Evolent Health, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Evolent provides technology and administrative services that help health care providers operate under value-based payment arrangements; it reports one operating segment for 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Revenue | $435.0 million | $254.2 million | Up 71.1%; FY2016 included acquired businesses for only part of the year. |
| Platform and operations revenue | $405.5 million | $215.9 million | Up 87.8%; 93.2% of FY2017 revenue. Platform lives grew 34.8%, from about 2.0 million to 2.7 million. |
| Transformation revenue | $29.5 million | $38.3 million | Down 23.1%; management expects it to decline as a share of revenue as the business becomes more product-oriented. |
| Cost of revenue | $269.4 million | $155.2 million | 61.9% and 61.0% of revenue, respectively; gross margin before depreciation and amortization was approximately 38.1% and 39.0%. |
| Selling, general and administrative expense | $205.7 million | $160.7 million | 47.3% and 63.2% of revenue, respectively. |
| Operating loss | $72.8 million | $237.4 million | FY2016 included a $160.6 million goodwill impairment; no impairment was recorded in FY2017. |
| Net loss | $69.8 million | $226.8 million | Net loss attributable to Evolent Health, Inc. was $60.7 million and $159.7 million, respectively. |
| Operating cash flow | $(28.0) million | $(35.5) million | Cash used in operations in both years. |
At December 31, 2017, cash and cash equivalents were $238.4 million; restricted cash and restricted investments totaled $65.7 million. Current assets were $378.2 million and current liabilities were $132.7 million. Cash and restricted cash increased by $125.3 million during the year, chiefly reflecting the equity offering.
Long-term debt had a $125.0 million principal amount and $121.4 million net carrying value. The 2.00% convertible notes mature in December 2021. Financing cash flow was $165.6 million, including $166.9 million net proceeds from the August 2017 primary stock offering. Investing cash flow was $(12.3) million, including a $20.0 million implementation loan, partly offset by investment maturities.
For Q4 2017, revenue was $113.7 million, operating expenses were $132.0 million, net loss was $13.8 million, and loss attributable to Evolent Health, Inc. was $13.2 million, or $0.18 per share.
Material changes versus the prior period
- Revenue growth reflected acquisitions, expanded services, and membership growth; the acquired businesses were included for only part of 2016.
- Operating loss narrowed substantially, primarily because 2016 included the goodwill impairment. FY2017 operating costs still exceeded revenue.
- Platform and operations services became a larger share of revenue, while transformation revenue decreased.
- The company’s economic ownership of Evolent Health LLC rose from 77.4% at year-end 2016 to 96.6% at year-end 2017, following exchanges and equity issuances.
- In January 2018, Evolent acquired NMHC commercial-business assets for $10.3 million and contributed them to True Health. True Health had approximately 20,000 members at year-end 2017; Evolent expected to report it as a separate segment beginning in Q1 2018.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no quantified forward guidance. Management expected operating losses to continue for the foreseeable future, while stating that available liquidity was sufficient for the next 12 months as of the financial statements’ issuance. It expects cost ratios to improve over time, but this is not assured.
- Customer and Medicaid concentration: Passport generated 20.6% of FY2017 revenue. The filing expects Kentucky’s newly approved Medicaid community-engagement waiver to reduce Passport membership in 2018, potentially affecting revenue. Other states have pursued similar waivers.
- Risk-sharing and partner support: $24.7 million of restricted cash and investments related to risk-sharing arrangements; the company also provided a $5.0 million letter of credit and a $20.0 million implementation loan. The loan was due in ten monthly installments during 2018.
- Regulation and market uncertainty: The impact of ACA changes, repeal of the individual mandate, Medicaid policy changes, reimbursement levels, and public-exchange conditions remained uncertain. The business is also subject to extensive health care, insurance, privacy, and data-security regulation.
- Financial reporting controls: Management and the auditor concluded that internal control over financial reporting was ineffective because of a material weakness involving insufficient accounting resources and expertise for complex, non-routine transactions. The weakness had led to revision of the June 2017 quarter’s financial statements; remediation efforts were underway but not yet effective for a sufficient period.
- Other notable items: The company recorded a $6.6 million income tax benefit in 2017, including provisional effects of the Tax Act. It adopted the restricted-cash cash-flow presentation standard, which changed cash-flow classifications. It also disclosed an immaterial correction to previously reported 2017 cash-flow classifications. Goodwill was $628.2 million; a December 2017 impairment test found fair value above carrying value, but the conclusion was sensitive to valuation assumptions.
- Revenue accounting: Evolent adopted the new revenue standard on January 1, 2018, and preliminarily estimated a $15 million to $18 million increase in opening stockholders’ equity, primarily from contract-cost deferrals and earlier recognition of variable consideration.
Most important facts for investors to verify
- Whether customer and platform-life growth continues, and whether the 2017 revenue increase is sustainable apart from acquisition effects.
- The actual membership and revenue impact of Kentucky’s Medicaid waiver on Passport and the consequences of any similar state policies.
- Progress in remediating the material weakness, including whether controls operate effectively and whether further financial-statement revisions are needed.
- Cash generation, use of restricted funds, collection and repayment of the $20.0 million implementation loan, and the company’s ability to fund continuing losses and growth.
- Performance of risk-sharing arrangements and the assumptions supporting goodwill and contingent-consideration valuations.
- The realized financial effects of the 2018 revenue-standard adoption and the NMHC/True Health acquisition, including health-plan costs and required regulatory capital.