Evolent Health, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Evolent provides technology, analytics, pharmacy benefit management and health-plan administration services to provider partners adopting value-based care.
Financial performance and position
- Revenue: $49.4 million: $8.1 million transformation revenue and $41.3 million platform and operations revenue.
- Profitability: GAAP operating loss was $175.2 million, including a $160.6 million goodwill impairment. Net loss was $173.9 million; $122.8 million was attributable to Evolent Health, Inc. Basic and diluted loss per share were $2.91.
- Adjusted operating results: Company-presented non-GAAP adjusted revenue was $49.5 million and adjusted operating loss was $10.0 million. These figures exclude specified items and are not GAAP measures.
- Cash flow: Cash used in operating activities was $20.8 million; cash used in investing activities was $13.7 million, principally for acquisitions and property and equipment. Cash and cash equivalents declined by $34.4 million during the quarter.
- Liquidity: At quarter-end, cash and cash equivalents were $111.3 million, restricted cash was $8.3 million and investments were $54.0 million. Management said liquidity was sufficient for the next 12 months.
- Debt: The company reported no outstanding debt. Total liabilities were $80.8 million.
- Margins and costs: On the adjusted presentation, cost of revenue was 56.8% of revenue versus 70.2% in the comparable adjusted 2015 period. Adjusted SG&A was 56.5% of revenue versus 53.7%.
Changes versus the prior comparable period
The reported Q1 2015 figures are not a like-for-like comparison: before the June 2015 reorganization, Evolent Health, Inc. accounted for Evolent Health LLC as an equity-method investment and did not consolidate its operating results. Thus, the 2015 reported statements show no revenue, while the 2016 statements include the operating business. In the company’s non-GAAP adjusted comparison, revenue increased 33.7% to $49.5 million, driven by 55.0% growth in platform and operations revenue; transformation revenue declined 21.0%. Platform lives grew from approximately 0.5 million to 1.2 million, and partners in the platform and operations phase increased from seven to twelve.
The quarter’s $160.6 million goodwill impairment followed a sustained decline in the share price and a failed interim impairment test. Goodwill fell from $608.9 million at year-end 2015 to $459.7 million at March 31, 2016.
Outlook, risks and unusual items
- Management expects operating losses to continue for the foreseeable future and plans continued investment in partner success, geographic expansion and capabilities. It said additional capital may be needed, although current liquidity was expected to cover the next 12 months. No quantitative earnings or revenue guidance was provided.
- The Passport strategic alliance began February 1, 2016. It included a 10-year services arrangement and shares issued for acquired capabilities and assets; up to an additional $10 million in equity consideration may be earned if new third-party Medicaid business is obtained. The filing attributes $6.4 million of Q1 revenue to Passport.
- Evolent paid $7.5 million for Vestica assets, with a further $4.0 million held in escrow and contingent on future events.
- Revenue is concentrated: four partners generated 56.8% of Q1 revenue. The company also relies on UPMC for certain services; a service disruption could adversely affect revenue. Most cash equivalents were held in one money-market fund ($81.2 million).
- The company recorded no material litigation accruals. It has a Tax Receivables Agreement requiring payment to certain investors of 85% of specified realized tax benefits; no liability was recorded as of quarter-end.
- Disclosure controls were judged ineffective at March 31, 2016, due to a previously identified material weakness in the financial-statement close process. Remediation efforts were ongoing, with additional review procedures applied for this filing.
- Key risks include partner concentration and retention, recoverability of upfront investment, healthcare regulation, growth execution, potential further goodwill impairment, and the ability to achieve profitability. Management warned that further sustained share-price declines or changes in forecasts, strategy or interest rates could lead to additional impairment.
Investor verification points
- Review the non-GAAP adjusted comparison and its exclusions; reported 2015 results are not directly comparable because of the reorganization and consolidation change.
- Assess the goodwill impairment valuation assumptions, including share-price effects, control premium, discount rate and management cash-flow forecasts.
- Track cash burn, investment requirements and the stated 12-month liquidity outlook, including acquisition and contingent consideration obligations.
- Monitor revenue exposure to the four largest partners and reliance on UPMC, as well as platform enrollment and conversion of partner relationships into durable revenue.
- Verify progress in remediating the material weakness and improving disclosure controls.