18. Incentive Compensation Plans

Prior to the Merger, we 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, we recognized stock compensation expense within Loss from Equity Method Investment in the Joint Venture on the consolidated statements of operations for our 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.

Upon closing of the UHG Transaction, existing awards will generally convert to equivalent UHG awards with consistent vesting provisions. Certain awards will vest upon closing of the UHG Transaction per the terms of the UHG Agreement.

Legacy CHC Equity Plan

In connection with the creation of the Joint Venture, we 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.

Replacement Awards

In connection with the creation of the Joint Venture, we were obligated to either assume obligations related to existing equity awards or issue substantially equivalent equity awards. We elected to issue replacement awards with 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 creation of the Joint Venture, 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.

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:

Tier I Time-Vesting Awards became immediately vested in connection with the creation of the Joint Venture, 54.4% of which were liquidated for cash at the creation. The remaining 45.6% 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 creation of the Joint Venture.

Tier II Time-Vesting Awards immediately vested when the Joint Venture was formed but because the original exercise price of these awards was greater than the fair value of the stock at the time of the creation of the Joint Venture, 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 reduced by the fair value of one share of eRx Network stock.

2.0x Exit-Vesting Awards immediately vested when the Joint Venture was formed 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. 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 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 creation of the Joint Venture.

The following table summarizes Replacement Time-Vesting Option activity for the year ended March 31, 2021:



	Replacement			Weighted Average		Aggregate
	Time-Vesting	Weighted Average		Remaining		Intrinsic
	Options	Exercise Price		Contractual Term		Value
Outstanding at April 1, 2020	3,458,744	$	11.95		3.3	$	4,083
Exercised	(778,441)	$	10.64		—	$	4,906
Forfeited	(196,221)	$	18.67		—	$	673
Outstanding at March 31, 2021	2,484,082	$	11.83		2.4	$	25,517
Exercisable at March 31, 2021	2,484,082	$	11.83		2.4	$	25,517

Unvested Awards: Certain awards granted by Legacy CHC contained conditions that were not satisfied at the time of the creation of the Joint Venture. These awards generally vest subject to the employee’s continued employment through the date when Blackstone has sold at least 25% of its shares of Legacy CHC (i.e., a liquidity event) and achieved specified rates of return that vary by award. When the Joint Venture was formed, these unvested equity awards were replaced with unvested restricted stock (“Replacement Exit-Vesting Restricted Stock”) with an aggregate intrinsic value and vesting conditions which were identical to the original awards. We estimated the fair value of the Replacement Exit-Vesting Restricted Stock using the Monte Carlo Simulation pricing model. 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.

As of March 31, 2021, unrecognized expense related to the Replacement Exit-Vesting Restricted Stock was $0. The following table summarizes Replacement Exit-Vesting Restricted Stock activity for the year ended March 31, 2021:


		Weighted
	Replacement	Average
	Exit-Vesting	Grant Date
	Restricted Stock	Fair Value
Unvested at April 1, 2020	1,005,718	$	12.87
Canceled	(83,466)	$	12.63
Unvested at March 31, 2021	922,252	$	12.89

Time-Vesting and Exit Vesting Options

Time-vesting options were granted with an exercise price equal to the fair value of the common stock on the date of grant and generally vest in equal 25% installments on the first through fourth anniversaries of the designated vesting start date, subject to the awardholders’ continued employment through the vesting date. We estimated the fair value of the time-vesting options using the Black-Scholes option pricing model. As of March 31, 2021, unrecognized expense related to the time-vesting options was $4,295 which is expected to be recognized over a weighted average period of 0.7 years.

Exit-vesting options were granted with an exercise price equal to the fair value of the common stock on the date of grant and vest, subject to the award holder’s continued employment through the vesting date, on the earlier 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 of the date that (i) affiliates of Blackstone sell more than 25% of the equity interests of the Joint Venture held by it on 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. We estimated the fair value of the exit-vesting options using the Monte Carlo Simulation option pricing model. We will not record compensation expense for these awards until the exit-vesting provisions occur. As of March 31, 2021, unrecognized expense related to the exit-vesting options was $28,008.

The following table summarizes outstanding time-vesting and exit-vesting option activity for the year ended March 31, 2021:


							Weighted Average
			Weighted Average				Remaining		Aggregate
	Awards		Exercise Price				Contractual Term		Intrinsic Value
	Time-	Exit-	Time-		Exit-		Time-	Exit-	Time-		Exit-
	Vesting	Vesting	Vesting		Vesting		Vesting	Vesting	Vesting		Vesting
	Options	Options	Options		Options		Options	Options	Options		Options
Outstanding at April 1, 2020	5,732,247	5,254,104	$	18.99	$	18.99	7.6	7.6	$	—	$	—
Exercised	(410,632)	—	$	18.99	$	—	—	—	$	1,754	$	—
Forfeited	(257,467)	(503,477)	$	18.99	$	18.99	—	—	$	906	$	1,567
Outstanding at March 31, 2021	5,064,148	4,750,627	$	18.99	$	18.99	6.6	6.6	$	15,764	$	14,774
Exercisable at March 31, 2021	4,426,522	—	$	18.99	$	—	6.6	—	$	13,781	$	—

The following table summarizes unvested time-vesting and exit-vesting option activity for the year ended March 31, 2021:


	Time-Vesting Options			Exit-Vesting Options
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Unvested at April 1, 2020	1,988,559	$	9.78	5,254,104	$	5.90
Granted	—		—	—		—
Cancelled	(118,428)	$	9.78	(503,477)	$	5.90
Vested	(1,232,505)	$	9.78	—		—
Unvested at March 31, 2021	637,626	$	9.78	4,750,627	$	5.90

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 year ended March 31, 2019. There were no new options granted during the years ended March 31, 2021 and 2020.


