Evolent Health, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; amounts below are in U.S. dollars. Evolent provides technology-enabled clinical and health-plan administrative services, alongside its True Health commercial health plan in New Mexico. The filing was delayed because COVID-19 restrictions limited access to facilities, records, and personnel.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $247.3 million | $197.8 million |
| Operating loss | $(25.5) million | $(46.6) million |
| Net loss attributable to Evolent common shareholders | $(78.8) million | $(46.7) million |
| Loss per share, diluted | $(0.93) | $(0.59) |
| Adjusted EBITDA | $3.6 million | $(14.8) million |
| Cash used in operating activities | $(20.5) million | $(25.7) million |
- Revenue rose 25.0%, led by platform and operations services, up 42.5% to $209.9 million. Transformation services were $5.2 million, while premiums fell 31.8% to $32.1 million.
- Platform and operations revenue was 84.9% of total revenue, versus 74.5% a year earlier. Services revenue growth reflected existing and new partners, cross-selling, and higher average per-member fees.
- Cost of revenue increased 49.6% to $175.7 million and rose to 81.6% of Services revenue from 78.0%. SG&A decreased 26.9% to $54.7 million and fell to 22.1% of revenue from 37.8%, primarily due to lower headcount.
- Net loss included a $47.1 million non-cash impairment of the GlobalHealth equity investment and a $6.4 million loss on disposal of a subsidiary. The prior-year quarter included $25.4 million of assumed NMHC reinsurance premiums; that agreement ended in 2019.
- At March 31, cash and cash equivalents were $67.9 million; restricted cash and investments were $62.7 million, including $51.8 million held for partners’ claims processing. Long-term debt, net of discount, was $296.7 million. Debt principal obligations disclosed were $372.5 million, including $125 million of 2021 Notes, $75 million under the credit agreement, and $172.5 million of 2025 Notes.
Changes, liquidity, and outlook
- Operating loss improved from the prior-year period, and Adjusted EBITDA turned positive; however, net loss widened, principally reflecting the GlobalHealth impairment and higher interest expense.
- Total assets were $1.45 billion and total liabilities were $603.7 million at quarter-end. Unrestricted cash declined from $101.0 million at December 31, 2019 to $67.9 million. The company reported $129.8 million of cash and restricted cash for cash-flow purposes; a substantial portion is restricted or held for partners.
- Management said available cash and other liquidity sources were expected to cover the next 12 months. The credit agreement includes minimum net revenue and liquidity covenants; the company reported compliance at March 31, 2020. The $50 million delayed-draw facility was subject to conditions.
- Management reported no material COVID-19 impact on results or outlook through the filing, but described the longer-term effects as uncertain. Medicaid enrollment could rise and provide a near-term benefit, while commercial membership could decline. Lower non-essential care utilization modestly benefited the business late in Q1, but deferred care could later rebound.
- No quantified full-year financial guidance was provided. Management expected future True Health revenue to be lower following termination of the NMHC reinsurance agreement and anticipated SG&A to decline as a share of revenue over the long term, subject to business growth and mix.
Material risks, contingencies, and unusual items
- Passport: Passport represented 22.0% of Q1 revenue. Its Kentucky Medicaid contract was due to expire December 31, 2020; the RFP outcome was expected in Q2 2020. Losing the contract could materially reduce future management-services revenue and investment value. Evolent also disclosed a $25 million performance-bond indemnity and a separate capital-support commitment; no amounts had been funded under the latter at quarter-end.
- GlobalHealth: A regulator required additional capital by May 15, 2020 to avoid receivership. On May 13, 2020, GlobalHealth transferred all equity to new investors for no consideration; Evolent recorded a $47.1 million impairment in Q1. This post-quarter event eliminated the recorded investment value.
- Accounting controls: Disclosure controls and procedures were deemed ineffective as of March 31, 2020 due to material weaknesses involving access controls, segregation of duties, claims-data changes, and third-party claims data. Remediation was ongoing; the filing said the weaknesses had not caused financial-statement adjustments.
- Litigation: A securities class action alleges misleading statements concerning Passport. Evolent said it believed the case lacked merit, but could not assess the probability or amount of loss.
- Other key exposures include customer and receivables concentration, health-plan claims estimates, credit and liquidity risks, covenant compliance, and potential further goodwill impairment. The filing also noted full valuation allowances against most deferred tax assets.
Key facts for investors to verify
- Final Kentucky Medicaid RFP outcome for Passport, and resulting service revenue, investment value, and any put/call option or capital-support obligations.
- Cash available for general use versus restricted and partner-held balances, operating cash burn, debt maturities, and compliance with credit-facility covenants.
- Whether COVID-19 changes Medicaid and commercial membership, medical utilization, client payments, or deferred-care costs beyond the period described.
- Progress and effectiveness testing of remediation for the disclosed material weaknesses in internal controls.
- Potential further impairments or liabilities relating to GlobalHealth, goodwill, litigation, claims reserves, or the Passport guarantees.