$0.05 
(1) The 2021 dividend on preferred shares includes amounts related to the conversion of the preferred shares. See Note 15, 8.00% Series A Convertible Preferred Stock, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Because of their anti-dilutive effect, 13,688,519 common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three months ended March 31, 2021. Additionally, for the three months ended March 31, 2021, the Investor's and Intermountain's exercisable warrants to acquire up to 60 million and 1.5 million shares, respectively, of the Company's common stock have been excluded from the diluted earnings per share calculation because they are anti-dilutive. For the three months ended March 31, 2021, the exercisable warrants equate to 53,206,631 dilutive shares under the treasury stock method.
For the three months ended March 31, 2020, 525,414 common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect.

17. Commitments and Contingencies

Legal Proceedings

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

23



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties, and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. Both the Company’s and plaintiff’s motions for summary judgment were denied in December 2020, and the parties are presently conducting damages and expert discovery. Discovery and dispositive motions are expected to extend through January 2022, with trial, if necessary, in mid-to-late 2022.

On April 13, 2021 and April 19, 2021, respectively, certain purported stockholders of the Company filed 2 complaints in the Delaware Court of Chancery regarding the Company’s January 15, 2021 recapitalization transaction with TCP-ASC, an investment vehicle owned jointly by Ascension and TowerBrook. Both complaints allege that TCP-ASC, Ascension, and TowerBrook controlled the Company and breached their fiduciary duties by using that alleged control to force the Company to overpay in redeeming TCP-ASC’s preferred stock as part of the recapitalization transaction. The plaintiffs seek an unspecified amount of damages against TCP-ASC, Ascension, and TowerBrook. The plaintiffs also allege that the Company and TCP-ASC entered into amendments to the Investor Rights Agreement that the plaintiffs contend contains provisions that are void under the Company’s charter, bylaws, and the Delaware General Corporation Law. The plaintiffs seek a declaratory judgment that these amendments are invalid, as well as attorneys’ fees and costs. The Company believes that it has meritorious defenses to all claims against the Company and intends to vigorously defend itself against these claims.
18. Related Party Transactions
This note encompasses transactions between Ascension and its affiliates, including AMITA Health, and the Company pursuant to the amended and restated Master Professional Services Agreement (“A&R MPSA”), including all supplements, amendments, and other documents entered into in connection therewith. For further details on the Company's agreements with Ascension, see Note 1 and Note 18 of the Company's 2020 Form 10-K.
Net services revenue from services provided to Ascension included in the Company’s consolidated statements of operations were (in millions):
 Three Months Ended March 31,
 20212020
Ascension$215.5 $208.4 
Amounts included in the Company's consolidated balance sheets for Ascension are (in millions):
 March 31, 2021December 31, 2020
Accounts receivable, net of $0.1 million and $0.1 million allowance - related party$31.8 $30.9 
Current portion of customer liabilities$10.6 $15.3 
Non-current portion of customer liabilities$15.4 $16.3 
Total customer liabilities$26.0 $31.6 

24



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Since Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's global business services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.
19. Deferred Contract Costs
Certain costs associated with the initial phases of customer contracts and the related transition of customer hospitals and physician groups are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations in the future, and are expected to be recovered through the margins realized. The following table summarizes the breakout of deferred contract costs (in millions):

March 31, 2021December 31, 2020
Prepaid expenses and other current assets$4.7 $4.5 
Other assets19.5 19.6 
Total deferred contract costs$24.2 $24.1 
The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three months ended March 31, 2021 and 2020, total amortization was $1.2 million and $1.1 million, respectively, and there were 0 associated impairment losses.
20. Segments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with how its business activities are managed and evaluated. All of the Company’s significant operations are organized around the single business of providing end-to-end management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only 1 reportable segment.
Healthcare providers affiliated with Ascension have accounted for a significant portion of the Company’s net services revenue each year since the Company’s formation. For the three months ended March 31, 2021 and 2020, net services revenue from healthcare organizations affiliated with Ascension accounted for 63% and 65% of the Company's total net services revenue, respectively. The loss of customers within the Ascension health system could have a material adverse impact on the Company’s operations. For the three months ended March 31, 2021 and 2020, Intermountain Healthcare accounted for 14% and 15% of the Company's total net services revenue, respectively.
As of March 31, 2021 and December 31, 2020, the Company had a concentration of credit risk with Ascension accounting for 25% and 25% of accounts receivable, respectively.
21. Derivative Financial Instruments

