15. Incentive Compensation Plans

Prior to the Merger, the Company provided equity awards to employees of the Joint Venture which were subject to the accounting framework for awards granted to non-employees. Under this framework, the Company recognized stock compensation expense within the Loss from Equity Method Investment in the Joint Venture caption on the consolidated statements of operations for its proportionate amount of stock compensation expense included in the operating results of the Joint Venture as well as the amount funded for the benefit of the McKesson member. However, due to requirements of the LLC Agreement, as described in Note 22, Related Party Transactions, the Company recognized a dividend receivable equal to the cumulative amount of stock compensation expense recognized by the Joint Venture for any outstanding equity awards with an offset to the Loss from Equity Method Investment in Joint Venture. As a result, no net equity compensation expense of the Joint Venture was recognized in the financial statements of the Company.

Legacy CHC Equity Plan

In connection with the Transactions, the Company assumed and amended the Legacy CHC Equity Plan. Pursuant to the amended Legacy CHC Equity Plan, 37.9 million shares of the Company’s common stock have been reserved for the issuance of equity awards to employees, directors and consultants of the Joint Venture and its affiliates.

The Company granted equity-based awards of its common stock to certain employees, officers and directors of the Joint Venture under terms of awards that are described below. Grants under the Legacy CHC Equity Plan consist of one or a combination of time-vested and/or performance-based awards. In most circumstances, the shares issued upon exercise of the equity awards are subject to certain call rights by the Company in the event of termination of service of an award holder and put rights by the award holder or his/her beneficiary in the event of death or disability.

The Company expects to repurchase shares of common stock held by former Joint Venture employees no earlier than six months following the issuance of such shares.

Replacement Awards

In connection with the Transactions, the Company was obligated to either assume obligations under Legacy CHC’s prior equity award plans or to issue substantially equivalent equity awards. The Company elected to issue replacement awards with vesting and exercisability terms generally identical to the awards which were replaced. Because the stock of eRx Network and the 2017 Tax Receivable Agreement were distributed to Legacy CHC stockholders immediately prior to the Transactions, certain participants in the Legacy CHC Equity Plan also received equity awards in eRx Network and the right to receive a cash payment related to a proportionate value of the 2017 Tax Receivable Agreement in connection with the Transactions.

These replacement awards granted under the Legacy CHC Equity Plan consisted of one, or a combination of, time-vested awards and/or performance-based awards.

Vested Awards: Vested awards consist of the following:

(i)

Tier I Time-Vesting Awards became immediately vested in connection with the Transactions, 54.4% of which were liquidated for cash upon the closing of the Transactions. The remaining 45.6% of such options were exchanged for vested options of the Company with exercise prices and expiration terms that correspond with those of the original grant to Legacy CHC Equity Plan participants (“Replacement Time-Vesting Options”). These Legacy CHC Equity Plan participants also received vested options in eRx Network with exercise prices equal to 25% of the fair value of the eRx Network stock and a cash payment related to the proportionate value of the 2017 Tax Receivable Agreement at the time of the Transactions.

(ii)

Tier II Time-Vesting Awards became immediately vested in connection with the Transactions but because the original exercise price of these awards was greater than the fair value of the stock at the time of the Transactions, none of the awards were liquidated and they were replaced with vested Replacement Time-Vesting Options with an exercise price equal to the original exercise price as reduced by the fair value of one share of eRx Network stock.

(iii)

2.0x Exit-Vesting Awards became immediately vested in connection with the Transactions as a result of meeting the specified performance and market conditions outlined in the original award terms. As with the Tier I Time-Vesting Awards, 54.4% were liquidated for cash upon the closing of the Transactions. The remaining 45.6% of such options were exchanged for vested Replacement Time-Vesting Options with exercise prices and expiration terms that correspond with those of the original grant to the Legacy CHC Equity Plan participants. The Legacy CHC Equity Plan participants also received vested options in eRx Network with exercise prices equal to 25% of the fair value of the eRx Network stock and a cash payment related to the proportionate value of the 2017 Tax Receivable Agreement at the time of the Transactions.

Unvested Awards: Certain awards granted by Legacy CHC contained conditions that were not satisfied at the time of the Transactions. These awards generally consisted of awards that vest subject to the employee’s continued employment through the date when Blackstone has sold at least 25% of the maximum number of Legacy CHC’s shares held by it (i.e. a liquidity event) and achieved specified rates of return that vary by award. In connection with the Transactions, these unvested equity awards were replaced with unvested restricted stock of the Company (“Replacement Exit-Vesting Restricted Stock”) with an aggregate intrinsic value and vesting conditions which were identical to the original Legacy CHC awards. Legacy CHC Equity Plan participants also received unvested restricted stock of eRx Network and a right, contingent upon vesting of the awards, to receive a future cash payment related to the proportionate value of the 2017 Tax Receivable Agreement at the time of the Transactions.

