Change Healthcare Inc. - Quarter Report: 2019 December (Form 10-Q)

 

 

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 December 31, 2019

 

☐	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 001-38961

 

 

Change Healthcare Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware		82-2152098
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
3055 Lebanon Pike, Suite 1000 Nashville, TN		37214
(Address of Principal Executive Offices)		(Zip Code)

(615) 932-3000

(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 $.001 per share		CHNG		The Nasdaq Stock Market LLC
6.00% Tangible Equity Units		CHNGU		The Nasdaq Stock Market LLC

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  ☒    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  ☒    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. (Check one):    

 

Large accelerated filer		☐		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  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding as of February 7, 2020
Common Stock, $0.001 par value		125,423,022

 

 

 

Change Healthcare Inc.

Table of Contents

 

Part I. Financial Information
Item 1. Financial Statements			3
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
Part II. Other Information
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Mine Safety Disclosures			45
Item 5. Other Information			45
Item 6. Exhibits			46
Signatures
Exhibit Index

 

2

Change Healthcare Inc.

Condensed Statements of Operations

(unaudited and amounts in thousands, except share and per share amounts)

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Revenue		$	—			$	—			$	—			$	—
Operating expenses
General and administrative			1,115				126				2,504				188
Accretion Expense			(1,191	)			—				47,172				—
Total operating expenses			(76	)			126				49,676				188
Operating income (loss)			76				(126	)			(49,676	)			(188	)
Non-operating (income) expense
Loss from Equity Method Investment in the Joint Venture			8,764				17,468				104,497				65,805
(Gain) Loss on Sale of Interests in the Joint Venture			—				—				—				(661	)
Management fee income			(771	)			(126	)			(1,648	)			(188	)
Interest expense			602				—				1,246				—
Interest income			(601	)			—				(1,245	)			—
Amortization of debt discount and issuance costs			191				—				403				—
Unrealized (gain) loss on forward purchase contract			(74,084	)			—				(71,649	)			—
Total non-operating (income) expense			(65,899	)			17,342				31,604				64,956
Income (loss) before income tax provision (benefit)			65,975				(17,468	)			(81,280	)			(65,144	)
Income tax provision (benefit)			15,240				(5,080	)			(564	)			(16,664	)
Net income (loss)		$	50,735			$	(12,388	)		$	(80,716	)		$	(48,480	)
Net income (loss) per share:
Basic		$	0.35			$	(0.16	)		$	(0.67	)		$	(0.64	)
Diluted		$	0.35			$	(0.16	)		$	(0.67	)		$	(0.64	)
Weighted average shares (see Note 5):
Basic			143,392,295				75,465,310				120,657,859				75,525,645
Diluted			146,201,860				75,465,310				120,657,859				75,525,645

See accompanying notes to condensed financial statements.

 

3

Change Healthcare Inc.

Condensed Statements of Comprehensive Income (Loss)

(unaudited and amounts in thousands)

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Net income (loss)		$	50,735			$	(12,388	)		$	(80,716	)		$	(48,480	)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale debt securities of the Joint Venture, net of taxes			134				—				1,307				—
Changes in fair value of interest rate swap of the Joint Venture, net of taxes			1,313				(6,543	)			(5,428	)			(3,793	)
Foreign currency translation adjustment of the Joint Venture			1,728				(2,418	)			3,537				(4,445	)
Other comprehensive income (loss)			3,175				(8,961	)			(584	)			(8,238	)
Total comprehensive income (loss)		$	53,910			$	(21,349	)		$	(81,300	)		$	(56,718	)

See accompanying notes to condensed financial statements.

 

4

Change Healthcare Inc.

Condensed Balance Sheets

(unaudited and amounts in thousands, except share and per share amounts)

 

		December 31,				March 31,
		2019				2019
Assets
Current Assets:
Cash		$	3,409			$	3,409
Prepaid expenses			1,544				—
Due from the Joint Venture			3,429				373
Due from McKesson			213				—
Investment in Joint Venture tangible equity units, current			15,362				—
Income taxes receivable			1,359				1,781
Total current assets			25,316				5,563
Dividend receivable			68,344				81,264
Investment in the Joint Venture			1,796,512				1,211,996
Investment in Joint Venture tangible equity units			329,581				—
Total assets		$	2,219,753			$	1,298,823
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	259			$	176
Due to the Joint Venture			9,806				6,167
Current portion of long-term debt			15,362				—
Total current liabilities			25,427				6,343
Long-term debt			23,656				—
Due to McKesson			47,172				—
Deferred income tax liabilities			172,055				159,993
Other liabilities			1,312				—
Commitments and contingencies (see Note 4)
Stockholders’ Equity:
Common Stock (par value, $.001), 9,000,000,000 and 252,800,000 shares authorized and 125,027,648 and 75,474,654 shares issued and outstanding at December 31, 2019 and March 31, 2019, respectively			124				75
Class X common stock (par value, $.001), 1 and 1 share authorized and no shares issued and outstanding at December 31, 2019 and March 31, 2019, respectively			—				—
Preferred stock (par value, $.001), 900,000,000 and 0 shares authorized and no shares issued and outstanding at December 31, 2019 and March 31, 2019, respectively			—				—
Additional paid-in capital			2,016,608				1,153,509
Accumulated other comprehensive income (loss)			(3,418	)			(3,256	)
Retained earnings (deficit)			(63,183	)			(17,841	)
Total stockholders’ equity			1,950,131				1,132,487
Total liabilities and stockholders’ equity		$	2,219,753			$	1,298,823

See accompanying notes to condensed financial statements.

