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 September 30, 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)

Delaware	02-0698101
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
434 W. Ascension Way	84123
6th Floor
Murray
Utah
(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	RCM	NASDAQ

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 filer ý
Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging 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 October 29, 2021, the registrant had 277,604,245 shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

Part I.	Financial Information
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations and Comprehensive Income	5
	Consolidated Statements of Stockholders' Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
Part II.	Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.	Exhibits	38
SIGNATURES		39

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)
	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	158.7	$	173.8
Accounts receivable, net of $2.3 million and $3.7 million allowance	113.8		91.3
Accounts receivable, net of $0.1 million and $0.1 million allowance - related party	29.2		30.9
Prepaid expenses and other current assets	62.9		59.4
Total current assets	364.6		355.4
Property, equipment and software, net	99.3		93.7
Operating lease right-of-use assets	57.4		57.8
Intangible assets, net	272.4		171.1
Goodwill	551.9		375.3
Non-current deferred tax assets	55.8		73.7
Non-current portion of restricted cash equivalents	0.5		1.0
Other assets	81.5		61.0
Total assets	$	1,483.4	$	1,189.0
Liabilities
Current liabilities:
Accounts payable	$	22.5	$	18.2
Current portion of customer liabilities	51.7		16.7
Current portion of customer liabilities - related party	7.6		15.3
Accrued compensation and benefits	86.6		51.9
Current portion of operating lease liabilities	11.8		12.2
Current portion of long-term debt	17.5		32.3
Other accrued expenses	59.7		59.7
Total current liabilities	257.4		206.3
Non-current portion of customer liabilities	4.4		—
Non-current portion of customer liabilities - related party	15.9		16.3
Non-current portion of operating lease liabilities	64.0		71.0
Long-term debt	779.1		519.7
Other non-current liabilities	28.5		36.3
Total liabilities	1,149.3		849.6
8.00% Series A convertible preferred stock, par value $0.01, no shares authorized, issued or outstanding as of September 30, 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, 295,885,508 shares issued and 277,492,322 shares outstanding at September 30, 2021; 137,812,559 shares issued and 121,144,038 shares outstanding at December 31, 2020	3.0		1.4
Additional paid-in capital	613.7		393.7
Accumulated deficit	(100.3)		(161.5)
Accumulated other comprehensive loss	(6.6)		(6.5)
Treasury stock, at cost, 18,393,186 shares as of September 30, 2021; 16,668,521 shares as of December 31, 2020	(175.7)		(139.2)
Total stockholders’ equity	334.1		87.9
Total liabilities and stockholders’ equity	$	1,483.4	$	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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net services revenue ($227.5 million and $661.4 million for the three and nine months ended September 30, 2021, respectively, and $193.4 million and $608.2 million for the three and nine months ended September 30, 2020, respectively, from related party)	$	379.7	$	307.2	$	1,075.7	$	942.4
Operating expenses:
Cost of services	304.0		255.2		858.2		757.4
Selling, general and administrative	33.2		25.7		87.8		74.5
Other expenses	11.4		15.7		34.2		42.4
Total operating expenses	348.6		296.6		980.2		874.3
Income from operations	31.1		10.6		95.5		68.1
Net interest expense	6.5		4.4		13.8		13.0
Income before income tax provision	24.6		6.2		81.7		55.1
Income tax provision	7.6		1.0		20.5		16.6
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Net income (loss) per common share:
Basic	$	0.06	$	—	$	(2.03)	$	0.10
Diluted	$	0.05	$	—	$	(2.03)	$	0.08
Weighted average shares used in calculating net income (loss) per common share:
Basic	278,655,269		115,976,377		262,209,929		115,164,631
Diluted	320,617,086		115,976,377		262,209,929		171,178,086
Consolidated statements of comprehensive income
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Other comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax	0.5		1.1		0.9		(2.5)
Foreign currency translation adjustments	—		1.4		(1.0)		(0.9)
Total other comprehensive income (loss), net of tax	$	0.5	$	2.5	$	(0.1)	$	(3.4)
Comprehensive income	$	17.5	$	7.7	$	61.1	$	35.1

Basic:
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Less dividends on preferred shares	—		(5.6)		(592.3)		(16.6)
Less income allocated to preferred shareholders	—		—		—		(10.9)
Net income (loss) available/allocated to common shareholders - basic	$	17.0	$	(0.4)	$	(531.1)	$	11.0
Diluted:
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Less dividends on preferred shares	—		(5.6)		(592.3)		(16.6)
Less income allocated to preferred shareholders	—		—		—		(8.7)
Net income (loss) available/allocated to common shareholders - diluted	$	17.0	$	(0.4)	$	(531.1)	$	13.2

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 Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	137,812,559	$	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 plans	6,497	—		—	—		—		—		—		—
Issuance of common stock	324,212	—		—	—		7.0		—		—		7.0
Exercise of vested stock options	539,795	—		—	—		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 shares	117,706,400	1.2		—	—		250.3		—		—		251.5
Inducement dividend	—	—		—	—		(592.3)		—		—		(592.3)
Issuance of common stock related to inducement	21,582,800	0.2		—	—		487.1		—		—		487.3
Net income	—	—		—	—		—		25.8		—		25.8
Balance at March 31, 2021	277,972,263	$	2.8	(16,670,722)	$	(139.2)	$	562.1	$	(135.7)	$	(6.4)	$	283.6
Share-based compensation expense	—	—		—	—		24.0		—		—		24.0
Issuance of common stock related to share-based compensation plans	539,884	—		—	—		—		—		—		—
Exercise of vested stock options	396,250	—		—	—		1.3		—		—		1.3
Acquisition of treasury stock related to share-based compensation plans	—	—		(167,832)	(4.5)		—		—		—		(4.5)
Net change on derivatives designated as cash flow hedges, net of tax of $0.0 million	—	—		—	—		—		—		(0.1)		(0.1)
Foreign currency translation adjustments	—	—		—	—		—		—		(0.6)		(0.6)
Exercise of warrants pursuant to cashless provisions	16,750,000	0.2		—	—		(0.2)		—		—		—
Net income	—	—		—	—		—		18.4		—		18.4
Balance at June 30, 2021	295,658,397	$	3.0	(16,838,554)	$	(143.7)	$	587.2	$	(117.3)	$	(7.1)	$	322.1
Share-based compensation expense	—	—		—	—		25.8		—		—		25.8
Issuance of common stock related to share-based compensation plans	54,524	—		—	—		—		—		—		—
Exercise of vested stock options	172,587	—		—	—		0.7		—		—		0.7
Acquisition of treasury stock related to share-based compensation plans	—	—		(16,555)	(0.3)		—		—		—		(0.3)
Repurchases of common stock	—	—		(1,538,077)	(31.7)		—		—		—		(31.7)
Net change on derivatives designated as cash flow hedges, net of tax of $0.1 million	—	—		—	—		—		—		0.5		0.5
Net income	—	—		—	—		—		17.0		—		17.0
Balance at September 30, 2021	295,885,508	$	3.0	(18,393,186)	$	(175.7)	$	613.7	$	(100.3)	$	(6.6)	$	334.1

See accompanying notes to consolidated financial statements.