The Company utilizes cash flow hedges to mitigate its currency risk arising from its global delivery resources and to reduce variability in interest cash flows from its outstanding debt. As of March 31, 2021, the Company has recorded $0.6 million of existing gains and $1.8 million of existing losses in accumulated other comprehensive income for the foreign currency hedges and interest rate swaps, respectively. The Company estimates that $0.6 million of gains and $1.3 million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months for the foreign currency hedges and interest rate swaps, respectively. The amounts related to foreign currency hedges that were reclassified into cost of services were a net gain of $0.4 million and a net loss of $0.1 million during the three month periods ended March 31, 2021 and 2020, respectively. The amounts related to the interest rate swaps that were reclassified into interest expense were a net loss of $0.5 million and a net gain of $0.1 million during the three month periods ended March 31, 2021 and 2020, respectively.

25



R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of March 31, 2021, the Company’s currency forward contracts have maturities extending no later than March 31, 2022. The Company's interest rate swaps extend no later than August of 2022.

As of March 31, 2021, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $95.1 million and $100.0 million, respectively. As of December 31, 2020, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $55.9 million and $200.0 million, respectively. As of March 31, 2021, the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.
22. Subsequent Events

On April 30, 2021, the Company entered into an agreement with Ascension amending the A&R MPSA. The agreement expands R1’s role as the provider of patient experience technologies, and extends R1’s revenue cycle management services agreement with Ascension to 2031.

On May 3, 2021, the Company entered into a definitive agreement to acquire VisitPay Inc. (“VisitPay”), a provider of digital payment solutions. The Company will acquire VisitPay for $298.0 million in cash, subject to customary adjustments for working capital, cash, and debt. The Company intends to fund the acquisition and related fees and expenses with the proceeds from additional borrowings and cash on hand. Concurrent with the entry into the definitive agreement to acquire VisitPay, the Company obtained a debt financing commitment letter from Bank of America in the amount of $300.0 million. There is 0 financing condition linked to the consummation of the acquisition. The agreement contains customary representations, warranties, and closing conditions. The transaction is expected to close in the third quarter of 2021.
26




Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “R1,” “the Company,” “we,” “our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes. Also refer to Note 1 of our consolidated financial statements.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, that involve substantial risks and uncertainties. These statements are often identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “designed,” “may,” “plan,” “predict,” “project,” “would,” and similar expressions or variations. These forward-looking statements include, among other things, statements about the potential impacts of the COVID-19 pandemic, our strategic initiatives, our capital plans, our costs, our ability to successfully deliver on our commitments to our customers, our ability to deploy new business as planned, our ability to successfully implement new technologies, our future financial performance, and our liquidity. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the severity, magnitude, and duration of the COVID-19 pandemic; responses to the pandemic by the government and healthcare providers and the direct and indirect impacts of the pandemic on our customers and personnel; the disruption of national, state, and local economies as a result of the pandemic; the impact of the pandemic on our financial results, including possible lost revenue and increased expenses; as well as those discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and elsewhere in this Report, and those set forth in Part I, Item 1A of the 2020 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.
We achieve these results for our customers by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation, and collections from patients and payers. We do so by deploying a unique operating model that leverages our extensive healthcare site experience, innovative technology, and process excellence. We assist our 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.
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Our primary service offering consists of end-to-end RCM services for health systems, hospitals, and physician groups, which we deploy through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions, and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused management, subject matter specialists, proprietary technology solutions, and other resources. Under the operating partner model, we record higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are our employees and more third-party vendor contracts are controlled by us. Under the co-managed model, the majority of the revenue cycle personnel and more third-party vendor contracts remain with the customer and those costs are netted against our co-managed revenue. For the three months ended March 31, 2021 and 2020, substantially all of our net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.