 

5

Change Healthcare Inc.

Condensed Statements of Stockholders’ Equity

(unaudited and amounts in thousands, except share and per share amounts)

 

																		Accumulated
										Additional				Retained				Other				Total
		Common Stock								Paid-in				Earnings				Comprehensive				Stockholders’
		Shares				Amount				Capital				(Deficit)				Income (Loss)				Equity
Balance at March 31, 2018			75,749,118			$	75			$	1,139,300			$	34,661			$	2,536			$	1,176,572
Cumulative effect of accounting change of the Joint Venture-ASU 2017-12			—				—								(490	)			490				—
Equity compensation expense			—				—				5,300				—				—				5,300
Repurchase of Change Healthcare Inc. common stock			(251,789	)			—				(4,782	)			—				—				(4,782	)
Issuance of Change Healthcare Inc. common stock upon exercise of equity awards			4,045				—				—				—				—				—
Net income (loss)			—				—				—				(17,501	)			—				(17,501	)
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				(2,593	)			(2,593	)
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				782				782
Balance at June 30, 2018			75,501,374			$	75			$	1,139,818			$	16,670			$	1,215			$	1,157,778
Equity compensation expense			—				—				2,969				—				—				2,969
Repurchase of Change Healthcare Inc. common stock			(90,629	)			—				(1,720	)			—				—				(1,720	)
Issuance of Change Healthcare Inc. common stock upon exercise of equity awards			35,139				—				—				—				—				—
Net income (loss)			—				—				—				(18,591	)			—				(18,591	)
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				566				566
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				1,478				1,478
Balance at September 30, 2018			75,445,885			$	75			$	1,141,067			$	(1,921	)		$	3,259			$	1,142,480
Equity compensation expense			—				—				8,109				—				—				8,109
Repurchase of Change Healthcare Inc. common stock			—				—				—				—				—				—
Issuance of Change Healthcare Inc. common stock upon exercise of equity awards			29,198				—				—				—				—				—
Proceeds from exercise of Change Healthcare Inc. equity based awards			—				—				—				—				—				—
Net income (loss)			—				—				—				(12,388	)			—				(12,388	)
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				(2,418	)			(2,418	)
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				(6,543	)			(6,543	)
Balance at December 31, 2018			75,475,083			$	75			$	1,149,176			$	(14,309	)		$	(5,702	)		$	1,129,240
Balance at March 31, 2019			75,474,654			$	75			$	1,153,509			$	(17,841	)		$	(3,256	)		$	1,132,487
Cumulative effect of accounting change of the Joint Venture-ASC 606			—				—				—				35,797				—				35,797
Cumulative effect of accounting change of the Joint Venture-ASU 2018-02			—				—				—				(422	)			422				—
Equity compensation expense			—				—				5,862				—				—				5,862
Net income (loss)			—				—				—				(37,517	)			—				(37,517	)
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				226				226
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				(5,431	)			(5,431	)
Balance at June 30, 2019			75,474,654			$	75			$	1,159,371			$	(19,983	)		$	(8,039	)		$	1,131,424
Issuance of Change Healthcare Inc. common stock upon initial public offering			49,285,713				49				608,630				—				—				608,679
Effect of initial public offering issuance costs on Joint Venture equity			—				—				(4,160	)			—				—				(4,160	)
Issuance of tangible equity units			—				—				232,929				—				—				232,929
Equity compensation expense			—				—				8,585				—				—				8,585
Issuance of Change Healthcare Inc. common stock upon exercise of equity awards			175,439				—				1,139				—				—				1,139
Net income (loss)			—				—				—				(93,935	)			—				(93,935	)
Unrealized gain (loss) on available for sale debt securities of the Joint Venture			—				—				—				—				1,173				1,173
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				1,583				1,583
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				(1,310	)			(1,310	)
Balance at September 30, 2019			124,935,806			$	124			$	2,006,494			$	(113,918	)		$	(6,593	)		$	1,886,107
Equity compensation expense			—				—				9,148				—				—				9,148
Issuance of Change Healthcare Inc. common stock upon exercise of equity awards			91,842				—				966				—				—				966
Net income (loss)			—				—				—				50,735				—				50,735
Unrealized gain (loss) on available for sale debt securities of the Joint Venture			—				—				—				—				134				134
Foreign currency translation adjustment of the Joint Venture			—				—				—				—				1,728				1,728
Change in fair value of interest rate cap, net of taxes of the Joint Venture			—				—				—				—				1,313				1,313
Balance at December 31, 2019			125,027,648			$	124			$	2,016,608			$	(63,183	)		$	(3,418	)		$	1,950,131

See accompanying notes to condensed financial statements.

 

6

Change Healthcare Inc.