6

R1 RCM Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

(In millions, except share and per share data)

	Common Stock			Treasury Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	127,807,546	$	1.3	(13,786,266)	$	(73.6)	$	372.7	$	(277.8)	$	(4.5)	$	18.1
Cumulative effect of ASC 326 adoption, net of tax of $0.3 million	—	—		—	—		—		(0.8)		—		(0.8)
Adjusted balance at January 1, 2020	127,807,546	$	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 plans	1,720	—		—	—		—		—		—		—
Exercise of vested stock options	553,520	—		—	—		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, 2020	128,362,786	$	1.3	(13,786,811)	$	(73.6)	$	375.2	$	(260.4)	$	(11.0)	$	31.5
Share-based compensation expense	—	—		—	—		4.4		—		—		4.4
Issuance of common stock related to share-based compensation plans	463,038	—		—	—		—		—		—		—
Exercise of vested stock options	464,136	—		—	—		1.2		—		—		1.2
Dividends paid/accrued	—	—		—	—		(5.6)		—		—		(5.6)
Acquisition of treasury stock related to share-based compensation plans	—	—		(128,361)	(1.1)		—		—		—		(1.1)
Net change on derivatives designated as cash flow hedges, net of tax of $0.3 million	—	—		—	—		—		—		0.8		0.8
Foreign currency translation adjustments	—	—		—	—		—		—		(0.2)		(0.2)
Net income	—	—		—	—		—		15.1		—		15.1
Balance at June 30, 2020	129,289,960	$	1.3	(13,915,172)	$	(74.7)	$	375.2	$	(245.3)	$	(10.4)	$	46.1
Share-based compensation expense	—	—		—	—		6.8		—		—		6.8
Issuance of common stock related to share-based compensation plans	14,015	—		—	—		—		—		—		—
Exercise of vested stock options	1,108,991	—		—	—		7.6		—		—		7.6
Dividends paid/accrued	—	—		—	—		(5.6)		—		—		(5.6)
Acquisition of treasury stock related to share-based compensation plans	—	—		(4,767)	(0.1)		—		—		—		(0.1)
Net change on derivatives designated as cash flow hedges, net of tax of $0.4 million	—	—		—	—		—		—		1.1		1.1
Foreign currency translation adjustments	—	—		—	—		—		—		1.4		1.4
Net income	—	—		—	—		—		5.2		—		5.2
Balance at September 30, 2020	130,412,966	$	1.3	(13,919,939)	$	(74.8)	$	384.0	$	(240.1)	$	(7.9)	$	62.5

See accompanying notes to consolidated financial statements.

7

R1 RCM Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

	Nine Months Ended September 30,
	2021		2020
Operating activities
Net income	$	61.2	$	38.5
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	56.8		50.9
Amortization of debt issuance costs	0.8		0.8
Share-based compensation	62.0		15.9
(Gain)/loss on disposal and right-of-use asset write-downs	(0.3)		5.1
Provision for credit losses	0.6		1.3
Deferred income taxes	18.0		16.2
Non-cash lease expense	7.4		8.7
Other	0.8		1.6
Changes in operating assets and liabilities:
Accounts receivable and related party accounts receivable	(18.8)		(47.2)
Prepaid expenses and other assets	(19.8)		(11.8)
Accounts payable	4.5		1.9
Accrued compensation and benefits	34.3		(36.1)
Lease liabilities	(9.9)		(7.8)
Other liabilities	(8.9)		22.5
Customer liabilities and customer liabilities - related party	30.1		(10.0)
Net cash provided by operating activities	218.8		50.5
Investing activities
Purchases of property, equipment, and software	(33.4)		(42.3)
Acquisition of SCI, net of cash acquired and earn-out provision	—		(189.0)
Acquisition of RevWorks, net of contingent consideration	—		(5.0)
Acquisition of VisitPay, net of cash acquired	(294.7)		—
Proceeds from disposal of assets	2.6		—
Net cash used in investing activities	(325.5)		(236.3)
Financing activities
Issuance of senior secured debt, net of discount	698.6		190.6
Borrowings on revolver	120.0		50.0
Payment of debt issuance costs	(1.9)		—
Repayment of senior secured debt	(484.6)		(17.0)
Repayments on revolver	(90.0)		(20.0)
Payment of contingent consideration liability	(4.8)		—
Deferred payment related to acquisition of RevWorks	(12.5)		—
Inducement of preferred stock conversion	(105.0)		—
Exercise of vested stock options	6.3		11.0
Purchase of treasury stock	(29.5)		—
Shares withheld for taxes	(4.8)		(7.5)
Other	(0.1)		(5.8)
Net cash provided by financing activities	91.7		201.3
Effect of exchange rate changes in cash, cash equivalents and restricted cash	(0.6)		(0.7)
Net (decrease) increase in cash, cash equivalents and restricted cash	(15.6)		14.8
Cash, cash equivalents and restricted cash, at beginning of period	174.8		92.5
Cash, cash equivalents and restricted cash, at end of period	$	159.2	$	107.3
Supplemental disclosures of cash flow information
Accrued dividends payable to preferred stockholders	$	—	$	5.6
Property, equipment and software purchases not paid	$	25.7	$	10.9

See accompanying notes to consolidated financial statements.

8

R1 RCM Inc.

Notes to Consolidated Financial Statements (Unaudited)

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.

Ascension

On April 30, 2021, the Company and Ascension Health (“Ascension”) entered into Amendment No. 5 to the Master Professional Services Agreement (“A&R MPSA”), effective as of May 1, 2021, extending the agreement to April 30, 2031, among other amendments. For further information regarding the Company's business, including relationships with Ascension, TowerBrook Capital Partners (“TowerBrook”), and TCP-ASC ACHI Series LLLP (“TCP-ASC” or the “Investor”), 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”).

VisitPay Acquisition

On July 1, 2021, the Company completed the acquisition of all the outstanding equity interests of iVinci Partners, LLC d/b/a VisitPay (“VisitPay”), a provider of digital payment solutions located in Idaho, pursuant to an Agreement and Plan of Merger dated as of May 3, 2021 by and among the Company, iVinci Partners, LLC, Vine Merger Sub, LLC, Flare Capital Partners I, L.P., Flare Capital Partners Investment Company, and Vine Sellers’ Representative, LLC (the “VisitPay Acquisition”). VisitPay’s proprietary analytics are designed to deliver consistent and compliant financing options that meet the unique needs of each patient and their family. VisitPay’s payment platform is purpose-built for healthcare with integrations across all major acute and ambulatory billing systems. The combination of the Company and VisitPay will enable the Company to increase price transparency, provide flexible and personalized payment options, and enhance big data analytics.

