R1 RCM Holdco Inc. - 10-K filing on 2016-03-10

Share-Based Compensation

12 Months Ended

Dec. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

The Company maintains two stock incentive plans: the 2006 Amended and Restated Stock Option Plan (the "2006 Plan") and the 2010 Amended and Restated Stock Incentive Plan (the "2010 Amended Plan", together with the 2006 Plan, the "Plans"). In August 2015, the Company's stockholders approved the Amended and Restated 2010 Stock Incentive Plan, which authorized the issuance of an additional five million shares of the Company's common stock pursuant to awards and made a number of other amendments to the 2010 Plan.

Under the Plans, the Company could issue (up to a maximum of 29,374,756 shares) any shares that remained available for issuance under the 2006 Plan as of the date of the IPO and any shares subject to awards that were outstanding under the 2006 Plan as of the date of the IPO that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company without the issuance of shares thereunder. The Company will not make any further grants under the 2006 Plan. The 2010 Amended Plan provides for the grant of incentive stock options, non-statutory stock options, Restricted Stock Awards, ("RSAs") and other share-based awards. As of December 31, 2015, an aggregate of 16,012,417 shares were outstanding as either options or RSAs under the Plans, and 5,148,848 shares were available for future grants of awards under the 2010 Amended Plan. To the extent that previously granted awards under the 2006 Plan or 2010 Amended Plan expire, terminate or are otherwise surrendered, canceled or forfeited, the number of shares available for future awards under the 2010 Amended Plan will increase.

Under the terms of the Plans, all awards will expire if they are not exercised within ten years of their grant date. Substantially all employee options and RSAs vest over four years at a rate of 25% per year on each grant date anniversary. Substantially all non-employee options vest over either one year or four years (at a rate of 25% per year). Options granted under the 2006 Plan could be exercised immediately upon grant, but upon exercise the shares issued were subject to the same vesting and repurchase provisions that applied before the exercise. There were no such exercises during the years ended December 31, 2015, 2014 and 2013. Options granted under the 2010 Plan and 2010 Amended Plan cannot be exercised prior to vesting.

In 2014 and 2013, the Company granted service-based, non-qualified options to purchase 3,400,000 and 4,703,801 shares of common stock and awarded 1,000,000 and 400,000 shares of restricted stock, respectively, to key employees pursuant to inducement grant rules of the New York Stock Exchange ("NYSE"), of which 7,103,801 of the stock options were outstanding as of December 31, 2015 and 2014 and 1,399,980 and 1,749,988 of the shares of restricted stock were outstanding as of December 31, 2015 and 2014, respectively.

Also in 2014, pursuant to inducement grant rules of the NYSE, the Company granted a market-based award of 500,000 shares of restricted stock to the Chief Executive Officer. This RSA vests only when the average closing price of the Company’s stock price equals or exceeds twice the amount of the grant date stock price.

Note 5. Share-Based Compensation (continued)

The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. The Company uses the Monte Carlo simulations to estimate the fair value of its RSAs with vesting based on market-based performance conditions as of their respective grant dates. Expected life is based on the market condition to which the vesting is tied.

The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense during 2015, 2014 and 2013:



	Year Ended December 31,
	2015	2014	2013
Expected dividend yield	—	—	—
Risk-free interest rate	1.5% to 2.0%	1.9% to 2.2%	0.9% to 2.1%
Expected volatility	50%	50%	50%
Expected term (in years)	6.25	6.25 to 7.50	5.82 to 8.82
Forfeitures	5.68% annually	5.68% annually	5.68% annually

Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in thousands):



	Year Ended December 31,
	2015		2014		2013

Share-Based Compensation Expense Allocation Details:
Cost of services	$	7,208	$	6,668	$	10,740
Selling, general and administrative	24,463		13,503		13,061
Restatement and other costs	—		8,761		1,224
Total share-based compensation expense (1)	$	31,671	$	28,932	$	25,025

(1) Includes $2.4 million and $1.8 million in share-based compensation expense paid in cash during the years ended December 31, 2015 and 2014, respectively.

There was $47.2 million, $42.8 million and $43.3 million of total, unrecognized share-based compensation expense related to stock options and RSAs granted under the Plans, which the Company expects to recognize over a weighted-average period of 2.9 years, 3.2 and 2.8 years as of December 31, 2015, 2014 and 2013, respectively. Refer to the consolidated statements of stockholders’ equity (deficit) for the tax benefits realized for the tax deductions from stock option exercises.