Condensed Statements of Cash Flows

(unaudited and amounts in thousands)

 

		Nine Months Ended
		December 31,
		2019				2018
Cash flows from operating activities:
Net income (loss)		$	(80,716	)		$	(48,480	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss from Equity Method Investment in the Joint Venture			104,497				65,805
Deferred income tax expense (benefit)			(564	)			(16,664	)
(Gain) Loss on Sale of Interests in the Joint Venture			—				(661	)
(Gain) loss on forward purchase contracts			(71,649	)			—
Amortization of debt discount and issuance costs			403				—
Other			1,526				—
Changes in operating assets and liabilities:
Prepaid expenses			(1,544	)			—
Due from the Joint Venture			(3,056	)			(188	)
Due from McKesson			(213	)			—
Income taxes receivable			422				13,292
Accounts payable and accrued expenses			83				189
Due to McKesson			47,172				—
Due to the Joint Venture			3,639				(9,662	)
Net cash provided by (used in) operating activities			—				3,631
Cash flows from investing activities:
Proceeds from sale of interests in Joint Venture			—				6,502
Investment in debt and equity securities of the Joint Venture			(278,875	)			—
Proceeds from investments in debt securities of the Joint Venture			7,332				—
Investment in the Joint Venture			(610,784	)			—
Net cash provided by (used in) investing activities			(882,327	)			6,502
Cash flows from financing activities:
Proceeds from initial public offering, net of issuance costs			608,679				—
Proceeds from issuance of equity component of tangible equity units, net of issuance costs			232,929				—
Proceeds from issuance of debt component of tangible equity units			47,367				—
Payment of loan costs			(1,421	)			—
Repayment of senior amortizing notes			(7,332	)			—
Proceeds from exercise of equity awards			2,105				—
Payments to acquire common stock			—				(6,502	)
Net cash provided by (used in) financing activities			882,327				(6,502	)
Net increase (decrease) in cash, cash equivalents and restricted cash			—				3,631
Cash, cash equivalents and restricted cash at beginning of period			3,409				—
Cash, cash equivalents and restricted cash at end of period		$	3,409			$	3,631

See accompanying notes to condensed financial statements.

 

7

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

1. Nature of Business and Organization

Organization

Change Healthcare Inc. (the “Company”), a Delaware corporation, was formed on June 22, 2016 to hold an equity investment in Change Healthcare LLC (the “Joint Venture”), a joint venture between the Company and McKesson Corporation (“McKesson”). As of December 31, 2019, the Company and McKesson each owned approximately 41% and 59%, respectively, of the membership interest in the Joint Venture, subject to adjustment based on exercise of equity-based awards or other changes in the number of the Joint Venture’s membership units outstanding.

The Transactions

In June 2016, the Company, the Joint Venture, Change Healthcare Holdings, LLC, Change Healthcare Intermediate Holdings, LLC, Change Healthcare Performance, Inc. (“Legacy CHC”) and its stockholders—including affiliates of The Blackstone Group, Inc. (formerly known as the Blackstone Group L.P.) (“Blackstone”) and Hellman & Friedman LLC entered into an Agreement of Contribution and Sale (the “Contribution Agreement”) with McKesson (together with the Company, the “Members”). Under the terms of the Contribution Agreement, the parties agreed to form the Joint Venture, a joint venture that combined the majority of the McKesson Technology Solutions businesses, excluding McKesson’s Enterprise Information Solutions business and RelayHealth Pharmacy Network (such contributed businesses, “Core MTS”), with substantially all of the assets and operations of Legacy CHC, but excluding Legacy CHC’s pharmacy claims switching and prescription routing businesses (such excluded business, the “eRx Network” and the businesses contributed by Legacy CHC, together with Core MTS, the “Contributed Businesses”). The creation of the Joint Venture, including the contribution of the Contributed Businesses and related transactions, is collectively referred to as the “Transactions”. The Transactions closed on March 1, 2017.

Amendment of Certificate of Incorporation

Effective June 26, 2019 and in contemplation of its initial public offering of common stock, the Company amended its certificate of incorporation to effect a 126.4 for 1 stock split for all previously issued shares of common stock, to increase the authorized number of common stock, and to authorize shares of preferred stock. Following this amendment, the authorized shares include 9,000,000,000 shares of common stock (par value $.001 per share), 1 share of Class X stock (par value $.001 per share), and 900,000,000 shares of preferred stock (par value $.001 per share). All issued or outstanding shares or related share-based payment arrangement disclosures included herein have been retrospectively adjusted for the stock split.

Initial Public Offering

Effective July 1, 2019, the Company completed its initial public offering of 49,285,713 shares of common stock and a concurrent offering of 5,750,000 of tangible equity units (“TEUs”) for net proceeds of $608,679 and $278,875, respectively. The proceeds of the offering of common stock were subsequently contributed to the Joint Venture in exchange for 49,285,713 additional units of the Joint Venture, which together with the Company’s existing holdings represents an approximately 41% interest in the Joint Venture. The proceeds of the offering of TEUs were used to acquire TEUs of the Joint Venture that substantially mirror the terms of the TEUs included in the offering. The Joint Venture, in turn, used the proceeds received from the Company to repay $805,000 of its indebtedness under the Term Loan Facility without penalty in July 2019.

2. Basis of Presentation

Principles of Consolidation

The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) Guidelines, Rules and Regulations and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. All intercompany accounts and transactions have been eliminated in the unaudited condensed financial statements.