Basis of Presentation

The accompanying unaudited consolidated financial statements reflect the Company's financial position as of September 30, 2021, the results of operations of the Company for the three and nine months ended September 30, 2021 and 2020, and the cash flows of the Company for the nine months ended September 30, 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 and nine months ended September 30, 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 makes a number of significant estimates, assumptions, and judgments in the preparation of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's 2020 Form 10-K.

9

Recently Issued Accounting Standards and Disclosures

No new accounting pronouncements issued or effective during the fiscal year had, or are expected to have, a material impact on the Company’s consolidated financial statements.

2. 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 and liabilities such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, accounts payable, accrued service costs, accrued compensation and benefits, and certain other current assets and accrued expenses, approximate their fair values, due to their short-term nature. See Note 11, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts and interest rate swaps.

The Company believes the carrying value of the senior revolver and term loan (see Note 10, Debt) approximates fair value as they are variable rate bank debt.

3. Acquisitions

Assets acquired and liabilities assumed in a business combination are recorded at their estimated fair value on the date of the acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed.

VisitPay

On July 1, 2021, the Company completed the acquisition of VisitPay. The purchase price for the VisitPay Acquisition was $305.4 million. The Company funded the purchase price for the VisitPay Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 10, Debt).

The purchase price has been provisionally allocated to assets acquired and liabilities assumed based on their established fair value as of the acquisition date. The fair value estimate of assets acquired and liabilities assumed is pending the completion of multiple elements, including gathering further information about the identification and completeness of all assets and liabilities acquired, the finalization of an independent appraisal and valuation of fair value of the assets acquired and liabilities assumed, and final review by the Company's management. Accordingly, management considers the balances shown in the following table to be preliminary. Some of the more significant amounts that are not yet finalized relate to the fair value of intangible assets and income and non-income related taxes. Accordingly, there could be adjustments to the consolidated financial statements, including changes in our amortization expense related to the valuation of intangible assets acquired and their respective useful lives, among other adjustments.

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

10

	Purchase Price Allocation
Total purchase consideration	$	305.4
Allocation of consideration to assets acquired and liabilities assumed:
Cash and cash equivalents	$	10.7
Accounts receivable	4.7
Prepaid expenses and other current assets	0.4
Property, equipment and software	0.3
Operating lease right-of-use assets	1.7
Deferred income tax assets	0.9
Intangible assets	117.3
Goodwill	176.4
Accounts payable	(0.5)
Current portion of customer liabilities	(1.1)
Accrued compensation and benefits	(0.7)
Current portion of operating lease liabilities	(0.4)
Other accrued expenses	(2.0)
Non-current portion of customer liabilities	(1.0)
Non-current portion of operating lease liabilities	(1.3)
Net assets acquired	$	305.4

The intangible assets preliminarily identified in conjunction with the VisitPay Acquisition are as follows:

	Useful Life	Gross Carrying Value
Customer Relationships	10 years	$	2.3
Technology	11 years	$	114.0
Tradename	3 years	$	1.0

The goodwill recognized is primarily attributable to synergies that are expected to be achieved from the integration of VisitPay. The goodwill recognized in the acquisition will be partially deductible for income tax purposes.

Included in the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2021 are net sales of $5.2 million and net loss before income taxes of $3.5 million related to the operations of VisitPay since the acquisition date of July 1, 2021.

During 2020, the Company acquired the following businesses:

Company Name	Description of the Business	Description of the Acquisition
SCHEDULING.COM, INC. d/b/a SCI Solutions, Inc. (“SCI”)	Provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions	Purchased all outstanding equity interests
RevWorks services business (acquired from Cerner Corporation)	Provider of revenue cycle management services	Purchased certain assets relating to the RevWorks services business

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There have been no significant purchase accounting adjustments to the fair value of assets acquired or the liabilities assumed in connection with the SCI and RevWorks acquisitions as disclosed in Note 5 of the Company’s 2020 Form 10-K.

The purchase price for SCI included contingent consideration that was based on achieving certain revenue and operational targets in the year following the acquisition, which had a fair value of $4.8 million at the time of acquisition. During the nine months ended September 30, 2021, the maximum amount of contingent consideration of $10.0 million was finalized and paid. Changes to the fair value of the contingent consideration were recorded as a component of other expenses.

With respect to the RevWorks acquisition, the Company paid the first deferred payment of $12.5 million in the third quarter of 2021. There is one remaining deferred payment of $12.5 million which is payable on the second anniversary of the closing date (August 2022), and is included in other accrued expenses on the Consolidated Balance Sheets as of September 30, 2021. At the time of the acquisition, the Company recorded a present value liability for the contractual deferred payments of $24.3 million.

The two deferred payments related to the RevWorks acquisition are contractual obligations of the Company; however, they are potentially fully refundable to the Company if certain RevWorks customer revenue targets defined in the purchase agreement for the first two years following the acquisition are not achieved. The Company has recorded an asset for the fair value of the contingently returnable consideration of $22.3 million, including $10.5 million in prepaid expenses and other current assets and $11.8 million in other assets on the Consolidated Balance Sheets as of September 30, 2021.

Pro Forma Results

The following table summarizes, on a pro forma basis, the combined results of the Company as though the VisitPay Acquisition had occurred as of January 1, 2020 and the SCI and RevWorks acquisitions had occurred as of January 1, 2019. These pro forma results are not necessarily indicative of the actual consolidated results had the acquisitions occurred as of those dates or of the future consolidated operating results for any period. Pro forma results are (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net services revenue	$	379.7	$	310.6	$	1,083.0	$	998.1
Net income (loss)	$	18.7	$	(4.0)	$	56.9	$	34.8

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

4. 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.

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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.

Even though the full effects of the 2019 Novel Coronavirus (“COVID-19”) on the Company’s customers continue to be uncertain, at this time, the Company does not believe there is incremental collection risk for customer receivables as a result of COVID-19.

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning balance	$	2.3	$	5.2	$	3.8	$	2.8
Cumulative effect of ASC 326 adoption	—		—		—		1.1
Provision (recoveries)	0.4		(0.8)		0.6		0.5
Amounts reclassified to held for sale (1)	—		(0.6)		—		(0.6)
Write-offs	(0.3)		(0.1)		(2.0)		(0.1)
Ending balance	$	2.4	$	3.7	$	2.4	$	3.7

(1) Relates to the disposition of the Company’s emergency medical services (“EMS”) business in October 2020. The EMS business was classified as held for sale as of September 30, 2020.

5. Property, Equipment and Software

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

	September 30, 2021		December 31, 2020
Buildings and land	$	3.8	$	4.6
Computer and other equipment	59.0		55.0
Leasehold improvements	23.3		23.2
Software	177.1		135.7
Office furniture	6.5		6.4
Property, equipment and software, gross	269.7		224.9
Less accumulated depreciation and amortization	(170.4)		(131.2)
Property, equipment and software, net	$	99.3	$	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):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of services	$	13.6	$	11.8	$	38.8	$	34.1
Selling, general and administrative	0.6		1.0		2.2		3.2
Total depreciation and amortization	$	14.2	$	12.8	$	41.0	$	37.3

6. Leases

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating lease cost	$	4.0	$	4.3	$	12.1	$	14.1
Sublease income	(0.6)		(0.6)		(1.7)		(1.7)
Total lease cost	$	3.4	$	3.7	$	10.4	$	12.4

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

	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	18.6	$	15.2
Right-of-use assets obtained in exchange for operating lease obligations:	13.6		3.4

The Company presents all non-cash transactions related to adjustments to the lease liability or right-of-use 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.

Maturities of lease liabilities as of September 30, 2021 are as follows (in millions):

	Operating Leases
Remainder of 2021	$	4.5
2022	16.7
2023	14.6
2024	14.6
2025	14.7
2026	11.4
Thereafter	25.0
Total	101.5
Less:
Imputed interest	25.7
Present value of lease liabilities	$	75.8

.

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7. Intangible Assets

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at September 30, 2021 and December 31, 2020 (in millions):

	September 30, 2021						December 31, 2020
	Gross Carrying Value		Accumulated Amortization		Net Book Value		Gross Carrying Value		Accumulated Amortization		Net Book Value
Customer relationships	$	100.0	$	(19.2)	$	80.8	$	97.7	$	(14.7)	$	83.0
Technology	215.5		(24.8)		190.7		101.7		(13.6)		88.1
Tradename	1.0		(0.1)		0.9		—		—		—
Total intangible assets	$	316.5	$	(44.1)	$	272.4	$	199.4	$	(28.3)	$	171.1

Intangible asset amortization expense was $7.1 million and $15.8 million for the three and nine months ended September 30, 2021, and $4.5 million and $13.6 million for the three and nine months ended September 30, 2020.

Estimated annual amortization expense related to intangible assets with definite lives as of September 30, 2021 is as follows (in millions):

Remainder of 2021	$	7.1
2022	28.4
2023	28.4
2024	26.5
2025	24.9
2026	24.9
Thereafter	132.2
Total	$	272.4

8. Goodwill

Unless otherwise required, goodwill is tested for impairment annually in the fourth quarter. Changes in the carrying amount of goodwill for the nine months ended September 30, 2021 were (in millions):

	Goodwill
Balance as of December 31, 2020	$	375.3
Acquisitions	176.4
Measurement period adjustments	0.2
Balance as of September 30, 2021	$	551.9

9. Revenue Recognition

Revenue is measured based on consideration specified in a contract with a customer, and presented net of any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contact term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.

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Disaggregation of Revenue

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net operating fees	$	308.5	$	253.7	$	879.8	$	822.4
Incentive fees	41.5		25.1		108.0		43.2
Other (1)	29.7		28.4		87.9		76.8
Net services revenue	$	379.7	$	307.2	$	1,075.7	$	942.4

(1) Other revenue primarily consists of physician advisory services (“PAS”), practice management services, and revenue related to Entri modular services.

Contract Balances

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

	September 30, 2021	December 31, 2020
Contract liabilities	29.4	28.6

Contract liabilities are included in other customer liabilities and contains related party amounts, including $2.3 million and $5.6 million of current customer liabilities and $15.9 million and $16.3 million of non-current customer liabilities as of September 30, 2021 and December 31, 2020, respectively. There were no contract assets as of September 30, 2021 and December 31, 2020.

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 $99.7 million and $88.0 million during the nine months ended September 30, 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 nine months ended September 30, 2021 and 2020, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.

Transaction Price Allocated to the Remaining Performance Obligation

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.

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	Net operating fees		Incentive fees		Other
Remainder of 2021	$	35.8	$	21.4	$	0.7
2022	104.6		25.0		0.8
2023	81.3		—		—
2024	57.7		—		—
2025	34.3		—		—
2026	34.3		—		—
Thereafter	162.3		—		—
Total	$	510.3	$	46.4	$	1.5

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 forecasted 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 PAS contracts that do not represent material rights to the customer.

10. Debt

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

	September 30, 2021		December 31, 2020
Senior Revolver (1)	$	100.0	$	70.0
Senior Term Loan	700.0		484.6
Unamortized discount and issuance costs	(3.4)		(2.6)
Total debt	796.6		552.0
Less: Current maturities	(17.5)		(32.3)
Total long-term debt	$	779.1	$	519.7

(1) As of September 30, 2021, the Company had $100.0 million in borrowings, $0.5 million letters of credit outstanding, and $349.5 million of availability under the Senior Revolver.

Amended and Restated Senior Secured Credit Facilities

On July 1, 2021, the Company and certain of its subsidiaries entered into an amended and restated senior credit agreement (the “A&R Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the Company’s amended and restated senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $700.0 million senior secured term loan facility (the “Senior Term Loan”) and a $450.0 million senior secured revolving credit facility (the “Senior Revolver”).

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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 0.25% and 1.25% dependent on the Company's net leverage ratio (provided that the Eurodollar rate applicable to the Senior Term Loan shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Senior Term Loan shall not be less than 0.00% per annum), plus between 1.25% and 2.25%, dependent on the Company's net leverage ratio. The interest rate as of September 30, 2021 was 2.33%. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.20% and 0.40% of the average daily unutilized commitments thereunder dependent on the Company's net leverage ratio.

The A&R Credit Agreement contains a number of financial and non-financial covenants. The Company was in compliance with all of the covenants in the A&R Credit Agreement as of September 30, 2021. The obligations under the A&R Credit Agreement are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by the Company and a security interest in substantially all of the Company’s tangible and intangible assets and the tangible and intangible assets of certain domestic subsidiaries.

In connection with the entry into the A&R Credit Agreement, the Company used all of the proceeds, in addition to cash on hand, to refinance, in full, all existing debt under the Company’s 2019 credit agreement and to fund the VisitPay Acquisition. Debt amounts presented as of December 31, 2020 were incurred under the 2019 credit agreement.