Restricted Stock Units: Vesting of Legacy CHC restricted share units was not affected by the Transactions. 54.4% of the vested portion of such restricted share units were liquidated in connection with the Transactions and the remainder of the vested and unvested restricted share units were replaced with vested and unvested Company restricted share units (“Replacement Restricted Share Units”) with terms identical to the original awards. Legacy CHC Equity Plan participants also received vested and unvested restricted share units of eRx Network and a right to receive a future cash payment upon vesting related to the proportionate value of the 2017 Tax Receivable Agreement at the time of the Transactions.

The total fair value of shares vested during the years ended March 31, 2020, 2019 and 2018 was $0, $0 and $1,440, respectively.

The following table summarizes Replacement Time-Vesting Option activity for the year ended March 31, 2020:



	Replacement				Weighted Average		Aggregate
	Time-Vesting	Weighted Average			Remaining		Intrinsic
	Options	Exercise Price		Contractual Term		Value
Outstanding at April 1, 2019	4,529,291	$	11.76		4.4	$	39,896
Exercised	(708,969)		15.66		—		5,077
Forfeited	(361,578)		—		—		74
Outstanding at March 31, 2020	3,458,744	$	11.95		3.3	$	4,083
Exercisable at March 31, 2020	3,458,744	$	11.95		3.3	$	4,083

The following table summarizes Replacement Exit-Vesting Restricted Stock activity for the year ended March 31, 2020:



		Replacement Exit-Vesting
		Restricted Stock
Unvested at April 1, 2019		1,261,599
Canceled		(255,881)
Unvested at March 31, 2020		1,005,718

Time-Vesting Options

Time-vesting options were granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant and generally vest in equal 25% installments on the first through fourth anniversary of the designated vesting start date, subject to the award holders continued employment through such vesting date. The Company estimates the fair value of the time-vesting options using the Black-Scholes option pricing model. As of March 31, 2020, unrecognized expense related to the time-vesting options was $3,611. This expense is expected to be recognized over a weighted average period of 1.3 years.

Exit-Vesting Options

Exit-vesting options were granted with an exercise price equal to the fair value of the Company’s common stock on the date of grant and vest, subject to the award holder’s continued employment through the vesting date, on the earlier to occur of (i) the date that affiliates of Blackstone sell 25% of the equity interests of the Joint Venture held by it on March 1, 2017 (the “Transaction Date”) at a specified weighted average price per share and McKesson distributes more than 50% of the equity interests of the Joint Venture held by it on the Transaction Date or (2) McKesson and affiliates of Blackstone collectively sell more than 25% of the aggregate equity interests held by McKesson and Blackstone on the Transaction Date at a specified weighted average price per share.

In May 2018, the terms of the Exit-Vesting Options and Replacement Exit-Vesting Restricted Stock were modified to permit, in addition to existing vesting provisions, vesting to occur in three equal installments commencing on the earlier to occur of the date that (i) affiliates of Blackstone sell more than 25% of the equity interests of the Joint Venture held by it on March 1, 2017 (the “Transaction Date”) and McKesson distributes more than 50% of the equity interests of the Joint Venture held by it on the Transaction Date or (ii) McKesson and affiliates of Blackstone collectively sell more than 25% of the aggregate equity interests held by McKesson and Blackstone on the Transaction Date. No effect on compensation expense was recognized in connection with this modification as the vesting of the affected awards remained not probable following the modification.

The following table summarized time-vesting and exit-vesting option activity for the year ended March 31, 2020:



							Weighted Average
			Weighted Average				Remaining		Aggregate
	Awards		Exercise Price				Contractual Term		Intrinsic Value
	Time-Vesting	Exit-Vesting	Time-Vesting		Exit-Vesting		Time-Vesting	Exit-Vesting	Time-Vesting		Exit-Vesting
	Options	Options	Options		Options		Options	Options	Options		Options
Outstanding at April 1, 2019	6,988,403	6,504,544	$	18.99	$	18.99	8.0	8.0	$	11,058	$	10,292
Forfeited	(1,256,156)	(1,250,440)		18.99		18.99	—	—		—		—
Outstanding at March 31, 2020	5,732,247	5,254,104		18.99		18.99	7.6	7.6		—		—
Exercisable at March 31, 2020	3,743,688	—	$	18.99	$	—	7.5	—	$	—	$	—

Valuation Assumptions

The following table summarizes the weighted average fair value of awards using the Black-Scholes and Monte Carlo Simulation option pricing models, as appropriate, and the weighted average assumptions used to develop the fair value estimates under each of the valuation models for the years ended March 31, 2020 and 2019.