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

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

On April 1, 2020, we completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020 (the “Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (the “SCI Acquisition”). At the closing of the transaction, we purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. The aggregate purchase price consisted of $190.0 million in cash, adjusted pursuant to the Stock Purchase Agreement for cash and working capital. The agreement also contained an earn-out of $10.0 million for meeting certain financial and operational targets. The earn-out is expected to be paid in the second quarter of 2021.

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

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

RevWorks Acquisition

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

Emergency Medical Services Disposition

On July 19, 2020, we entered into a definitive agreement to dispose of our emergency medical services (“EMS”) business, including EMS Revenue Cycle Management and Electronic Patient Care Reporting (the “EMS Disposition”) for $140.0 million, inclusive of a $5.0 million hold-back amount subject to the completion of certain transition services, to be paid approximately one year from the date of the disposition. On October 30, 2020, we completed the EMS Disposition. We recognized a gain on the sale of $55.7 million, which was subject to customary working capital adjustments.

VisitPay Inc. Acquisition

On May 3, 2021, we entered into a definitive agreement to acquire VisitPay Inc. (“VisitPay”), a provider of digital payment solutions. We will acquire VisitPay for $298.0 million in cash, subject to customary adjustments for working capital, cash, and debt. We intend to fund the acquisition and related fees and expenses with the proceeds from additional borrowings and cash on hand. Concurrent with the entry into the definitive agreement to acquire VisitPay, we obtained a debt financing commitment letter from Bank of America in the amount of $300.0 million. There is no financing condition linked to the consummation of the acquisition. The agreement contains customary representations, warranties, and closing conditions. The transaction is expected to close in the third quarter of 2021.

Coronavirus Pandemic

In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Restrictions on businesses and travel are occurring based on state and local guidelines and vary by locality and cannot be reasonably predicted.

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Given the ongoing challenges associated with efforts to contain the spread of COVID-19 and related business impact for our customers, we initiated a number of actions in 2020 and continuing into 2021 to ensure (1) the health, safety, and well-being of our workforce; (2) uninterrupted and, in many respects, expanded support for our customers and the patients and communities they serve; and (3) business and operational continuity. Our efforts to date include: repositioning more than 15,000 global employees to a work-from-home operating environment; offering zero out-of-pocket cost COVID-19 testing and telemedicine visits; encouraging vaccinations; restricting all non-essential domestic and international travel; launching our PX mobile patient registration technology to reduce risk of patient and R1 staff exposure and preserve the use of critical personal protective equipment for clinical staff; leveraging capabilities acquired via our SCI acquisition to assist customers with processes to restart elective procedure scheduling; developing reporting to allow for detailed COVID-19 order tracking, scheduling, and follow-up; offering in-depth regulatory resource guidance and content to aid our customers in navigating a rapidly developing and changing series of healthcare regulations during the public health emergency; preserving continuous pay for our hourly workforce during periods of reduced patient volumes for our customers; and providing customers with operational best practices for implementation and revenue cycle management of telehealth services.