 

8

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors and various other assumptions that the Company believes are necessary to consider in order to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of expenses and disclosure of contingent assets and liabilities. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in the reported results of operations; and if material, the effects of changes in estimates are disclosed in the notes to the financial statements. Estimates and assumptions by management affect: the carrying value of the Company’s investments; the provision and benefit for income taxes and related deferred tax accounts; contingencies; and the value attributed to equity awards. Additionally, the Company’s financial statements are impacted by estimates and assumptions made by management that affect the financial statements of the Joint Venture, including: the allowance for doubtful accounts; the fair value assigned to assets acquired and liabilities assumed in business combinations; tax receivable agreement obligations; the fair value of interest rate cap agreement obligations; measurement of the components of tangible equity units; contingent consideration; loss accruals; the carrying value of long-lived assets (including goodwill and intangible assets); the classification and measurement of assets held for sale; the amortization period of long-lived assets (excluding goodwill); the carrying value, capitalization and amortization of software development costs; the provision and benefit for income taxes and related deferred tax accounts; certain accrued expenses; revenue recognition; contingencies; and the value attributed to equity awards.

Tangible Equity Units

In connection with the initial public offering, the Company completed an offering of tangible equity units (TEUs). Each TEU comprises an amortizing note and purchase contract, both of which are freestanding instruments and separate units of account. The amortizing notes were issued at par and are classified as debt on the accompanying condensed consolidated balance sheet, with scheduled principal payments over the next twelve months reflected in current maturities of long-term debt. The purchase contracts are accounted for as prepaid forward contracts and classified as equity. The TEU proceeds and issuance costs were allocated to the amortizing notes and purchase contracts on a relative fair value basis. See Note 10 for further discussion.

Other Investments

The Company holds investments in tangible equity units issued by the Joint Venture with terms that substantially mirror the TEUs issued by the Company. Each TEU comprises an amortizing note and forward purchase contract, both of which are freestanding instruments and separate units of account. The Company accounts for its investment in each component at fair value. Unrealized gains and losses resulting from changes in the fair value of the investment in debt securities are included as a component of other comprehensive income. Unrealized gains and losses resulting from changes in the fair value of the investment in the equity purchase contracts are recorded in current period earnings, in accordance with ASU 2016-01. See Note 11 for further discussion.

Recently Adopted Accounting Pronouncements

In April 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2018-07 on a modified retrospective basis, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Among other provisions, the measurement date for awards to nonemployees was changed from the earlier of the date at which a commitment for performance by the counterparty was reached or the date at which performance was complete under the previous guidance to the grant date under this update. Because the Company’s equity-based compensation was previously subject to remeasurement at fair value each quarter under previous authoritative literature, the adoption of this update had no material direct effect on the Company’s consolidated financial statements. As described in Note 7, however, the adoption of this update changed the relationship between the equity-based compensation and the accounting for the freestanding option (i.e. the Dividend receivable).

 

9

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

In April 2019, the Joint Venture adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which replaces most prior general and industry specific revenue recognition guidance with a principles-based comprehensive revenue recognition framework on a modified retrospective basis. Under this revised framework, a company will recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. As the Company’s operations consist principally of an investment in the Joint Venture, its financial statements reflect no revenue and, accordingly, the Company recognized no direct impact on its financial statements from the adoption of this update. However, upon adoption, the Joint Venture recognized a cumulative effect adjustment to its Members’ deficit. As a result of the impact of the adoption of ASC 606 to the Joint Venture’s Members’ equity (deficit), the Company was required to recognize a proportionate amount of this cumulative effect adjustment to its April 1, 2019 retained earnings as well. The effect is disclosed within a separate caption of the accompanying condensed statement of stockholders’ equity.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, as amended by ASU No. 2018-19, which requires that a financial asset (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This update is scheduled to be effective for the Company beginning April 1, 2021, with early adoption permitted beginning April 1, 2019. The Company is currently assessing the potential effects this update may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective for public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for either the entire standard or only the provisions that eliminate or modify requirements. The Company is currently assessing the potential effects this update may have on its financial statement disclosures.

3. 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 to acquire the remaining 54.385% of Legacy CHC. The Company 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 (“DCF”) 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.

 

10

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Equity Method Investment in Change Healthcare LLC

The Company accounts for its investment in the Joint Venture using the equity method of accounting. During the three and nine months ended December 31, 2019 and 2018, the Company recorded a proportionate share of the earnings from this investment based on its ownership percentage during each respective period, which included transaction and integration related expenses incurred by the Joint Venture and the Company’s portion of basis adjustments including amortization expenses associated with equity method intangible assets. These amounts are aggregated and recorded under the caption, “Loss from Equity Method Investment in the Joint Venture” in the accompanying condensed statements of operations.

Summarized financial information of the Joint Venture is as follows:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Statement of Operations Data:
Total revenue		$	808,226			$	821,937			$	2,459,593			$	2,445,390
Cost of operations (exclusive of depreciation and amortization)		$	339,413			$	339,485			$	998,943			$	1,007,328
Customer postage		$	55,693			$	58,788			$	171,288			$	180,706
Net income (loss)		$	31,191			$	13,009			$	102,973			$	138,955

Subsequent to the Company’s initial public offering of common stock, the Company now has a publicly available indication of the value of its investment in the Joint Venture. Accordingly, the Company evaluated its equity method investment for an other-than-temporary impairment (“OTTI”). The Company considered various factors in determining whether an OTTI has occurred, including the Company’s ability and intent to hold the investment, the trading history available, the implied EBITDA valuation multiples compared to public guideline companies, the Joint Venture’s ability to achieve milestones and any notable operational and strategic changes by the Joint Venture. After the evaluation, the Company determined that an OTTI had not occurred as of December 31, 2019 nor as of the date of this quarterly report on Form 10-Q. However, the Company may experience declines in the fair value of its investment in the Joint Venture, and it may determine an impairment loss will be required to be recognized in a future reporting period. Such determination will be based on the prevailing facts and circumstances, including those related to the reported results and disclosures of the Joint Venture as well as from changes in the market price of the Company’s common stock.