Note 5. Share-Based Compensation (continued)

Stock options

The following table sets forth a summary of all employee and non-employee option activity under all plans and inducement grants for the years ended December 31, 2015, 2014 and 2013:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2013	17,707,139		$	13.88	7.6	$	25,957
Granted	8,345,437		10.09
Exercised	(9,400	)	4.34
Canceled	(1,057,052	)	17.60
Forfeited	(4,445,851	)	15.64
Outstanding at December 31, 2013	20,540,273		11.77		7.4	15,673
Granted	4,406,856		8.78
Exercised	—		—
Canceled	(1,494,219	)	13.41
Forfeited	(3,528,505	)	12.14
Outstanding at December 31, 2014	19,924,405		10.91		6.9	9,444
Granted	2,231,504		5.60
Exercised	(1,374,438	)	1.13
Canceled	(4,484,843	)	14.10
Forfeited	(1,036,362	)	8.47
Outstanding at December 31, 2015	15,260,266		10.23		7.0	261
Outstanding, vested and exercisable at December 31, 2013	9,605,505		$	11.89	5.9	$	15,096
Outstanding, vested and exercisable at December 31, 2014	11,879,209		$	11.73	5.6	$	9,444
Outstanding, vested and exercisable at December 31, 2015	8,876,517		$	11.63	6.1	$	108

The weighted-average grant date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $2.78, $4.40 and $5.19 per share, respectively. The total intrinsic value of the options exercised in the years ended December 31, 2015 and 2013 was $4.9 million and $0.1 million, respectively. No options were exercised in the year ended December 31, 2014. The total fair value of options vested during the years ended December 31, 2015, 2014 and 2013 was $14.9 million, $22.9 million and $27.1 million, respectively.

Stock option activity for non-employee consultants

Included in the table and disclosures above are options to purchase 125,779, 109,887, and 265,517 shares held by non-employee consultants as of December 31, 2015, 2014 and 2013, respectively. These options had a weighted average exercise price of $15.67, $17.12 and $20.05 at December 31, 2015, 2014 and 2013, respectively.

Note 5. Share-Based Compensation (continued)

Restricted stock awards

In the third quarter of 2011, the Company began to grant RSAs to its employees. A summary of the activity during the years ended December 31, 2015, 2014 and 2013 is shown below:



	Shares		Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (in years)
Outstanding and Unvested at January 1, 2013	160,220		$	21.23	9.0
Granted	508,303		11.46
Vested	(50,004	)	11.47
Forfeited	(160,220	)	21.23
Outstanding and Unvested at December 31, 2013	458,299		$	11.45	9.4
Granted	2,365,000		8.39
Vested	(127,084	)	11.46
Forfeited	(218,750	)	9.40
Outstanding and Unvested at December 31, 2014	2,477,465		$	8.71	9.3
Granted	8,994,729		3.34
Vested	(1,892,049	)	5.24
Forfeited	(324,213	)	7.61
Outstanding and Unvested at December 31, 2015	9,255,932		$	4.24	9.4

The total fair value of RSAs vested during the years ended December 31, 2015, 2014 and 2013 was $9.9 million, $1.5 million and $0.6 million, respectively. The Company’s RSA agreements allow employees to deliver to the Company shares of stock upon vesting of their RSAs in lieu of their payment of the required personal employment-related taxes. The Company does not withhold taxes in excess of minimum required statutory requirements. During the years ended December 31, 2015, 2014 and 2013, employees delivered to the Company 441,537, 45,142 and 16,623 shares of stock, respectively, which the Company recorded at a cost of approximately $1.6 million, $0.4 million and $0.2 million, respectively. As of December 31, 2015, the Company held 533,427 shares of surrendered common stock in treasury related to the vesting of RSAs.

Forfeited and canceled RSAs are added to treasury stock. For the years ended December 31, 2015, 2014 and 2013, 324,213, 218,750 and 160,220 shares were respectively added to treasury stock due to canceled RSAs.

Modifications of share-based awards

As described in Note 7, Restatement and Other, during 2013, the Company failed to timely file its annual report on Form 10-K for the fiscal year ended December 31, 2012, and on March 4, 2013, its Registration Statement on Form S-8 was suspended. As a result, individuals were not permitted to exercise vested options until the S-8 became effective. During the second quarter of 2013, the Company modified the terms of the share-based awards for those individuals who were involuntarily terminated in connection with the 2013 restructuring plan as described in Note 8. These modifications allowed for the extension of the exercise period for vested options from 60 days following each affected employee's respective termination date to the later of 60 days following the filing of the Company's 2012 consolidated financial statements with the Securities and Exchange Commission ("SEC") or December 31, 2013. During the quarter ended June 30, 2013, 13 employees were terminated under the 2013 restructuring plan, resulting in an increase in share-based compensation expense of $1.1 million for the year ended December 31, 2013.