Debt Maturities

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

	Scheduled Maturities
Remainder of 2021	$	4.4
2022	17.5
2023	21.9
2024	35.0
2025	35.0
2026	686.2
Total	$	800.0

For further details on the Company's 2019 credit agreement, refer to Note 13 of the Company's 2020 Form 10-K.

11. Derivative Financial Instruments

The Company utilizes cash flow hedges to manage its currency risk arising from its global delivery resources. As of September 30, 2021, the Company has recorded $0.7 million of unrealized gains in accumulated other comprehensive income related to foreign currency hedges. The Company estimates that $0.7 million of gains reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. Amounts reclassified into cost of services were a net gain of $0.4 million and $1.0 million during the three and nine month periods ended September 30, 2021, respectively, and a net loss of $0.1 million and $0.8 million during the three and nine month periods ended September 30, 2020, respectively. As of September 30, 2021, the Company’s currency forward contracts have maturities extending no later than March 31, 2022, and had total notional amounts of $40.2 million.

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The Company also utilizes cash flow hedges to reduce variability in interest cash flows from its outstanding debt. As of September 30, 2021, the Company has recorded $1.2 million of unrealized losses in accumulated other comprehensive income related to interest rate swaps. The Company estimates that $1.2 million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. Amounts reclassified into interest expense were a net loss of $0.3 million and $1.1 million during the three and nine month periods ended September 30, 2021, respectively, and a net loss of $0.5 million and $0.8 million during the three and nine month periods ended September 30, 2020, respectively. As of September 30, 2021, the Company's interest rate swaps extend no later than August 31, 2022, and had total notional amounts of $100.0 million.

The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.

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 September 30, 2021 and 2020 was $25.5 million and $6.8 million, respectively, with related tax benefits of approximately $5.1 million and $1.2 million, respectively. The share-based compensation expense relating to the Company’s stock options, RSUs, and PBRSUs for the nine months ended September 30, 2021 and 2020 was $62.0 million and $15.9 million, respectively, with related tax benefits of approximately $12.2 million and $2.6 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 $0.6 million and $1.2 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended September 30, 2021 and 2020, respectively. The Company recognized $7.2 million and $2.9 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the nine months ended September 30, 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Share-Based Compensation Expense Allocation Details:
Cost of services	$	15.8	$	2.7	$	38.8	$	6.1
Selling, general and administrative	9.7		4.1		23.2		9.8
Total share-based compensation expense	$	25.5	$	6.8	$	62.0	$	15.9

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

The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the calculation of share-based compensation expense for the nine months ended September 30, 2021 and 2020:

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	Nine Months Ended September 30,
	2021	2020
Expected dividend yield	—%	—%
Risk-free interest rate	0.4% to 1.0%	0.4% to 1.7%
Expected volatility	43%	43%
Expected term (in years)	5.5	5.5

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 nine months ended September 30, 2021 is shown below:

	Options	Weighted- Average Exercise Price
Outstanding at December 31, 2020	6,220,971	$	3.68
Granted	4,775	23.60
Exercised	(1,108,632)	4.90
Canceled/forfeited	(10,888)	6.02
Expired	(7,000)	27.08
Outstanding at September 30, 2021	5,099,226	$	3.40
Outstanding, vested and exercisable at September 30, 2021	5,069,288	$	3.35
Outstanding, vested and exercisable at December 31, 2020	5,230,690	$	3.73

Restricted stock units and performance-based restricted stock units    

A summary of the RSU and PBRSU activity during the nine months ended September 30, 2021 is shown below:

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					Weighted- Average Grant Date Fair Value
	RSUs		PBRSUs		RSU		PBRSU
Outstanding and unvested at December 31, 2020	2,108,447		2,917,071		$	9.87	$	11.35
Granted	2,179,823		1,071,431		24.41		25.36
Performance factor adjustment	—		101,937		—		9.81
Vested	(600,905)		(305,811)		8.74		9.81
Forfeited	(325,118)		(225,019)		15.36		13.22
Outstanding and unvested at September 30, 2021	3,362,247		3,559,609		$	18.97	$	15.53
Shares surrendered for taxes for the nine months ended September 30, 2021	186,588		—
Cost of shares surrendered for taxes for the nine months ended September 30, 2021 (in millions)	$	4.8	$	—
Shares surrendered for taxes for the nine months ended September 30, 2020	133,673		—
Cost of shares surrendered for taxes for the nine months ended September 30, 2020 (in millions)	$	1.2	$	—

PBRSUs vest upon satisfaction of both time-based and performance-based conditions. Depending on the award, performance condition targets may include cumulative adjusted EBITDA, end-to-end RCM agreement growth, scored revenue growth, 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 6,693,815.

13. Other Expenses

Other expenses are incurred in connection with acquisition and integration costs, various exit activities, transformation initiatives, and organizational changes to improve our business alignment and cost structure. The following table summarizes the other expenses (income) recognized for the three and nine months ended September 30, 2021 and 2020.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Severance and related employee benefits	$	0.3	$	2.5	$	2.1	$	5.5
Strategic initiatives (1)	4.8		6.5		13.2		18.2
Transitioned employees restructuring expense (2)	3.2		—		3.2		(0.2)
Facility-exit charges (3)	—		2.5		2.9		7.4
Other (4)	3.1		4.2		12.8		11.5
Total other expenses	$	11.4	$	15.7	$	34.2	$	42.4

(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 and nine months ended September 30, 2021, $0.0 million and $0.5 million of contingent consideration changes were included, respectively.

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(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.

(3) As part of evaluating its footprint, the Company has exited certain leased facilities. Costs include asset impairment charges and other costs related to exited leased facilities.

(4) For the three and nine months ended September 30, 2021, other includes $2.7 million and $7.1 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. For the three and nine months ended September 30, 2020, includes $2.6 million and $7.9 million, respectively, of expenses 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 and nine months ended September 30, 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 expense, and discrete items.

The Company recognized income tax expense for the three months ended September 30, 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 income tax expense for the nine months ended September 30, 2020 was higher than the amount derived by applying the federal statutory tax rate of 21% primarily due to GILTI 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 VisitPay included $0.9 million of net deferred tax assets attributed to NOL carryforwards.

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15. 8.00% Series A Convertible Preferred Stock

On January 15, 2021, TCP-ASC, a limited liability limited partnership jointly owned by Ascension Health Alliance, the parent entity of Ascension, and investment funds affiliated with TowerBrook, a related party, converted all of its 294,266 shares (the “Preferred Shares”) of preferred stock into 117,706,400 shares of common stock of the Company into which the Preferred 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 table summarizes the preferred stock activity for the nine months ended September 30, 2021 (in millions, except per share data):

	Preferred Stock
	Shares Issued and Outstanding	Carrying Value
Balance at December 31, 2020	288,497	$	251.5
Dividends paid/accrued dividends	5,769	—
Conversion of preferred stock	(294,266)	(251.5)
Balance at September 30, 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 nine months ended September 30, 2021 and the three and nine months ended September 30, 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 and shares issuable upon vesting of RSUs and PBRSUs.