In the event the Company obtains a controlling interest in the Joint Venture, the Company will evaluate its investment under the guidance in ASC 805 for a business combination achieved in stages. Upon such a change in control, the Company will remeasure its investment in the Joint Venture to fair value as of the date that control is obtained and will recognize a gain or loss in its statement of operations for the difference between the carrying value and fair value of its investment.

During the three months ended September 30, 2019, the Joint Venture committed to a plan to sell its Alpharetta, GA office property in an effort to reduce its real estate footprint. The Joint Venture completed the sale of the property during its fiscal third quarter and recognized an immaterial gain on sale. As a result of the completion of the sale, the Company recognized a write-off of approximately $13,900 of basis differences associated with the office property within its Loss from Equity Method Investment in the Joint Venture for the three and nine months ended December 31, 2019.

 

11

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

4. Legal Proceedings

In the ordinary course of business, the Company may become subject to various claims and legal proceedings. The Company is not currently a defendant in any pending litigation.

5. Net Income (Loss) Per Share

The following table sets forth the computation of basic net income (loss) per share of common stock for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Basic net income (loss) per share:
Numerator:
Net income (loss)		$	50,735			$	(12,388	)		$	(80,716	)		$	(48,480	)
Denominator:
Weighted average common shares outstanding			124,962,970				75,465,310				108,371,642				75,525,645
Minimum shares issuable under purchase contracts			18,429,325				—				12,286,217				—
			143,392,295				75,465,310				120,657,859				75,525,645
Basic net income (loss) per share		$	0.35			$	(0.16	)		$	(0.67	)		$	(0.64	)
Diluted net income per share:
Numerator:
Net income (loss)		$	50,735			$	(12,388	)		$	(80,716	)		$	(48,480	)
Denominator:
Number of shares used in basic computation			143,392,295				75,465,310				120,657,859				75,525,645
Weighted average effect of dilutive securities
Add:
Dilutive shares issuable under purchase contracts			1,450,910				—				—				—
Time-Vesting Options			1,059,868				—				—				—
Deferred Stock Units			9,250				—				—				—
Restricted Share Units			289,537				—				—				—
			146,201,860				75,465,310				120,657,859				75,525,645
Diluted net income (loss) per share		$	0.35			$	(0.16	)		$	(0.67	)		$	(0.64	)

Due to their antidilutive effect, the following securities have been excluded from diluted net income (loss) per share for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Incremental shares issuable under purchase contracts			—				—				1,712,220				—
Time-Vesting Options			—				1,858,331				1,290,327				1,846,029
Deferred Stock Units			—				—				6,167				—
Restricted Stock Units			—				—				605,830				—

 

12

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

6. Income Taxes

Income tax expense for the three months ended December 31, 2019 was $15,240, compared to an income tax benefit of $5,080 for the three months ended December 31, 2018, which represents an effective tax rate of 23.1% and 29.1%, respectively. The income tax benefit for the nine months ended December 31, 2019 and 2018 was $564 and $16,664, respectively, which represents an effective tax rate of 0.7% and 25.6%, respectively.

Fluctuations in our reported income tax rates from the statutory rate are primarily due to benefits recognized as a result of certain incentive tax credits resulting from research and experimental expenditures and discrete items recognized in the quarters.

McKesson Tax Receivable Agreement

In connection with the closing of the Transactions, the Joint Venture, subsidiaries of McKesson that serve as members of the Joint Venture (the “McK Members”), McKesson and the Company entered into a tax receivable agreement (the “McKesson Tax Receivable Agreement”). The McKesson Tax Receivable Agreement generally provides for the payment by the Joint Venture to the McK Members and it assigns 85% of the net cash tax savings realized (or, in certain circumstances, deemed to be realized) by the Company in periods ending on or after the date on which McKesson ceases to own at least 20% of the outstanding units of the Joint Venture (the “LLC Units”) as a result of (i) certain amortizable tax basis in assets transferred to the Joint Venture at the closing of the Transactions and (ii) imputed interest deductions and certain other tax attributes arising from payments under the McKesson Tax Receivable Agreement. Additionally, upon the occurrence of the first exchange of LLC Units by McKesson (or its permitted transferees), if any, the Company has agreed to enter into an additional tax receivable agreement with the McK Members, pursuant to which the Company would be required to pay to the relevant McK Member 85% of the net cash tax savings, if any, arising from the Company’s utilization of (i) certain tax basis increases resulting from the relevant exchange and payments under such additional tax receivable agreement and (ii) imputed interest deductions. The Company may also be required to enter into and make payments under an additional tax receivable agreement with McKesson in certain circumstances.

Because payments under the McKesson Tax Receivable Agreement are contingent upon McKesson’s ceasing to own at least 20% of the Joint Venture and such an event was not probable at the inception of the McKesson Tax Receivable Agreement or as of December 31, 2019, no related obligation has been reflected on the accompanying condensed balance sheet.