							Replacement
	Time-Vesting			Exit-Vesting			Exit-Vesting
	Options			Options			Restricted Stock
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

Long-term Incentive Plan Awards

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

In connection with the Omnibus Incentive Plan, during the years ended March 31, 2021 and 2020, we granted to our employees and directors one or a combination of time-vesting restricted stock units, performance stock units, cash settled restricted stock units and time-vesting deferred stock units, under vesting terms that generally vary from one to four years from the date of grant. The fair value of each of these awards was determined on a per share basis based on our closing stock price on 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. Certain RSUs were granted with accelerated vesting terms, in which 50% of the RSUs will vest on the first anniversary of the vesting commencement date and 25% of the RSUs will vest on each of the second and third anniversaries of the vesting commencement date. Upon vesting, RSUs are exchanged for shares of 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 Company’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 Company’s compound annual adjusted EBITDA growth rate over a three-year period in comparison to a target percentage. The awards granted during the year ended March 31, 2020 that are earned upon satisfaction of the performance conditions vest 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 awards granted during the year ended March 31, 2021 that are earned upon satisfaction of the performance conditions vest on the third anniversary of the vesting commencement date of the award. We recognize compensation expense for 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 one or three years, depending on the terms of the specific award. Upon vesting, we are required to pay cash in settlement of such CSRSUs based on their fair value at the vesting date. As such, these awards are classified as liabilities and are recorded as Accrued liabilities on our consolidated balance sheets. During the years ended March 31, 2021 and 2020, we made cash payments of $2,273 and $0 to settle Cash Settled Restricted Stock Units upon vesting.

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 following the participant’s separation from service.

The following table summarizes the Long-term Incentive Plans activity for the years ended March 31, 2021:


	Restricted			Deferred			Cash Settled			Performance
	Stock Units			Stock Units			Restricted Stock Units			Stock Units
		Weighted			Weighted			Weighted			Weighted
		Average			Average			Average			Average
		Grant Date			Grant Date			Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value		Shares	Fair Value		Shares	Fair Value
Unvested at April 1, 2020	4,468,089	$	13.53	45,704	$	15.06	477,561	$	14.35	965,689	$	14.34
Granted	11,579,143	$	17.68	86,916	$	11.93	172,524	$	11.93	1,177,152	$	14.26
Cancelled	(795,515)	$	12.63	—		—	(41,757)	$	13.19	(84,311)	$	13.75
Vested(1)	(1,131,199)	$	13.63	(45,704)	$	15.06	(173,816)	$	14.39	—		—
Unvested at March 31, 2021	14,120,518	$	16.98	86,916	$	11.93	434,512	$	13.49	2,058,530	$	14.32

⁽¹⁾

During the year ended March 31, 2021, 45,704 Deferred Stock Units vested. However, these holders of these awards do not receive shares of common stock in exchange for these DSUs until they leave their position as described above.

eRx Awards

Upon completion of the eRx acquisition all outstanding eRx equity awards were canceled. Holders of eRx stock options and vested eRx stock appreciation rights were able to elect to receive consideration in the form of a cash payment or vested stock appreciation rights of the Company (“eRx vested SARs”). There were 478,180 of eRx vested SARs granted in conjunction with the eRx acquisition. These awards will remain outstanding until the individual holders exercise their award but are fully vested. As such, these eRx vested SARs are excluded from the unvested awards table below. For individuals with unvested eRx equity awards, we elected to issue replacement awards with vesting and exercisability terms generally identical to the existing eRx awards which were replaced. These replacement awards were granted under the Omnibus Incentive Plan and consisted of unvested restricted share units (“eRx RSUs”) and unvested stock appreciation rights (“eRx unvested SARs”) with terms identical to the original eRx awards. The awards vest subject to the employee’s continued employment through the date when Blackstone has sold at least 25% of the maximum number of shares held by it (i.e., a liquidity event) and achieved specified rates of return that vary by award. Upon vesting and upon exercise of the outstanding eRx vested SARs, we are required to pay cash in settlement of such eRx awards based on their fair value at the vesting date. As such, these awards are classified as liabilities and are recorded as Accrued liabilities on our consolidated balance sheets.

The following table summarizes the eRx Awards activity for the years ended March 31, 2021:


	eRx Restricted			eRx Unvested Stock
	Stock Units			Appreciation Rights
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Unvested at April 1, 2020	—		—	—		—
Granted	262,071	$	11.04	11,439	$	11.04
Cancelled	(18,238)	$	11.04	—	$	11.04
Vested	—		—	—		—
Unvested at March 31, 2021	243,833	$	11.04	11,439	$	11.04

At March 31, 2021, aggregate unrecognized compensation expense related to awards granted under the Omnibus Incentive Plan was $239,038 which is expected to be recognized over a weighted average period of 1.8 years.

Equity Compensation Expense

The following is a summary of equity compensation expense. Prior to the Merger, no net equity compensation expense was recognized in the Change Healthcare Inc. financial statements due to a requirement of the Change Healthcare LLC agreement. As such, equity compensation for the years ended March 31, 2020 and 2019 was immaterial:


	Year-Ended		Year-Ended		Year-Ended
	March 31, 2021		March 31, 2020		March 31, 2019
Equity compensation expense	$	59,016	$	1,701	$	—
Deferred tax benefit recognized	$	7,336	$	166	$	—
Actual tax benefit recognized	$	6,067	$	152	$	—