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

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Basic EPS:
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Less dividends on preferred shares (1)	—		(5.6)		(592.3)		(16.6)
Less income allocated to preferred shareholders	—		—		—		(10.9)
Net income (loss) available/(allocated) to common shareholders - basic	$	17.0	$	(0.4)	$	(531.1)	$	11.0
Diluted EPS:
Net income	$	17.0	$	5.2	$	61.2	$	38.5
Less dividends on preferred shares (1)	—		(5.6)		(592.3)		(16.6)
Less income allocated to preferred shareholders	—		—		—		(8.7)
Net income (loss) available/(allocated) to common shareholders - diluted	$	17.0	$	(0.4)	$	(531.1)	$	13.2
Basic weighted-average common shares	278,655,269		115,976,377		262,209,929		115,164,631
Add: Effect of dilutive equity awards	7,281,436		—		—		12,293,285
Add: Effect of dilutive warrants	34,680,381		—		—		43,720,170
Diluted weighted average common shares	320,617,086		115,976,377		262,209,929		171,178,086
Net income (loss) per common share (basic)	$	0.06	$	—	$	(2.03)	$	0.10
Net income (loss) per common share (diluted)	$	0.05	$	—	$	(2.03)	$	0.08

(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, for more information.

Because of their anti-dilutive effect, 890,717 and 15,155,288 common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2021, respectively. Additionally, for the nine months ended September 30, 2021, the Investor's and IHC Health Services, Inc.’s (“Intermountain”) exercisable warrants to acquire up to 40.5 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 and nine months ended September 30, 2020, 21,350,755 and 95,210 common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. Additionally, for the three months ended September 30, 2020, the Investor's and Intermountain’s exercisable warrants to acquire up to 60.0 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.

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.

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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 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 two complaints in the Delaware Court of Chancery regarding the Company’s January 15, 2021 recapitalization transaction with TCP-ASC. Both complaints allege that TCP-ASC, Ascension, and TowerBrook controlled the Company and breached their fiduciary duties by using that alleged control to force the Company to overpay in redeeming TCP-ASC’s preferred stock as part of the recapitalization transaction. The plaintiffs seek an unspecified amount of damages against TCP-ASC, Ascension, and TowerBrook. The plaintiffs also allege that the Company and TCP-ASC entered into amendments to the Investor Rights Agreement that the plaintiffs contend 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 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, as well as corresponding accounts receivable and customer liabilities are presented in the Consolidated Statements of Operations and Comprehensive Income and the Consolidated Balance Sheets. Since Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's global business services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.

On May 27, 2021 and May 28, 2021, the Company issued 16,750,000 shares of common stock to TCP-ASC upon the cashless exercise of a warrant to purchase 19,535,145 shares of common stock at an exercise price of $3.50 per share based upon a market value of $24.54 to $24.64 per share as determined under the terms of the warrant.

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):

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	September 30, 2021		December 31, 2020
Prepaid expenses and other current assets	$	3.2	$	4.5
Other assets	22.8		19.6
Total deferred contract costs	$	26.0	$	24.1

The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three and nine months ended September 30, 2021, total amortization was $0.9 million and $3.1 million, respectively, and there were no associated impairment losses. For the three and nine months ended September 30, 2020, total amortization was $1.3 million and $3.6 million, respectively and there were no 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 one 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 September 30, 2021 and 2020, net services revenue from healthcare organizations affiliated with Ascension accounted for 60% and 63% of the Company's total net services revenue, respectively. For the nine months ended September 30, 2021 and 2020, net services revenue from Ascension accounted for 61% and 65%, 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 September 30, 2021 and 2020, Intermountain accounted for 14% and 12% of the Company's total net services revenue, respectively. For the nine months ended September 30, 2021 and 2020, Intermountain accounted for 14% of the Company’s total net services revenue.

As of September 30, 2021 and December 31, 2020, the Company had a concentration of credit risk with Ascension accounting for 20% and 25% of accounts receivable, respectively.

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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.

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, our ability to retain existing customers or acquire new customers; our ability to manage our operations effectively; competition within the market; 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 (including as a result of supply chain interruptions, labor shortages, and inflationary pressures); the impact of the pandemic on our financial results, including possible lost revenue and increased expenses; as well as those discussed 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 nine months ended September 30, 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.

VisitPay Acquisition

On July 1, 2021, we completed the acquisition of iVinci Partners, LLC d/b/a VisitPay (“VisitPay”) pursuant to an Agreement and Plan of Merger dated as of May 3, 2021 (the “VisitPay Acquisition”). The purchase price was $305.4 million. We funded the VisitPay Acquisition and related fees and expenses with the proceeds from additional borrowings and cash on hand. VisitPay is a provider of digital payment solutions. VisitPay’s proprietary analytics are designed to deliver consistent and compliant financing options that meet the unique needs of each patient and their family. VisitPay’s payment platform is purpose-built for healthcare with proven integrations across all major acute and ambulatory billing systems. The combination of R1 and VisitPay will enable us to increase price transparency, provide flexible and personalized payment options, and enhance big data analytics.

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Coronavirus Pandemic

On January 31, 2020, the Secretary of Health and Human Services (“HHS”) announced a determination that a Public Health Emergency existed in the U.S. as a result of the 2019 Novel Coronavirus (hereafter, “COVID-19”). Since that time, HHS has repeatedly renewed its determination of the Public Health Emergency, most recently as of July 19, 2021. Further, in March 2020, the World Health Organization characterized COVID-19 as a pandemic and that characterization remains in place. In turn, and based on continuously updated international, federal, state, and local guidelines, certain restrictions on businesses and travel remain in place, varying by locality, and cannot be reasonably predicted.

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 that have continued throughout 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. Among our specific actions to support our workforce, we have maintained our work-from-home model for more than 15,000 global employees, offered zero out-of-pocket cost for COVID-19 testing and telemedicine visits, offered mental wellness programming, and continued the R1 Cares vaccination support program for our India workforce. In addition, we have continued to deliver customer support that includes: deploying our PX mobile patient registration technology which reduces risk of patient and R1 staff exposure and preserves the use of critical personal protective equipment for clinical staff; reporting to allow for detailed COVID-19 order tracking, scheduling, and follow-up; 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; and providing operational best practices for implementation and revenue cycle management of telehealth services. With oversight and support from our COVID-19 taskforce, we have actively managed and coordinated with many of our customer partners through the Delta variant at a local, national, and global level. As we continue to track COVID-19 risks, including ongoing monitoring and assessment of current state, we may adjust the above efforts as needed based on our continual assessment.