Note 5. Share-Based Compensation (continued)

During the second quarter of 2014, the Company modified the terms of awards granted to 39 employees (including the 13 who were affected in 2013) who were terminated under the 2013 restructuring plan to allow for the extension of the exercise period for vested options until such time as the Company's registration statement on Form S-8 had been effective for 60 consecutive days. Such modifications resulted in a net increase in share-based compensation expense of $2.3 million for the year ended December 31, 2014.

During the first quarter of 2014, in connection with the resignation of a senior executive from the Company, the Company modified the terms of awards previously granted to such executive. Such modification extended the term to exercise vested options from 60 days following his effective resignation date to such time as the Company's registration statement on Form S-8 had been effective for 60 consecutive days. Such modification resulted in a net increase of share-based compensation expense for the year ended December 31, 2014 of $5.6 million.

During the second quarter of 2013, the Company modified the terms of an award granted to Mary Tolan, the Company's former chief executive officer, in connection with her transition to the role of the Chairman of the Board of the Company. This modification allowed for the extension of the exercise period for options vested as of the date of the modification from 60 days following the termination of employment to the expiration of the original award (ten years from the grant date). This modification resulted in a net increase in share-based compensation expense of $0.1 million and $1.5 million for the years ended December 31, 2014 and 2013, respectively.

During the second quarter of 2014, the Company granted to the Chief Operating Officer (the "COO") retention equity awards subject to the approval of our stockholders of an amendment to our 2010 Stock Incentive Plan (the "2010 Plan"). In the event that the stockholders did not approve the amendment prior to December 31, 2014, then in lieu of the incentive equity awards, the COO would be entitled to receive cash payments following each date that any portion of such equity grant would have otherwise vested equal to: (i) for stock options, the difference between the exercise price and the closing price of the common stock on the vesting date and (ii) for restricted stock, the closing price of the common stock on the vesting date. The Company determined that stockholder approval to amend the 2010 Plan would not occur by December 31, 2014 and accrued for these grants at the value as explained above. For the years ended December 31, 2015 and 2014, the Company incurred $0.6 million and $0.9 million of share-based compensation expense related to this grant, respectively.

Additionally, as part of the COO's retention agreement, the Company modified the terms of a stock option granted to the COO at the commencement of his employment. This modification would be triggered upon termination of employment by the Company without cause or by the COO for good reason and if triggered, the vested portion of the stock option would remain exercisable for a period of time equal to 60 days plus the number of days of service with the Company, but not longer than two years, or until the stock option otherwise expires, if earlier. This modification resulted in a net increase in share-based compensation expense of $0.2 million for year ended December 31, 2014.

During the year ended December 31, 2014, the Company settled share-based awards in cash with three employees who had options that expired during the year as all employees were restricted from exercising vested options during the year. This modification resulted in an increase in share-based compensation expense of $0.9 million for the year ended December 31, 2014.

Note 5. Share-Based Compensation (continued)

During the second quarter of 2015, in connection with the resignation of a member of the Board who was also the former Chief Executive Officer of the Company, the Company modified the terms of awards previously granted to such Board member. This modification allowed for the continuation of vesting of options despite his resignation from the Board. Such modification resulted in a net increase of share-based compensation expense for the year ended December 31, 2015 of $3.1 million.

During the third quarter of 2015, the Compensation Committee of the Board approved the grant of cash bonuses to the participants in the Company's 2014 annual cash incentive bonus plan who received all or a portion of their 2014 annual cash incentive award in the form of restricted shares of the Company's common stock (the "2014 Bonus Plan RSA Grantees"). Such bonuses were paid to 2014 Bonus Plan RSA Grantees on the second regularly scheduled payroll date following the Company’s scheduled second quarter earnings release on August 5, 2015 and were equal to the product of (i) $2.66 (which amount represents the difference of $5.38, the trading price per share of the Company’s common stock as of the close of trading on the date that the Company determined the number of restricted shares to be granted to 2014 Bonus Plan RSA Grantees, minus $2.72, the trading price per share of the Company’s common stock as of the close of trading on the second business day following the earnings release), multiplied by (ii) the number of restricted shares granted to the applicable 2014 Bonus Plan RSA Grantee. The aggregate number of restricted shares granted to 2014 Bonus Plan RSA Grantees was 683,401. This modification resulted in a net increase of share-based compensation expense for the year ended December 31, 2015 of $1.8 million.