Evolent Health, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Evolent provides technology-enabled services supporting providers’ transition to value-based care and, following its January acquisition of NMHC assets, operates True Health, a commercial health plan in New Mexico. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $139.7 million | $106.2 million; up 31.5% |
| Operating loss | $14.1 million | $21.5 million loss; operating loss margin improved to about 10.1% from 20.2% of revenue |
| Net loss attributable to Evolent | $13.6 million; $0.18 per share | $18.0 million; $0.34 per share |
| Adjusted EBITDA (non-GAAP) | $7.9 million | $4.8 million loss |
| Operating cash flow | $24.7 million cash used | $34.8 million cash used |
| Cash and cash equivalents | $200.3 million | $238.4 million at December 31, 2017 |
| Restricted cash and investments | $36.8 million | $65.7 million at December 31, 2017 |
| Long-term debt | $125.0 million principal; $121.6 million carrying value | 2.00% convertible notes due December 2021 |
Current assets were $337.3 million and current liabilities $116.9 million at quarter-end. Cash, cash equivalents and restricted cash totaled $236.4 million, down $59.0 million during the quarter. Investing activities used $12.7 million and financing activities used $21.6 million; financing cash use primarily reflected a $22.3 million decline in restricted cash held for partners’ claims processing.
Cost of revenue was $72.0 million, or 51.5% of revenue, versus 63.6% a year earlier. Claims expense was $16.7 million, or 12.0% of revenue, reflecting the newly consolidated health plan. SG&A was $55.5 million, or 39.7% of revenue versus 50.4%; depreciation and amortization increased 43.6% to $9.5 million.
Material changes versus the prior period
- Platform and operations services revenue grew 14.4% to $109.8 million, primarily from higher average per-member-per-month fees and 1.4% aggregate growth in lives on platform. Evolent had over 30 revenue-producing partners, compared with over 25 a year earlier.
- Transformation services revenue fell 36.4% to $6.5 million as the offering became more product-oriented; management expects it to continue declining as a share of revenue.
- True Health contributed $23.4 million of premiums and $16.7 million of claims expense in its first reported quarter. The NMHC asset acquisition closed January 2 for approximately $10.3 million; preliminary purchase accounting included $5.8 million of goodwill.
- Evolent adopted ASC 606 on January 1 using the modified retrospective method. The adoption increased opening retained earnings by $17.3 million. It also affected reported Q1 revenue and costs; prior-year figures were not restated.
- The March 2018 private sale generated no proceeds for Evolent, but the related Class B exchange increased its economic ownership of Evolent Health LLC from 96.6% to 98.9%.
Outlook, risks and notable items
- No specific quantified full-year guidance is provided. Management believes available liquidity is sufficient for at least the next 12 months, but expects continued investment in growth and may incur operating losses for the foreseeable future. It expects depreciation and amortization to rise as software and acquired intangible assets are amortized.
- Management cited partner concentration, contract termination or renegotiation, health-care regulatory uncertainty, execution and integration risks, and the ability to control medical costs—particularly in New Mexico. The two largest partners represented 30.7% of Q1 revenue; one partner alone represented 20.1%.
- True Health claims reserves were $6.7 million. Estimation depends on claims completion factors and medical-cost trends; management noted the challenge of applying historical experience to a business it had only recently acquired.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2018, due to an unremediated material weakness in accounting for complex, non-routine transactions. Remediation and testing were underway but had not operated long enough to establish effectiveness.
- The filing reports no legal proceedings believed likely to have a material adverse effect and no material changes to the risk factors in the 2017 Form 10-K. The $10.0 million NMHC capital-only reinsurance arrangement carries no underwriting risk to Evolent, according to the filing.
Important facts for investors to verify
- Track cash burn and liquidity, including the distinction between unrestricted cash and restricted funds; assess whether the stated 12-month liquidity expectation remains reasonable.
- Monitor Services growth, partner concentration and contract renewals, and compare recurring platform revenue with declining transformation revenue.
- Evaluate True Health enrollment, premium revenue, medical claims costs and reserve development as more operating history becomes available.
- Reconcile GAAP results to non-GAAP Adjusted EBITDA. Q1 adjusted segment metrics include a one-time $4.5 million ASC 606 transition-related revenue adjustment that management says will not recur.
- Follow remediation and operating-effectiveness testing of the material weakness, and review future filings for any restatements or control-related updates.
- Review the $125.0 million convertible notes due 2021, their conversion terms, and the company’s ability to reach profitability without additional financing.