Letter Agreement

The Company, the Joint Venture, McKesson and certain of McKesson’s affiliates have entered into a letter agreement relating to the Contribution Agreement (the “Letter Agreement”). The Letter Agreement addresses miscellaneous tax-related matters, including (i) technical clarifications and modifications to the manner in which the Joint Venture allocates certain items of taxable income, loss and deduction among, and calculates and makes required tax distributions to, its members, (ii) the sharing of certain contingent tax benefits and expenses not addressed by the McKesson Tax Receivable Agreement or the tax matters agreement that the Company will enter into with McKesson in connection with a spin-off or split-off transaction (or a combination of the foregoing) that McKesson may, at its election, initiate and complete that would result, among other things, in the acquisition by the Company of all of McKesson’s LLC Units and the issuance by the Company to McKesson and/or McKesson’s securityholders of an equal number of shares of its common stock and (iii) procedures applicable in the case of certain tax proceedings. In particular, pursuant to the terms of the Letter Agreement, McKesson may adjust the manner in which depreciation or amortization deductions in respect of assets transferred to the Joint Venture at the closing of the Transactions are allocated among the Company, McKesson and certain of McKesson’s affiliates beyond minimum amounts provided in the LLC Agreement. If an amount of deductions is allocated to the Company in excess of a specified minimum threshold, the Company will be required to make cash payments to McKesson equal to 100% of the tax savings of the Company attributable to such excess deductions for any tax period ending prior to the date on which McKesson ceases to own at least 20% of the outstanding LLC Units of the Joint Venture, after which the terms of the McKesson Tax Receivable Agreement will control. At December 31, 2019, the Company has recorded a liability to McKesson equal to $47,172, which reflects the amount payable for future tax savings the Company anticipates receiving as a result of deductions which were allocated by McKesson to the Company for the year ended March 31, 2019 and is reflected as Due to McKesson on the consolidated balance sheet.

 

13

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

7. Fair Value Measurements

The Company’s assets and liabilities that are measured at fair value on a recurring basis consist of the Company’s Dividend Receivable and Other Investments. The debt component of the tangible equity units issued by the Company is a Level 2 liability measured at fair value on a nonrecurring basis based on available market data and a discounted cash flow analysis (see Note 10). The tables below summarize the Dividend Receivable and Other Investments as of December 31, 2019 and March 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

						Quoted in								Significant
		Balance at				Markets				Significant Other				Unobservable
		December 31,				Identical				Observable Inputs				Inputs
Description		2019				(Level 1)				(Level 2)				(Level 3)
Other Investments (see Note 11)		$	344,943			$	—			$	344,943			$	—
Dividend Receivable			68,344				—				—				68,344
Total		$	413,287			$	—			$	344,943			$	68,344

 

						Quoted in								Significant
		Balance at				Markets				Significant Other				Unobservable
		March 31,				Identical				Observable Inputs				Inputs
Description		2019				(Level 1)				(Level 2)				(Level 3)
Other Investments (see Note 11)		$	—			$	—			$	—			$	—
Dividend Receivable			81,264				—				—				81,264
Total		$	81,264			$	—			$	—			$	81,264

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 10). At December 31, 2019 and March 31, 2019, the Company’s investment in the Joint Venture’s debt securities were classified as “available-for-sale” and its investment in the Joint Venture’s purchase contracts were accounted for as equity securities measured at fair value. Changes in unrealized gains and losses for the Company’s investment in the Joint Venture’s debt securities are recognized as adjustments to other comprehensive income (loss) while changes in unrealized gains and losses for the Company’s investment in the Joint Venture’s purchase contracts are recognized as adjustments to pretax income (loss). The fair value measurement of the investments is based on available market data of the Joint Venture’s debt and equity securities for which the Company is investing.

The following table presents a reconciliation of the activity related to the other investments for the nine months ended December 31, 2019:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Balance at beginning of period		$	274,391			$	—			$	—			$	—
Initial investment							—				278,875				—
Proceeds from investment in securities of the Joint Venture			(3,712	)			—				(7,332	)			—
Change in fair value			74,264				—				73,400				—
Balance at end of period		$	344,943			$	—			$	344,943			$	—

 

14

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Dividend Receivable

The Company is entitled to receive an additional unit of the Joint Venture for each share of stock issued by the Company. In the case of equity-based awards, the requirement to receive an additional unit of the Joint Venture upon exercise of such awards represents a freestanding derivative. Because the fair value measurement of this derivative involves significant unobservable inputs, the most significant of which is the use of a levered volatility calculation of a peer group of companies, the Company has determined that it represents a Level 3 fair value measurement.

Because the freestanding derivative is directly related to the Company’s equity-based compensation awards, the valuation of the derivative is determined to be consistent with the valuation of the underlying equity-based awards (although we use a current period measurement date). As with the equity-based awards, changes in the value of the derivative are generally expected to fluctuate with changes in the value of the Company’s common stock.