Due to the impact of the pandemic, there continues to be decreased patient volumes for our customers. Corresponding to the decreased volume, we anticipate that our revenues on average will be approximately 90 to 95% of pre-COVID amounts. Given the uncertainty of the pandemic, we cannot reasonably predict when volumes will return to their pre-COVID levels. The impact of the COVID-19 pandemic is fluid and continues to evolve. We cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. However, we continue to assess its impact on our business and are actively managing our response. For further details on the potential impact of COVID-19 on our business, refer to “Risk Factors,” in Part II, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides consolidated operating results and other operating data for the periods indicated:
 Three Months Ended March 31,2021 vs. 2020
Change
 20212020Amount%
 (In millions except percentages)
Consolidated Statement of Operations Data:
Net operating fees$286.1 $280.9 $5.2 %
Incentive fees29.0 16.8 12.2 73 %
Other27.5 22.8 4.7 21 %
Net services revenue342.6 320.5 22.1 %
Operating expenses:
Cost of services267.2 253.9 13.3 %
Selling, general and administrative25.6 25.5 0.1 — %
Other expenses13.0 8.7 4.3 49 %
Total operating expenses305.8 288.1 17.7 %
Income from operations36.8 32.4 4.4 14 %
Net interest expense3.9 3.8 0.1 %
Net income before income tax provision32.9 28.6 4.3 15 %
Income tax provision7.1 10.4 (3.3)(32)%
Net income$25.8 $18.2 $7.6 42 %
Adjusted EBITDA (1)$80.4 $61.6 $18.8 31 %

(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.
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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 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.
Selected Non-GAAP Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense, strategic initiatives costs, and other items which are detailed in the table below.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
Adjusted EBITDA does not reflect:
Changes in, or cash requirements for, our working capital needs;
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, the most comparable GAAP measure, for each of the periods indicated:
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 Three Months Ended March 31,2021 vs. 2020
Change
 20212020Amount%
 (In millions except percentages)
Net income$25.8 $18.2 $7.6 42 %
  Net interest expense3.9 3.8 0.1 %
  Income tax provision7.1 10.4 (3.3)(32)%
  Depreciation and amortization expense17.9 15.7 2.2 14 %
  Share-based compensation expense (1)12.7 4.8 7.9 165 %
  Other expenses (2)13.0 8.7 4.3 49 %
Adjusted EBITDA (non-GAAP)$80.4 $61.6 $18.8 31 %

(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. See Note 12, Share-Based Compensation, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
(2)        Other expenses consist of the following (in millions):

Three Months Ended March 31,
 20212020
Severance and related employee benefits$1.5 $1.1 
Strategic initiatives (1)6.5 3.2 
Facility-exit charges (2)1.5 0.4 
Other (3)3.5 4.0 
Total other expenses$13.0 $8.7 

