Evolent Health, Inc. annual report, FY2021

Evolent Health, Inc. — FY2021 Form 10-K

Business context and reporting period. This annual report covers the year ended December 31, 2021; the filing also provides unaudited fourth-quarter results. Evolent supplies technology-enabled administrative and clinical services to health plans, providers and physician groups transitioning to value-based care. Its two reportable segments are Evolent Health Services (EHS) and Clinical Solutions. True Health was sold on March 31, 2021, and its results are reported as discontinued operations.

Key financial metrics

Metric	FY2021	FY2020
Revenue	$908.0 million	$924.6 million
Operating loss	$42.4 million	$267.6 million
Net loss	$37.6 million	$334.2 million
Adjusted EBITDA	$66.3 million	$48.6 million
Cash from operating activities	$38.7 million	Use of $16.2 million
Cash and cash equivalents at year-end	$266.3 million	$319.0 million
Long-term debt, net of discount	$215.7 million	$263.3 million

• Platform and operations services generated $896.8 million, or 98.8% of revenue; transformation services contributed $11.2 million.
• Cost of revenue was 72.4% of revenue, down from 75.3%; the implied gross margin was 27.6%, compared with 24.7%. SG&A rose to $219.5 million, or 24.2% of revenue, from $210.4 million, or 22.8%.
• FY2021 segment revenue was $309.8 million for EHS and $598.1 million for Clinical Solutions. Adjusted EBITDA was $17.1 million and $82.9 million, respectively; corporate costs were $33.7 million.
• Year-end current assets were $524.0 million and current liabilities $445.5 million. Restricted cash and investments totaled $88.7 million, including $73.2 million held for partner claims processing and $11.7 million related to risk-sharing arrangements.
• Convertible note principal outstanding was $289.6 million: $117.1 million due 2024 and $172.5 million due 2025. The 2021 notes matured during the year; $26.3 million principal converted to shares and $0.4 million was repaid in cash.

Material changes versus prior periods

• Revenue fell 1.8% year over year, primarily reflecting the runout of Passport operations, partly offset by new partners and expansion with existing partners. EHS revenue declined $72.5 million; Clinical Solutions revenue increased $55.9 million.
• Operating loss narrowed substantially, principally because FY2020 included a $215.1 million goodwill impairment and FY2021 did not. Net loss also improved, but comparisons include other nonrecurring items and discontinued operations.
• Operating cash flow improved by $54.9 million to positive $38.7 million. Investing cash flow was a $15.8 million use, including $46.5 million cash consideration for Vital Decisions, partly offset by Passport-related proceeds and investment returns.
• Evolent acquired Vital Decisions on October 1, 2021, for $46.5 million cash, 1.8 million shares valued at $56.6 million and contingent consideration initially valued at $14.6 million; the earn-out can be up to $45.0 million.
• The company repaid and terminated its Ares credit agreement in January 2021, paying $98.6 million, and settled related warrants for $13.7 million. It recorded a $19.2 million loss on that repayment. The year-end balance sheet includes no short-term debt.

Outlook, risks and unusual items

• Management provided no specific numerical FY2022 revenue or earnings guidance in the supplied filing text. It expects operating losses to continue for the foreseeable future, while stating available cash should meet liquidity needs for the next 12 months.
• Management cites growth opportunities in partner expansion, new customers, cross-selling and greater participation in risk-sharing arrangements. It expects longer-term cost of revenue and SG&A percentages to decline, subject to the mix and pace of growth.
• COVID-19 had not materially affected results or outlook to date, according to management. Increased Medicaid membership and lower utilization provided a modest benefit, but the duration and subsequent claims impact are uncertain.
• Customer concentration is significant: Cook County represented 28.0% of FY2021 revenue and Florida Blue Medicare 14.1%. Cook County was conducting an RFP for certain services. Many contracts can be renegotiated, terminated or not renewed; New Century Health contracts are generally annual.
• Claims reserves were $171.3 million at year-end and depend on actuarial estimates, including completion factors and medical cost trends. Deloitte identified the reserve for claims as a critical audit matter.
• Other key risks include performance-based contract underwriting, changing health-care regulation and government-program policy, partner credit and enrollment, cybersecurity and privacy, acquisition integration, and the ongoing Passport-related securities class action and derivative litigation. The company said it believes the claims have little merit but noted outcomes are uncertain.
• The 2021 annual goodwill review found no impairment indicators requiring quantitative testing; goodwill was $426.3 million. Prior Passport-related impairments totaled $199.8 million in 2019 and $215.1 million in 2020.
• The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. Vital Decisions was excluded from the internal-control assessment as a recently acquired entity.

Important facts for investors to verify

• Progress and outcome of Cook County’s RFP, renewal prospects for other major partners, and changes in revenue concentration and receivables.
• Whether Clinical Solutions growth and its reported Adjusted EBITDA translate into durable cash generation, particularly as risk-bearing exposure and claims volumes change.
• Vital Decisions integration, realized cross-selling and margin benefits, and the likelihood and potential share impact of its contingent earn-out.
• Cash availability after restricted balances, debt service and maturities, and the terms and potential dilution or cash-settlement effects of the 2024 and 2025 convertible notes.
• Claims reserve development, Passport wind-down and capital-return approvals, and resolution or financial exposure from pending litigation and contingencies.
• Use of non-GAAP Adjusted EBITDA alongside GAAP losses: FY2021 Adjusted EBITDA was $66.3 million while net loss was $37.6 million.