The following table summarizes the fair value of the freestanding derivative at December 31, 2019 and March 31, 2019, respectively:

 

		Fair Values of Derivative Financial Instruments
		Asset (Liability)
		Balance Sheet Location				December 31, 2019				March 31, 2019
Derivative financial instruments not designated as hedging instruments:
Freestanding Option			Dividend receivable			$	68,344			$	81,264
						$	68,344			$	81,264

The following table presents a reconciliation of the fair value of the derivative for which the Company uses significant unobservable inputs:

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2019				2018				2019				2018
Balance at beginning of period		$	34,547			$	66,641			$	81,264			$	59,116
Increase in fair value based on ASC 505 equity-based compensation			—				8,109				—				16,378
Settlements due to exercise of awards			(346	)			(553	)			(1,670	)			(1,297	)
Change in fair value of equity-based awards			34,143				—				(11,250	)			—
Balance at end of period		$	68,344			$	74,197			$	68,344			$	74,197

As the dividend receivable was initially received in connection with the contribution of assets to the Joint Venture, the initial fair value was treated as a component of the Company’s contribution of assets and receipt of its Investment in the Joint Venture. During the three and nine months ended December 31, 2019 and 2018, the Company recognized changes in the balance of the Dividend Receivable as a component of Loss from Equity Method Investment in the Joint Venture. The result was that no net equity-based compensation related to employees of the Joint Venture was recognized in the financial statements of the Company for the three and nine months ended December 31, 2019 and 2018.

Following the adoption of FASB ASU No. 2018-07, however, the measurement of equity-based compensation generally becomes fixed at the date of grant such that the fair value of the dividend receivable is no longer correlated with the amount of equity compensation recognized. As a result, following the adoption of FASB ASU No. 2018-07, the Loss from Equity Method Investment in the Joint Venture is subject to variability associated with changes in the fair value of the equity-based awards.

 

15

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

8. Accumulated Other Comprehensive Income (Loss)

The following is a summary of the Company’s proportionate share of the Joint Venture’s accumulated other comprehensive income (loss) balances, net of taxes, as of and for the three and nine months ended December 31, 2019 and 2018.

 

						Foreign								Accumulated
		Available				Currency								Other
		For Sale				Translation				Cash Flow				Comprehensive
		Debt Security				Adjustment				Hedge				Income (Loss)
Balance at March 31, 2018		$	—			$	1,268			$	1,268			$	2,536
Cumulative effect of accounting change of the Joint Venture-ASU 2017-12			—				—				490				490
Change associated with foreign currency translation			—				(2,593	)			—				(2,593	)
Change associated with current period hedging			—				—				1,206				1,206
Reclassification into earnings			—				—				(424	)			(424	)
Balance at June 30, 2018		$	—			$	(1,325	)		$	2,540			$	1,215
Change associated with foreign currency translation			—				566				—				566
Change associated with current period hedging			—				—				1,866				1,866
Reclassification into earnings			—				—				(388	)			(388	)
Balance at September 30, 2018		$	—			$	(759	)		$	4,018			$	3,259
Change associated with foreign currency translation			—				(2,418	)			—				(2,418	)
Change associated with current period hedging			—								(6,168	)			(6,168	)
Reclassification into earnings			—				—				(375	)			(375	)
Balance at December 31, 2018		$	—			$	(3,177	)		$	(2,525	)		$	(5,702	)
Balance at March 31, 2019		$	—			$	(1,565	)		$	(1,691	)		$	(3,256	)
Cumulative effect of accounting change of the Joint Venture-ASU 2018-02			—				—				422				422
Change associated with foreign currency translation			—				226				—				226
Change associated with current period hedging			—				—				(5,117	)			(5,117	)
Reclassification into earnings			—				—				(314	)			(314	)
Balance at June 30, 2019		$	—			$	(1,339	)		$	(6,700	)		$	(8,039	)
Unrealized gain (loss) on available for sale debt securities of the Joint Venture			1,173				—				—				1,173
Change associated with foreign currency translation			—				1,583				—				1,583
Change associated with current period hedging			—				—				(1,509	)			(1,509	)
Reclassification into earnings			—				—				199				199
Balance at September 30, 2019		$	1,173			$	244			$	(8,010	)		$	(6,593	)
Unrealized gain (loss) on available for sale debt securities of the Joint Venture			134												134
Change associated with foreign currency translation			—				1,728				—				1,728
Change associated with current period hedging			—				—				289				289
Reclassification into earnings			—				—				1,024				1,024
Balance at December 31, 2019		$	1,307				1,972			$	(6,697	)		$	(3,418	)

 

16

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

Effective April 1, 2018, the Joint Venture adopted FASB ASU No. 2017-12, which significantly changed the framework by which hedge accounting is recognized, presented and disclosed in the Joint Venture’s financial statements. The adoption of this update by the Joint Venture resulted in a reclassification between its accumulated other comprehensive income (loss) and accumulated earnings (deficit).

Effective April 1, 2019, the Joint Venture adopted FASB ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The adoption of this update resulted in a reclassification between accumulative other comprehensive income (loss) and accumulated earnings (deficit).

As an investor in the Joint Venture, the Company has recognized its proportionate amount of these reclassifications as presented in the table above.

9. Equity Based Compensation

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, the Company, during the nine months ended December 31, 2019, granted to 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 is described below.

Restricted Stock Units (“RSUs”)—The Company granted 4,436,758 RSUs during the nine months ended December 31, 2019. 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 Company granted 1,079,621 PSUs during the nine months ended December 31, 2019. 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 Joint Venture 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 Company granted 597,006 CSRSUs during the nine months ended December 31, 2019. 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. The Company will be reimbursed by the Joint Venture for any cash settlements, and as of December 31, 2019, the Company has a receivable from the Joint Venture of approximately $1,312.

Deferred Stock Units (“DSUs”)—The Company granted 45,704 DSUs during the nine months ended December 31, 2019. The DSUs vest 100% upon the one-year anniversary of the date of grant. Unlike the RSUs, however, the DSUs are exchanged for shares of the Company’s common stock only following the participant’s separation from service.