(1) 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 months ended March 31, 2021, $0.5 million of contingent consideration changes were included.
(2) As part of evaluating our footprint, we have exited certain leased facilities. Costs include asset impairment charges and other costs related to exited leased facilities.
(3) For the three months ended March 31, 2021 and 2020, includes $1.7 million and $2.6 million, respectively, of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs related to the COVID-19 pandemic.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Net Services Revenue
Net services revenue increased by $22.1 million, or 7%, from $320.5 million for the three months ended March 31, 2020, to $342.6 million for the three months ended March 31, 2021. The increase was primarily driven by the SCI and RevWorks acquisitions, higher incentive fees, and new customers onboarded in the last twelve months, partially offset by the EMS Disposition.
Cost of Services
Cost of services increased by $13.3 million, or 5%, from $253.9 million for the three months ended March 31, 2020, to $267.2 million for the three months ended March 31, 2021, modestly improving cost of services as a percentage of revenue. The increase in cost of services was primarily driven by the SCI and RevWorks acquisitions and an increase associated with new customers onboarded in the last twelve months, partially offset by the EMS Disposition.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.1 million, or 0%, from $25.5 million for the three months ended March 31, 2020, to $25.6 million for the three months ended March 31, 2021. The increase was primarily driven by increased share-based compensation expense, partially offset by lower travel and marketing expenses.
Other Expenses
Other expenses increased by $4.3 million, or 49%, from $8.7 million for the three months ended March 31, 2020, to $13.0 million for the three months ended March 31, 2021. The increase was primarily driven by expenses related to strategic initiatives, the preferred stock conversion transaction, and facility-exit expenses, partially offset by lower expenses related to COVID-19.
Income Tax Provision
Income tax expense decreased by $3.3 million from $10.4 million income tax expense for the three months ended March 31, 2020, to $7.1 million income tax expense for the three months ended March 31, 2021, primarily due to higher discrete benefits. Our effective tax rate (including discrete items) was approximately 22% and 36% for the three months ended March 31, 2021 and 2020, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
CRITICAL ACCOUNTING POLICIES
Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective, or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates” of our 2020 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2020 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new accounting guidance, see Note 2, Recent Accounting Pronouncements, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
Liquidity and Capital Resources
Our primary sources of liquidity include our cash and cash equivalents, cash flows from operations, and borrowings under our Credit Agreement. As of March 31, 2021 and December 31, 2020, we had cash and cash equivalents of $103.5 million and $173.8 million, respectively. The primary driver for the decreased cash position at March 31, 2021 was the payment made related to the conversion of the preferred stock, offset by cash inflows from operations.
Our Credit Agreement includes a senior secured revolving credit facility (the “Senior Revolver”) with a total capacity of $100.0 million. As of March 31, 2021 and December 31, 2020, we had drawn $70.0 million and had $30.0 million remaining under the senior revolver. See Note 11, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on our Credit Agreement. As of March 31, 2021 we had total available liquidity of $133.5 million reflecting our cash and cash equivalents as well as remaining availability under our revolver. On January 15, 2021, we paid $105.0 million in cash to the Investor in connection with the conversion of the preferred stock held by the Investor.
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Concurrent with entering into a definitive agreement to acquire VisitPay on May 3, 2021, we obtained a debt financing incremental commitment letter from Bank of America with respect to a potential incremental term loan in the amount of $300.0 million, subject to the terms and conditions set forth in the incremental commitment letter and related fee letter.
We intend to embark on a process to refinance our senior credit facility in the second quarter of 2021. The intended purpose of the refinancing is to complete the VisitPay acquisition, increase borrowing capacity, provide for more flexibility for general corporate purposes and potential acquisitions, and to generally improve terms, including pricing terms. There can be no assurances that such refinancing will be completed. If such refinancing is completed as contemplated, we will not incur the potential incremental term loan described in the preceding paragraph.
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.
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. As noted above, we obtained a debt financing commitment letter from Bank of America in the amount of $300.0 million, which would be sufficient to cover the acquisition of VisitPay. The extent to which COVID-19 will ultimately impact our results will depend on future developments, but could adversely impact our business, results of operations, and liquidity in future periods.
Cash flows from operating, investing, and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
 Three Months Ended March 31,
 20212020
 (In millions)
Net cash provided by operating activities$46.0 $0.6 
Net cash used in investing activities$(9.6)$(13.3)
Net cash (used in) provided by financing activities$(107.1)$28.4 
Cash Flows from Operating Activities
Cash provided by operating activities increased by $45.4 million from $0.6 million for the three months ended March 31, 2020, to $46.0 million for the three months ended March 31, 2021. Cash provided by operating activities increased due to increased net income of $7.6 million and a smaller cash bonus pay-out related to the 2020 bonus plan.
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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 decreased by $3.7 million from $13.3 million for the three months ended March 31, 2020, to $9.6 million for the three months ended March 31, 2021. Cash used in investing activities decreased due to timing of payments for purchases of 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 the acquisition of SCI in 2020, we amended our Credit Agreement to draw additional funds to finance the acquisition. 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 cash financing activities.
Cash used in financing activities increased by $135.5 million from cash provided of $28.4 million for the three months ended March 31, 2020, to cash used of $107.1 million for the three months ended March 31, 2021. This change was due to the payment made in conjunction of the conversion of the preferred stock, as well as changes in our revolver financing activities.
Debt and Financing Arrangements
On June 26, 2019, we entered into a senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $325.0 million senior secured term loan facility (the “Senior Term Loan”) issued at 99.66% of par and a $100.0 million senior secured revolving credit facility (the “Senior Revolver”). On April 1, 2020, we drew an additional $191.1 million in conjunction with Amendment No. 1 to the Credit Agreement (the “Amendment”) on the same terms as our existing Senior Term Loan provided under the Credit Agreement. As of March 31, 2021, we had $548.1 million outstanding on our term loan facilities and had drawn $70.0 million on our Senior Revolver, with $30.0 million of availability remaining. The term loans require quarterly payments, and we bear interest at a floating rate, which was 2.36% at March 31, 2021.

