SEC Form 10-Q filed by Change Healthcare Inc.

Change Healthcare Inc. (the “Company”, “our” or “we”) is a healthcare technology company, focused on accelerating the transformation of the healthcare system through the power of our healthcare platform. We provide data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. Our platform and comprehensive suite of software, analytics, enterprise imaging solutions, technology-enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.

We are a Delaware corporation originally formed on June 22, 2016, to initially hold an equity investment in Change Healthcare LLC (the “Joint Venture”), a joint venture between the Company and McKesson Corporation (“McKesson”). Effective July 1, 2019, we completed our initial public offering. The proceeds from the common stock offering were subsequently contributed to the Joint Venture in exchange for additional units of the Joint Venture, which together with the Company’s existing holdings represented an approximate 41% interest in the Joint Venture.

On March 10, 2020, McKesson completed a split-off of its interest in the Joint Venture through an exchange offer of its common stock for shares of PF2 SpinCo, Inc, a Delaware corporation and wholly owned subsidiary of McKesson (“SpinCo”). Immediately following consummation of the exchange offer, SpinCo was merged with and into Change Healthcare Inc. (the “Merger”). Subsequent to the Merger, we own 100% of Change Healthcare LLC, and as a result, consolidate the financial statements of Change Healthcare LLC.

UnitedHealth Group Incorporated

On January 5, 2021, we entered into an Agreement and Plan of Merger (the “UHG Agreement”) with UnitedHealth Group Incorporated (“UnitedHealth Group”) and UnitedHealth Group’s wholly owned subsidiary, Cambridge Merger Sub Inc. Pursuant to the UHG Agreement, UnitedHealth Group has agreed to acquire all of the outstanding shares of the Company’s common stock for $25.75 per share in cash (the “UHG Transaction”). On April 13, 2021, our stockholders approved a proposal to adopt the UHG Agreement, thereby satisfying one of the closing conditions contained in the UHG Agreement. The consummation of the transaction remains subject to the satisfaction or, to the extent permitted by law, waiver of other customary closing conditions.

The UHG Agreement contains representations, warranties, covenants, closing conditions and termination rights customary for transactions of this type. Until the earlier of the termination of the UHG Agreement and the consummation of the UHG Transaction, we have agreed to operate our business in the ordinary course and have agreed to certain other operating covenants, as set forth in the UHG Agreement. If UnitedHealth Group terminates the UHG Agreement after we materially breach the agreement, and we fail to cure such breach, and then within 12 months of such termination we enter into an alternative transaction to sell the Company, or if our Board recommends to our stockholders that they approve an alternative transaction to sell the Company, and such alternative transaction is subsequently consummated, then we may be required to pay UnitedHealth Group a termination fee of $300 million at the time such alternative transaction is consummated.

On February 24, 2022, the U.S. Department of Justice (“DOJ’) and certain other parties commenced litigation to block the UHG Transaction, and the Company continues to support UnitedHealth Group in working toward closing the UHG Transaction. Trial for that action commenced on August 1, 2022.

On April 4, 2022, the parties to the UHG Agreement entered into a waiver (the “Waiver”) pursuant to which, among other things, the Company and UnitedHealth Group each waived its right to terminate the UHG Agreement due to a failure of the UHG Transaction to have been consummated by the Outside Date (as defined in the UHG Agreement) until the earlier of (i) 5:00 p.m. (New York time) on the tenth business day following a final order (whether or not appealable) issued by the U.S. District Court for the District of Columbia (the “Trial Court”) with respect to the complaint filed by the DOJ and certain other parties regarding the UHG Transaction that permanently prohibits the consummation of the UHG Transaction and (ii) 11:59 p.m. (New York time) on December 31, 2022 (the “Waiver Period”); provided, that if (A) the Trial Court issues a final order that permits the consummation of the UHG Transaction (whether or not subject to conditions), (B) any plaintiff appeals such order and (C) the ability to consummate the UHG Transaction is enjoined or otherwise prohibited by a governmental entity pending such appeal, then the Waiver Period may be extended by either UnitedHealth Group or the Company (in each case, acting in its sole discretion) to 5:00 p.m. (New York time) on March 31, 2023, by providing written notice to the other party prior to 11:59 p.m. (New York time) on December 31, 2022.

The Waiver provides that, if the Company or UnitedHealth Group terminates the UHG Agreement pursuant to Sections 9.2(a) or 9.2(c) of the UHG Agreement at a time when any of the conditions to the closing set forth in Sections 8.1(b), 8.1(c) (in connection with a legal restraint of a governmental antitrust entity) or 8.2(c) of the UHG Agreement has not been satisfied or, to the extent permitted by applicable law, waived, UnitedHealth Group will pay to the Company an amount equal to $650 million.

The Waiver also provides that the Company may declare and pay a one-time special dividend of up to $2.00 in cash per each issued and outstanding share of common stock of the Company, with a record date and payment date to be determined in the sole

discretion of our Board (or a committee thereof). We expect to pay the dividend at or about the time of closing of the UHG Transaction.

On April 22, 2022, UnitedHealth Group, as seller, entered into an equity purchase agreement and related agreements relating to the sale of the Company’s claims editing business (“ClaimsXten”) to an affiliate of investment funds of TPG Capital for a base purchase price in cash equal to $2.2 billion (subject to customary adjustments). Consummation of the transaction is contingent on a number of conditions, including the consummation of the UHG Transaction.

