Evolent Health, Inc. annual report, FY2020

Evolent Health, Inc. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; quarterly figures below are for the three months ended December 31, 2020. Evolent provides technology-enabled clinical and administrative services supporting value-based care, alongside its New Mexico health plan, True Health. Its 2020 reportable segments were Services and True Health.

Financial performance

Metric	FY2020	FY2019
Revenue	$1,022.4 million	$846.4 million
Operating loss	$(270.6) million	$(306.6) million
Net loss	$(334.2) million	$(305.6) million
Adjusted EBITDA	$41.4 million	$(11.0) million
Cash used in operating activities	$(16.2) million	$(42.6) million

• Revenue increased 20.8%. Platform and operations services revenue rose 35.4% to $893.1 million, driven by membership growth, cross-selling and new partners. Premium revenue declined 31.7% to $117.4 million; transformation revenue fell 21.1% to $12.0 million.
• Operating margin was approximately (26.5%) and net margin approximately (32.7%). Losses included a $215.1 million non-cash goodwill impairment and a $47.1 million non-cash impairment of the GlobalHealth equity-method investment.
• Services cost of revenue was 77.5% of Services revenue, versus 76.0% in 2019, reflecting a mix shift toward lower-margin services. SG&A was 21.8% of consolidated revenue, down from 30.4%.
• Fourth-quarter revenue was $271.9 million; net loss attributable to Evolent common shareholders was $14.6 million, or $0.17 per diluted share.
• At year-end, cash and cash equivalents were $340.5 million; restricted cash and investments were $21.7 million. Total current assets were $546.1 million and current liabilities $401.8 million.
• Year-end debt included $316.3 million principal of convertible notes and a $75.0 million Ares term loan; debt carrying values were reduced by discounts and issuance costs. The Ares loan was repaid and terminated in January 2021 for $98.6 million, including a $9.7 million make-whole premium; related warrants were settled for $13.7 million.

Material changes and significant transactions

• Services revenue growth was partly offset by the planned exit from health-plan activities. True Health contributed 11.5% of 2020 revenue, down from 20.3% in 2019.
• After Passport failed to win renewal of its Kentucky Medicaid contract, Evolent sold specified Passport assets and transferred the contract to Molina effective September 1, 2020. Evolent then consolidated EVH Passport and redeemed the sponsors’ 30% interest for $20.0 million. Management expects a $130–$170 million return of capital, subject to regulatory approval. The filing says Passport wind-down is expected to weigh on 2021 platform-and-operations growth.
• In August 2020, Evolent issued $117.1 million principal of 3.50% convertible notes due 2024, including an exchange of $84.2 million of 2021 notes and $32.8 million issued for cash. The exchange resulted in a $4.8 million debt-extinguishment loss.
• In January 2021, the company agreed to sell True Health to Bright HealthCare for $22.0 million plus excess risk-based capital, subject to closing conditions, regulatory approval and a claims-based purchase-price adjustment. Management expected closing in the first half of 2021; after closing, Evolent expects no premium revenue.
• The company reported $41.4 million of Adjusted EBITDA, compared with a loss of $11.0 million in 2019. Services Adjusted EBITDA was $48.6 million; True Health Adjusted EBITDA was $(7.1) million.

Outlook, risks and unusual items

• Management said COVID-19 had not materially affected results or outlook through the filing date. Higher Medicaid membership and lower medical utilization provided a modest near-term benefit, but the duration, net effect and possibility of later utilization increases were uncertain.
• No numerical 2021 revenue or earnings guidance is provided in the filing. Management expects operating losses to continue for the foreseeable future if revenue growth and cost objectives are not achieved; it also expects Services cost of revenue to decline as a percentage of revenue over the longer term, depending on growth mix.
• A repositioning plan running through the fourth quarter of 2021 includes organizational changes, potential workforce reductions and other cost initiatives. Estimated total plan costs are $8.8 million; $1.3 million was recorded in 2020.
• Partner concentration is significant: Cook County accounted for 20.3% of 2020 revenue and 61.5% of year-end accounts receivable. Cook County and EVH Passport/UHC together represented approximately 37.1% of 2020 revenue; a Molina services contract contributed approximately 8.8% through year-end.
• Key risks include partner loss or renegotiation, performance-based care-cost estimates, Medicaid/Medicare policy and funding changes, health-plan claims and reserve estimates, cybersecurity and privacy, acquisition integration, and the potential for further goodwill impairment. The $188.7 million claims and performance-based reserve is a significant estimate.
• A shareholder securities class action alleging misleading statements concerning Passport remained pending; the company had moved to dismiss and said it could not estimate a potential loss. No material accrual was reported for the case.
• Auditors issued unqualified opinions on the financial statements and internal controls. Previously reported control material weaknesses were deemed remediated as of year-end; management and the auditor excluded EVH Passport from the 2020 internal-control assessment.

Most important facts for investors to verify

• Whether the expected $130–$170 million Passport capital return receives regulatory approval, and the final amount and timing.
• Whether the True Health sale closes on the expected terms and how the claims-based adjustment and excess risk-based capital affect proceeds.
• How much 2021 revenue and cash flow are lost through the Passport wind-down, and whether growth in other Services contracts offsets it.
• Whether the large Cook County receivable is collected on schedule and customer concentration declines.
• Whether claims reserves, risk-based contracts and remaining goodwill withstand actual experience and updated forecasts.
• The liquidity and dilution implications of remaining convertible notes and any future cash requirements; year-end cash-flow from investing included substantial Passport consolidation and investment-sale proceeds.