Patient volumes have continued to recover over the last 12 months and are largely in line with pre-COVID levels. Given the continued 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, including as a result of macro-economic impacts to the global supply chain, labor shortages, and inflationary pressures. However, we continue to assess its impact on our business and continue to actively manage our response. For further details on the potential impact of COVID-19 on our business, refer to “Risk Factors,” in Part 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:

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	Three Months Ended September 30,				2021 vs. 2020 Change				Nine Months Ended September 30,				2021 vs. 2020 Change
	2021		2020		Amount		%		2021		2020		Amount		%
	(In millions except percentages)
Consolidated Statement of Operations Data:
Net operating fees	$	308.5	$	253.7	$	54.8	22	%	$	879.8	$	822.4	$	57.4	7	%
Incentive fees	41.5		25.1		16.4		65	%	108.0		43.2		64.8		150	%
Other	29.7		28.4		1.3		5	%	87.9		76.8		11.1		14	%
Net services revenue	379.7		307.2		72.5		24	%	1,075.7		942.4		133.3		14	%
Operating expenses:
Cost of services	304.0		255.2		48.8		19	%	858.2		757.4		100.8		13	%
Selling, general and administrative	33.2		25.7		7.5		29	%	87.8		74.5		13.3		18	%
Other expenses	11.4		15.7		(4.3)		(27)	%	34.2		42.4		(8.2)		(19)	%
Total operating expenses	348.6		296.6		52.0		18	%	980.2		874.3		105.9		12	%
Income from operations	31.1		10.6		20.5		193	%	95.5		68.1		27.4		40	%
Net interest expense	6.5		4.4		2.1		48	%	13.8		13.0		0.8		6	%
Net income before income tax provision	24.6		6.2		18.4		297	%	81.7		55.1		26.6		48	%
Income tax provision	7.6		1.0		6.6		n.m.		20.5		16.6		3.9		23	%
Net income	$	17.0	$	5.2	$	11.8	227	%	$	61.2	$	38.5	$	22.7	59	%
Adjusted EBITDA (1)	$	89.3	$	50.4	$	38.9	77	%	$	248.5	$	177.3	$	71.2	40	%

n.m.- not meaningful

(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.

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.

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;

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•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 closely comparable GAAP measure, for each of the periods indicated:

	Three Months Ended September 30,				2021 vs. 2020 Change				Nine Months Ended September 30,				2021 vs. 2020 Change
	2021		2020		Amount		%		2021		2020		Amount		%
	(In millions except percentages)
Net income	$	17.0	$	5.2	$	11.8	227	%	$	61.2	$	38.5	$	22.7	59	%
Net interest expense	6.5		4.4		2.1		48	%	13.8		13.0		0.8		6	%
Income tax provision	7.6		1.0		6.6		n.m.		20.5		16.6		3.9		23	%
Depreciation and amortization expense	21.3		17.3		4.0		23	%	56.8		50.9		5.9		12	%
Share-based compensation expense (1)	25.5		6.8		18.7		275	%	62.0		15.9		46.1		290	%
Other expenses (2)	11.4		15.7		(4.3)		(27)	%	34.2		42.4		(8.2)		(19)	%
Adjusted EBITDA (non-GAAP)	$	89.3	$	50.4	$	38.9	77	%	$	248.5	$	177.3	$	71.2	40	%

n.m. - not meaningful

(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 are incurred in connection with acquisition and integration costs, various exit activities, transformation initiatives, and organizational changes to improve our business alignment and cost structure. See Note 13, Other, to the consolidated financial statements included in this Quarterly Report on Form 10-Q for the detail of the amounts included in other expenses.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net Services Revenue

Net services revenue increased by $72.5 million, or 24%, from $307.2 million for the three months ended September 30, 2020, to $379.7 million for the three months ended September 30, 2021. The increase was driven by improvement in net operating and incentive fees aided by a recovery in patient volumes, new customers onboarded in the last twelve months, and the RevWorks and VisitPay acquisitions.

Cost of Services

Cost of services increased by $48.8 million, or 19%, from $255.2 million for the three months ended September 30, 2020, to $304.0 million for the three months ended September 30, 2021. The increase in cost of services was primarily driven by the onboarding of new customers, the RevWorks and VisitPay acquisitions, technology investments to support scaling, and an increase in share-based compensation expense.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $7.5 million, or 29%, from $25.7 million for the three months ended September 30, 2020, to $33.2 million for the three months ended September 30, 2021. The increase was primarily driven by share-based compensation expense and the VisitPay acquisition.

Other Expenses

Other expenses decreased by $4.3 million, or 27%, from $15.7 million for the three months ended September 30, 2020, to $11.4 million for the three months ended September 30, 2021. The decrease was primarily due to lower costs associated with strategic initiatives and reduced facility-exit charges.

Income Tax Provision

Income tax expense increased by $6.6 million from $1.0 million for the three months ended September 30, 2020, to $7.6 million for the three months ended September 30, 2021, primarily due to higher pre-tax income and higher non-deductible expenses. Our effective tax rate (including discrete items) was approximately 31% and 16% for the three months ended September 30, 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.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net Services Revenue

Net services revenue increased by $133.3 million, or 14%, from $942.4 million for the nine months ended September 30, 2020, to $1,075.7 million for the nine months ended September 30, 2021. The increase was driven by improvement in net operating and incentive fees aided by a recovery in patient volumes, new customers onboarded in the last twelve months, and the RevWorks and VisitPay acquisitions, partially offset by the emergency medical services divestiture.

Cost of Services

Cost of services increased by $100.8 million, or 13%, from $757.4 million for the nine months ended September 30, 2020, to $858.2 million for the nine months ended September 30, 2021. The increase in cost of services was primarily driven by the onboarding of new customers, the RevWorks and VisitPay acquisitions, technology investments to support scaling, and an increase in share-based compensation expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $13.3 million, or 18%, from $74.5 million for the nine months ended September 30, 2020, to $87.8 million for the nine months ended September 30, 2021. The increase was primarily driven by share-based compensation expense and the VisitPay acquisition.

Other Expenses

Other expenses decreased by $8.2 million, or 19%, from $42.4 million for the nine months ended September 30, 2020, to $34.2 million for the nine months ended September 30, 2021. The decrease was primarily due to lower costs associated with strategic initiatives and reduced facility-exit charges.