								Replacement
		Time-Vesting			Exit-Vesting			Exit-Vesting
		Options			Options			Restricted Stock
Year Ended March 31, 2020:
Weighted average fair value	$	2.10		$	0.08		$	2.15
Expected dividend yield		—	%		—	%		—	%
Expected volatility		52.0	%		50.9	%		76.9	%
Risk-free interest rate		0.3	%		0.3	%		0.9	%
Expected term (years)		3.8			4.1			0.9

Year Ended March 31, 2019:
Weighted average fair value	$	9.78		$	5.90		$	12.80
Expected dividend yield		—	%		—	%		—	%
Expected volatility		52.5	%		52.9	%		62.2	%
Risk-free interest rate		2.2	%		2.2	%		2.3	%
Expected term (years)		4.5			5.1			1.9

Expected dividend yield – Prior to the Merger, the Company was subject to limitations on the payment of dividends under the LLC Agreement. An increase in the dividend yield will decrease compensation expense.

Expected volatility – Expected volatility is a measure of the amount by which the price of the equity instrument has fluctuated or is expected to fluctuate. The expected volatility was based on the levered median historical volatility of a group of guideline companies. An increase in the expected volatility will increase compensation expense.

Risk-free interest rate – This is the U.S. Treasury rate as of the measurement date having a term approximating the expected life of the award. An increase in the risk-free interest rate will increase compensation expense.

Expected term – This is the period of time over which the awards are expected to remain outstanding. The Company estimates the expected term as the mid-point between the actual or expected vesting date and the contractual term. An increase in the expected term will increase compensation expense.

Omnibus Incentive Plan

Effective as of the Company’s initial public offering, the Company adopted the Change Healthcare Inc. 2019 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) pursuant to which 25.0 million shares of the Company’s common stock have been reserved for issuance to employees, directors and consultants of the Company, the Joint Venture and its affiliates.

In connection with the Omnibus Incentive Plan, Change Healthcare Inc., during the year ended March 31, 2020, granted to the Company’s and the Joint Venture’s employees and directors one or a combination of time-vesting restricted stock units (RSUs), time-vesting deferred stock units, performance stock units, and cash settled restricted stock units under vesting terms that generally vary from one to four years from the date of grant. Each of these instruments are described below.

Restricted Stock Units (“RSUs”) –The RSUs are subject to either a graded vesting schedule over four years, or a one or four year cliff vesting schedule, depending on the terms of the specific award. Upon vesting, the RSUs are exchanged for shares of the Company’s common stock.

Performance Stock Units (“PSUs”) – The PSUs consist of two tranches, one for which the quantity of awards expected to vest varies based on the Joint Venture’s compound annual revenue growth rate over a three year period in comparison to a target percentage and one for which the quantity of awards expected to vest varies based on the Joint Venture’s compound annual Adjusted EBITDA growth rate over a three year period in comparison to a target percentage. The awards earned upon satisfaction of the performance conditions become vested on the fourth anniversary of the vesting commencement date of the award (i.e., continued service is required beyond the satisfaction of the performance condition prior to vesting). The Company recognizes compensation expense for the PSUs based on the number of awards that are considered probable to vest. Recognition of expense is based on the probability of achievement of performance targets and is periodically reevaluated.

Cash Settled Restricted Stock Units (“CSRSUs”) – The CSRSUs are expected to vest ratably over three years. Upon vesting, however, the Company is required to pay cash in settlement of such CSRSUs based on their fair value at the date such CSRSUs vest. Prior to the Merger, the Company was reimbursed by the Joint Venture for any cash settlements.

Deferred Stock Units (“DSUs”) – The DSUs vest 100% upon the one-year anniversary of the date of grant. Unlike the RSUs, the DSUs are exchanged for shares of the Company’s common stock only following the participant’s separation from service.

The following table summarizes Omnibus Incentive Plan activity for the year ended March 31, 2020:


			Cash Settled
	Restricted	Deferred	Restricted	Performance
	Stock Units	Stock Units	Stock Units	Stock Units
Outstanding at April 1, 2019	—	—	—	—
Granted	4,846,058	45,704	597,006	1,079,621
Cancelled	(377,969)	—	(119,445)	(113,932)
Outstanding at March 31, 2020	4,468,089	45,704	477,561	965,689

During the year ended March 31, 2020, the Company recognized compensation expense of $1,701. At March 31, 2020, aggregate unrecognized compensation expense related to awards granted under the Omnibus Incentive Plan was $89,182.