The 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 Credit Agreement as of March 31, 2021.
Concurrent with entering into a definitive agreement to acquire VisitPay on May 3, 2021, we obtained a debt financing incremental commitment letter from Bank of America with respect to a potential incremental term loan in the amount of $300.0 million, subject to the terms and conditions set forth in the incremental commitment letter and related fee letter.
We intend to embark on a process to refinance our senior credit facility in the second quarter of 2021. The intended purpose of the refinancing is to complete the VisitPay acquisition, increase borrowing capacity, provide for more flexibility for general corporate purposes and potential acquisitions, and to generally improve terms, including pricing terms. There can be no assurances that such refinancing will be completed. If such refinancing is completed as contemplated, we will not incur the potential incremental term loan described in the preceding paragraph.

See Note 11, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
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CONTRACTUAL OBLIGATIONS

The following table presents a summary of our contractual obligations as of March 31, 2021 (in millions):
 202120222023202420252026ThereafterTotal
Operating leases (1)$14.0 $16.0 $15.2 $15.3 $15.2 $12.0 $22.1 $109.8 
Purchase and finance lease obligations (2)$7.4 $10.1 $9.0 $5.0 $1.8 $— $— $33.3 
Debt obligations$25.8 $38.7 $45.2 $438.4 $— $— $— $548.1 
Interest on debt$10.8 $13.0 $11.2 $5.0 $— $— $— $40.0 
Total$58.0 $77.8 $80.6 $463.7 $17.0 $12.0 $22.1 $731.2 

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

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

Item 3.Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of March 31, 2021, we have hedged $100.0 million of our $548.1 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. The remaining $448.1 million outstanding is subject to an average variable rate of 2.36% as of March 31, 2021. 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 $4.5 million.
Our interest income is primarily generated from variable rate interest earned on operating cash accounts.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee 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 the three months ended March 31, 2021 and 2020, 9% and 9% of our expenses were denominated in foreign currencies, respectively. As of March 31, 2021 and 2020, we had net assets of $61.0 million and $40.0 million in foreign entities, respectively. The reduction in earnings from a 10% change in foreign currency spot rates would be $3.0 million and $2.8 million at March 31, 2021 and 2020, 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 March 31, 2021, it was anticipated that approximately $0.4 million of gains, 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 $8.7 million as of March 31, 2021.

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Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, 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 first quarter of 2021 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 17, 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

There have been no material changes in our risk factors from those disclosed in our 2020 Form 10-K. The risk factors disclosed in Part I, Item 1A of our 2020 Form 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, and/or operating results.

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:
PeriodNumber of Shares  Purchased (1) Average Price Paid per ShareTotal 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)
January 1, 2021 through January 31, 2021 1,945   $23.97 —   $49.0 
February 1, 2021 through February 28, 2021136 $27.44 — $49.0 
March 1, 2021 through March 31, 2021120 $28.06 — $49.0 

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



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Item 6.Exhibits

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

(a)
Exhibit Number
Exhibit Description
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

+
Management contract or compensatory plan or arrangement.

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

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  
R1 RCM INC.
By:/s/ Joseph Flanagan
Joseph Flanagan
President and Chief Executive Officer
By:/s/ Rachel Wilson
Rachel Wilson
Chief Financial Officer and Treasurer
Date: May 4, 2021
    

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