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Income Tax Provision

Income tax expense increased by $3.9 million from $16.6 million for the nine months ended September 30, 2020, to $20.5 million for the nine months ended September 30, 2021, primarily due to higher pre-tax income and higher non-deductible expenses, which was offset by higher discrete benefits. Our effective tax rate (including discrete items) was approximately 25% and 30% for the nine months ended September 30, 2021 and 2020, respectively. The interim tax accounting guidance requires the use of the estimated 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

No new accounting pronouncements issued or effective during the fiscal year had, or are expected to have, a material impact on our consolidated financial statements as described in Note 1, Business Description and Basis of Presentation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include our cash and cash equivalents, cash flows from operations, and borrowings under our amended and restated senior credit agreement (the “A&R Credit Agreement”). As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $158.7 million and $173.8 million, respectively.

As of September 30, 2021, our A&R Credit Agreement included a senior secured revolving credit facility (the “Senior Revolver”) with a total capacity of $450.0 million. As of September 30, 2021, we had $100.0 million in borrowings, $0.5 million letters of credit outstanding, and $349.5 million of availability under the Senior Revolver. See Note 10, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on our A&R Credit Agreement. As of September 30, 2021, we had total available liquidity of $508.2 million reflecting our cash and cash equivalents as well as remaining availability under our Senior Revolver.

Our liquidity is influenced by many factors, including timing of revenue and corresponding cash collections, the amount and timing of investments in strategic initiatives, our investments in property, equipment and software, and the use of cash to pay debt principal, interest, and 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.

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We expect cash and cash equivalents, cash flows from operations, and our availability under the Senior Revolver in the A&R Credit Agreement 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. The extent to which COVID-19 will ultimately impact our results continues to 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:

	Nine Months Ended September 30,
	2021		2020
	(In millions)
Net cash provided by operating activities	$	218.8	$	50.5
Net cash used in investing activities	$	(325.5)	$	(236.3)
Net cash provided by financing activities	$	91.7	$	201.3

Cash Flows from Operating Activities

Cash provided by operating activities increased by $168.3 million from $50.5 million for the nine months ended September 30, 2020, to $218.8 million for the nine months ended September 30, 2021. Cash provided by operating activities increased due to increased net income of $22.7 million, inclusive of an increase in share-based compensation expense of $46.1 million which is a non-cash item, and a smaller cash bonus pay-out related to the 2020 bonus plan compared to the 2019 bonus plan.

Cash Used in Investing Activities

Cash used in investing activities primarily includes our investments in property, equipment and software and our inorganic growth initiatives. Outflows for significant acquisitions are typically offset by cash inflows from financing activities related to obtaining new debt.

Cash used in investing activities increased by $89.2 million from $236.3 million for the nine months ended September 30, 2020, to $325.5 million for the nine months ended September 30, 2021. The increase in cash usage is primarily due to the difference in purchase price between the VisitPay Acquisition in 2021 compared to the SCI acquisition in 2020.

Cash Flows from Financing Activities

Cash flows from financing activities primarily relate to borrowings and repayments of debt. 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 provided by financing activities decreased by $109.6 million from $201.3 million for the nine months ended September 30, 2020 to $91.7 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, cash was provided through new borrowings made conjunction with our acquisition of SCI. For the nine months ended September 30, 2021, cash was provided through new borrowings made in conjunction with our acquisition of VisitPay, however it was offset by the payment made in conjunction with the conversion of the preferred stock, as well as our purchase of treasury stock.

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Debt and Financing Arrangements

On July 1, 2021, we entered into the A&R Credit Agreement with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the our Senior Secured Credit Facilities, consisting of a $700.0 million senior secured term loan facility (the “Senior Term Loan”) and a $450.0 million Senior Revolver. As of September 30, 2021, we had $700.0 million outstanding on our Senior Term Loan and had drawn $100.0 million on our Senior Revolver, with $349.5 million of availability remaining.

The A&R Credit Agreement contains a number of financial and non-financial covenants. We are required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of the covenants in the A&R Credit Agreement as of September 30, 2021.

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

CONTRACTUAL OBLIGATIONS

The following table presents a summary of our contractual obligations as of September 30, 2021 (in millions):

	2021		2022		2023		2024		2025		2026		Thereafter		Total
Operating leases (1)	$	4.5	$	16.7	$	14.6	$	14.6	$	14.7	$	11.4	$	25.0	$	101.5
Purchase obligations (2)	$	16.4	$	43.1	$	41.9	$	27.8	$	24.7	$	11.4	$	—	$	165.3
Debt obligations	$	4.4	$	17.5	$	21.9	$	35.0	$	35.0	$	686.2	$	—	$	800.0
Interest on debt	$	5.2	$	19.6	$	18.3	$	17.6	$	16.7	$	8.0	$	—	$	85.4
Total	$	30.5	$	96.9	$	96.7	$	95.0	$	91.1	$	717.0	$	25.0	$	1,152.2

(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 September 30, 2021, we have hedged $100.0 million of our $800.0 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the A&R Credit Agreement. The remaining $700.0 million outstanding is subject to an average variable rate of 2.33% as of September 30, 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 $7.0 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 each of the nine months ended September 30, 2021 and 2020, 9% of our expenses were denominated in foreign currencies. As of September 30, 2021 and 2020, we had net assets of $65.6 million and $53.6 million in foreign entities, respectively. Before the impact of our foreign currency hedging activities discussed below, the reduction in earnings from a 10% change in foreign currency spot rates would be $9.6 million and $9.1 million at September 30, 2021 and 2020, respectively.

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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 September 30, 2021, it was anticipated that approximately $0.5 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 $3.7 million as of September 30, 2021.

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 September 30, 2021. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 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 third 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:

Period	Number of Shares  Purchased (1)	Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
July 1, 2021 through July 31, 2021	15,157	$	21.77		—	$	49.0
August 1, 2021 through August 31, 2021	1,398	$	21.14		—	$	49.0
September 1, 2021 through September 30, 2021	1,538,077	$	20.59	(3)	1,538,077	$	17.3

(1)	Amounts include stock repurchased under our repurchase program (see discussion in footnote 2 below) and the surrender of shares of our common stock related to employees’ tax withholding upon vesting of restricted stock of 15,157, 1,398, and 0 shares for the months ended July 31, 2021, August 31, 2021, and September 30, 2021, respectively. 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 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”). Between October 1, 2021 and October 27, 2021, the Company finalized authorized repurchases under the 2013 Repurchase Program. On October 22, 2021, the Board adopted a new repurchase program and authorized the repurchase of up to $200.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the “2021 Repurchase Program”). The timing and amount of any shares repurchased under the 2021 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2021 Repurchase Program may be suspended or discontinued at any time.
(3)	Average price paid per share of common stock repurchased under the 2013 Repurchase Program is the execution price, including commissions paid to brokers.

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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
10.1	Amended and Restated Credit Agreement, dated as of July 1, 2021, by and among R1 RCM Inc., the other parties party thereto as Credit Parties (as defined therein), Bank of America, N.A., as administrative agent and the financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-34746) filed on August 3, 2021)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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: November 2, 2021

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