During the three and nine months ended December 31, 2019 the Joint Venture recognized compensation expense related to awards granted under the Omnibus Incentive Plan of $6,161 and $12,257, respectively. At December 31, 2019, aggregate unrecognized compensation expense of the Joint Venture related to awards granted under the Omnibus Incentive Plan was $78,788.

 

17

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

10. Tangible Equity Units

In July 2019, the Company completed its offering of 5,750,000 TEUs. Total proceeds, net of underwriting discounts, were $278,875. Each TEU, which has a stated amount of $50, is comprised of a stock purchase contract and a senior amortizing note due June 30, 2022. The Company allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of the respective components of each TEU. The value allocated to the stock purchase contracts is reflected net of issuance costs in additional paid in capital. The value allocated to the senior amortizing notes is reflected in debt on the accompanying balance sheet, with payments expected in the next twelve months reflected in current maturities of long-term debt. Issuance costs, reflected as a reduction of the face amount of the amortizing notes, are being accreted to the face amount of the debt under the effective interest method.

The aggregate values assigned upon issuance of the TEUs, based on the relative fair value of the respective components of each TEU, were as follows:

 

		Equity Component				Debt Component				Total
Price per TEU		$	41.7622			$	8.2378			$	50.00
Gross proceeds			240,133				47,367				287,500
Issuance costs			(7,204	)			(1,421	)			(8,625	)
Net proceeds		$	232,929			$	45,946			$	278,875

Each senior amortizing note has an initial principal amount of $8.2378 and bears interest at 5.5% per year. On each March 30, June 30, September 30 and December 30, the Company pays equal quarterly cash installments of $0.7500 per amortizing note (except for the September 30, 2019 installment payment, which was $0.7417 per amortizing note). Each installment constitutes a payment of interest and partial payment of principal. The carrying value and fair value of the senior amortizing notes as of December 31, 2019 was $38,626 and $40,365, respectively. Unless settled earlier, each purchase contract will automatically settle on June 30, 2022. The Company will deliver between a minimum of 18,429,325 shares and a maximum of 22,115,075 shares of the Company’s common stock, subject to adjustment, based on the Applicable Market Value (as defined below) of the Company’s common stock as described below:

 

•

If the Applicable Market Value is greater than $15.60 per share, holders will receive 3.2051 shares of common stock per purchase contract.

 

•

If the Applicable Market Value is less than or equal to $15.60 per share but greater than or equal to $13.00 per share, the holder will receive a number of shares of the Company’s common stock per purchase contract equal to $50, divided by the Applicable Market Value; and

 

•

If the Applicable Market Value is less than $13.00 per share, the holder will receive 3.8461 shares of common stock per purchase contract.

The Applicable Market Value is defined as the arithmetic average of the volume weighted average price per share of the Company’s common stock over the twenty consecutive trading day period immediately preceding the balance sheet date, or June 30, 2022, for settlement of the stock purchase contracts.

The TEUs have a dilutive effect on the Company’s net income (loss) per share. The 18,429,325 minimum shares to be issued are included in the calculation of basic net income (loss) per share. The difference between the minimum shares and the maximum shares are potentially dilutive securities, and accordingly, are included in the Company’s diluted net income (loss) per share on a pro rata basis to the extent the Applicable Market Value is higher than $13.00 but is less than $15.60 at period end.

 

18

Change Healthcare Inc.

Notes to Condensed Financial Statements

(unaudited and amounts in thousands, except share and per share amounts)

 

11. Other Investments

The proceeds of the offering of TEUs were used to acquire TEUs of the Joint Venture that substantially mirror the terms of the TEUs included in the offering. Under these mirrored arrangements, the Joint Venture is required to make cash payments or to transfer LLC Units to the Company concurrent with any cash payments or issuance of shares by the Company pursuant to the terms of its TEUs. The Company accounts for these mirror arrangements as investments in debt and equity securities.

At December 31, 2019 and March 31, 2019, the Company’s investment in debt securities are classified as “available-for-sale” and its investment in forward purchase contracts are considered equity securities measured at fair value. Changes in unrealized gains and losses for the Company’s debt securities are recognized as adjustments to other comprehensive income (loss) while changes in unrealized gains and losses for the Company’s investment in forward purchase contracts are recognized as adjustments to pretax income (loss).

A summary of the Company’s other investments at December 31, 2019 and March 31, 2019 is summarized in the tables that follow.

 

		December 31, 2019
		Amortized				Unrealized Amounts
		Costs				Gains				Losses				Fair Value
Debt Securities (Level 2)		$	38,614			$	1,751			$	—			$	40,365
Forward Purchase Contracts (Level 2)		$	232,929			$	71,649			$	—				304,578
														$	344,943
Amounts classified within current assets															15,362
Amounts classified within Other investments														$	329,581

 

March 31, 2019

Amortized

Unrealized Amounts

Costs

Gains

Losses

Fair Value

Debt Securities

$

—

$

—

$

—

$

—

Forward Purchase Contracts

$

—

$

—

$

—

—

—

Amounts classified within current assets

—

Amounts classified within Other investments

$

—

Scheduled maturities of investments in debt securities at December 31, 2019 were as follows:

 

		Amortized Cost				Fair Value
Due in one year or less		$	15,362			$	15,362
Due after one year through five years			23,252				25,003
Due after five years through ten years			—				—
Due after ten years			—				—
		$	38,614			$	40,365

 

19