6. Equity Method Investment in Change Healthcare LLC

Exchange of Equity Method Investments

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

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

Additional Ownership Interest

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

Equity Method Investment in the Joint Venture

Prior to the Merger, the Company accounted for its investment in the Joint Venture using the equity method of accounting. During the period from April 1, 2019 to March 10, 2020, and the years ended March 31, 2019 and 2018, the Company recorded a proportionate share of the loss from this investment of $380,713, $70,487, and $58,680, respectively, which included transaction and integration expenses incurred by the Joint Venture and basis adjustments, including amortization expenses, associated with equity method intangible assets. The amount is in Loss from Equity Method Investment in the Joint Venture in the consolidated statements of operations.

Following completion of the Merger, the Company consolidates the Joint Venture and no longer accounts for its ownership interest as an equity method investment.

Summarized financial information of the Joint Venture is as follows:


		Period of		Year Ended		Year Ended
		April 1, 2019 to		March 31,		March 31,
Statement of Operations Data:		March 10, 2020		2019		2018
Net revenue	$	3,092,875	$	3,281,729	$	3,298,843
Cost of operations (exclusive of depreciation and amortization)	$	1,263,244	$	1,354,655	$	1,407,893
Customer postage	$	215,448	$	238,618	$	274,397
Net income (loss)	$	123,771	$	176,670	$	192,442

		March 10,		March 31,
Balance Sheet Data (at period end):		2020		2019
Current assets	$	1,339,908	$	980,463
Long-term assets	$	5,187,220	$	5,223,675
Current liabilities	$	1,112,875	$	889,783
Long-term liabilities	$	5,185,304	$	6,219,141

Other Investments

The Company invested in a unit purchase contract and a debt instrument of the Joint Venture on terms that substantially mirror the economics of the TEUs (see Note 13, Tangible Equity Units). Prior to the Merger, the Company accounted for these mirror arrangements as investments in debt and equity securities. After the Merger, the Company’s investments in the TEUs of the Joint Venture are eliminated in consolidation.

The following table presents a reconciliation of the activity related to the other investments:


	Year Ended
	March 31, 2020
Balance at beginning of period	$	—
Acquisition of forward purchase contracts		232,928
Acquisition of available-for-sale debt securities		45,946
Receipt of payments on debt securities		(7,332)
Change in fair value of forward purchase contracts		14,836
Change in fair value of debt securities		1,489
TEU conversions of forward purchase contracts		(31,000)
Settlement of investment in forward purchase contracts (1)		(216,764)
Elimination of investment in debt securities (2)		(40,103)
Balance at end of period	$	—

⁽¹⁾

Amount is included as part of the Merger purchase price. See Note 2, Business Combinations for additional information.

⁽²⁾

Amount is eliminated as part of consolidation.