COVID-19 Considerations

On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the U.S., federal, state and local governments imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures led to weakened conditions in many sectors of the economy, including a decline in healthcare transaction volumes that are integral to our business.

In calendar 2021 and the first half of 2022, the global economy has with certain setbacks, begun reopening and wider distribution of vaccines will likely continue to encourage greater economic activity. Nevertheless, we are unable to predict how widely the vaccines will be utilized, whether they will be effective in preventing the spread of COVID-19 (including its variant strains), and the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by COVID-19. Accordingly, the full extent of the impact of COVID-19 on the global economy generally, and on the Company’s business, in particular, remains uncertain. However, we are not presently aware of events or circumstances arising from COVID-19 that would require us to revise the carrying value of our assets or liabilities, nor do we expect the impact of COVID-19 to cause us to be unable to comply with our debt covenants or meet our contractual obligations.

Change in Reportable Segments

Historically, the Company had three reportable segments: Software and Analytics, Network Solutions and Technology-Enabled Services. During the first quarter of fiscal year 2023, the Company reassessed its segment reporting structure due to changes in the way we manage our business and view operating results. As a result, the Company has established its Enterprise Imaging business, which was previously included in its Software and Analytics segment, as a standalone fourth reportable segment. Prior period segment information contained herein has been adjusted to reflect the Company’s new operating and reporting structure. For more information, see Note 14, Segment Reporting.

Basis of Presentation

Revenue

Equity Compensation

Allowance for Credit Losses

Recently Adopted Accounting Pronouncements

We generate most of our solutions revenue using technology solutions (generally Software as a Service (“SaaS”)) to provide services to our customers that automate and simplify business and administrative functions for payers, providers, pharmacies, and channel partners and through the licensing of software, software systems (consisting of software, hardware and maintenance support) and content. We recognize revenue when the customer obtains control of the good or service through satisfying a performance obligation by transferring the promised good or service to the customer.

Contract Balances

As of June 30, 2022, we expect 93% of the deferred revenue balance to be recognized in one year or less. Approximately $139,431 of the balance at the beginning of fiscal year 2023 was recognized during the three months ended June 30, 2022. Approximately $159,230 of the balance at the beginning of fiscal year 2022 was recognized during the three months ended June 30, 2021.

Remaining Performance Obligations

The aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed contracts includes deferred revenue and other revenue yet to be recognized from non-cancellable contracts. As of June 30, 2022, remaining performance obligations totaled $1,392,784, of which 52% is expected to be recognized over the next 12 months, and the remaining 48% thereafter.

In this balance, we do not include the value of unsatisfied performance obligations related to those contracts for which we recognize revenue at the amount for which we have the right to invoice for services performed. Additionally, this balance does not include revenue related to performance obligations that are part of a contract with an original expected duration of one year or less. Lastly, this balance does not include variable consideration allocated to the individual goods or services in a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Examples include variable fees associated with transaction processing and contingent fee services.

Disaggregated Revenue

We disaggregate the revenue from contracts with customers by operating segment as we believe doing so best depicts how the nature, amount, timing and uncertainty of revenues are affected by economic factors. See Note 14, Segment Reporting, for total revenue disaggregated by operating segment for the three months ended June 30, 2022.

In addition to disaggregating revenue by operating segment, we disaggregate between revenue that is recognized over time and revenue that is recognized at a point in time. For each of the three months ended June 30, 2022 and 2021, 94% of revenue was recognized over time and 6% of revenue was recognized at a point in time.

During the first quarter of fiscal year 2023, we made certain changes in the way we manage our business and view operating results. Management now views the Company’s operating results based on four reportable segments: Software and Analytics, Network Solutions, Enterprise Imaging and Technology-Enabled Services. The operating results of Enterprise Imaging were previously included in the operating results of Software and Analytics. See Note 14, Segment Reporting, for further information.

The following table presents the changes in the carrying amount of goodwill:

Long-term debt consists of the following:

Our long-term indebtedness includes a senior secured term loan facility (the “Term Loan Facility”) and a revolving credit facility (the “Revolving Facility”; together with the Term Loan Facility, the “Senior Credit Facilities”). The Senior Credit Facilities provide us with the right at any time to request additional term loan tranches and/or term loan increases, increases in the revolving commitments and/or additional revolving credit facilities. Our long-term indebtedness also includes 5.75% senior notes due March 1, 2025 (the “Senior Notes”) with interest payable semi-annually on March 1 and September 1 of each year.

As of June 30, 2022, we were in compliance with all of the applicable covenants under the Senior Credit Facilities and the Senior Notes.

In the first quarter of fiscal year 2023, we repaid $100,000 on our Senior Notes and recognized a loss on extinguishment of $390 in our consolidated statement of operations.

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage exposures to a wide variety of business and operational risks through management of core business activities. We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instrument contracts to manage differences in the amount, timing and duration of known or expected cash receipts and known or expected cash payments principally related to existing borrowings.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate cap agreements as part of our interest rate risk management strategy. Payments and receipts related to interest rate cap agreements are included in cash flows from financing activities in the consolidated statements of cash flows.

During fiscal year 2022, two of our interest rate cap agreements expired on December 31, 2021. These agreements had a combined notional amount of $1,500,000. At June 30, 2022, each of our outstanding interest rate cap agreements were designated as cash flow hedges of interest rate risk and were determined to be highly effective. Our outstanding instruments expire on March 31, 2024.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $18,424 will be reclassified as a decrease to interest expense within one year.

The fair value of derivative instruments is as follows: