Evolent Health, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Comparisons require care: Evolent Health, Inc. reported Evolent Health LLC using the equity method before June 4, 2015, then consolidated it after the Offering Reorganization. Accordingly, reported GAAP results do not show a full year of operating-company revenue and expenses.
Business context and financial results
Evolent provides technology and managed services to health systems transitioning from fee-for-service to value-based care. Services include population-health technology and operations, health-plan administration, pharmacy benefit management, and transformation and implementation work. Revenue is driven in part by partner membership and the services adopted.
| Metric | 2015 | Comparable information |
|---|---|---|
| Reported revenue | $96.9 million | $0 in 2014 GAAP statements; 2014 does not include consolidated operating-company revenue |
| Adjusted revenue (non-GAAP, as if reorganization occurred at start of period) | $163.5 million | $100.9 million in 2014, up 62.1% |
| Adjusted platform and operations revenue | $126.3 million | $64.6 million in 2014, up 95.6% |
| Adjusted operating loss | $41.5 million | $40.8 million in 2014 |
| GAAP operating loss | $43.0 million | 2014 reported operating expenses and revenue were zero under the holding-company presentation |
| GAAP net income attributable to Evolent Health, Inc. | $332.5 million | Includes a $414.1 million non-cash gain on consolidation; net loss attributable to the company was $25.2 million in 2014 |
| Net cash used in operating activities | $18.5 million | 2014 reported cash flow was zero under the holding-company presentation |
| Cash and cash equivalents at year-end | $145.7 million | Plus $54.1 million of investments and $6.3 million of restricted cash |
| Debt | None outstanding | As of December 31, 2015 |
On the adjusted basis, cost of revenue was 61.0% of revenue in 2015 versus 71.7% in 2014, implying gross margins of 39.0% and 28.3%, respectively. Adjusted SG&A was 58.4% of revenue versus 65.0%. Adjusted measures are non-GAAP and exclude purchase-accounting, stock-compensation and IPO/reorganization transaction effects; they should not be treated as GAAP results.
Adjusted platform and operations growth was mainly associated with a 65.8% increase in lives on the platform, from 432,837 at year-end 2014 to 717,526 at year-end 2015. The company ended 2015 with nine partners in the platform and operations phase and eleven partners under long-term agreements.
Material changes, liquidity, and outlook
- Partner concentration and contract changes: The five largest partners accounted for 72.3% of 2015 revenue. Amendments reduced expected revenue from Piedmont WellStar; the company expected 2016 revenue from that contract at about 75% of 2015 revenue attributable to it, with minimal revenue anticipated in later years. A WakeMed amendment changed pricing to fixed and performance-based fees; 2016 revenue was expected to be limited to the fixed portion, about 60% of 2015 WakeMed-attributable revenue.
- Liquidity: Management said cash, short-term investments and other liquidity were sufficient for the next 12 months. The IPO generated approximately $209.1 million net of underwriting discounts and commissions before offering expenses. Working capital, calculated from reported current assets less current liabilities, was approximately $125.0 million at year-end. Operating cash use reflected, among other factors, an $18.0 million decline in deferred revenue.
- Profitability: Management expected operating losses to continue for the foreseeable future while it invested in growth, partner acquisition, technology and capabilities. It cautioned that additional financing might be needed and might not be available on acceptable terms.
- Goodwill risk: The balance sheet included $608.9 million of goodwill from the reorganization. The October 2015 impairment test passed, but the filing warned that a sustained share-price decline could require a potentially material impairment charge. The stock closed at $8.71 on February 25, 2016, compared with the $17.00 IPO price.
- Subsequent event: On February 1, 2016, Evolent entered a 10-year services arrangement with Passport Health Plan and issued 1,067,271 Class A shares to acquire capabilities and assets for a Medicaid Center of Excellence. Passport served more than 280,000 Medicaid and Medicare Advantage beneficiaries; up to $10.0 million of additional equity consideration may be earned subject to obtaining new third-party Medicaid business.
- Controls and contingencies: Management concluded disclosure controls were not effective at December 31, 2015, due to a material weakness involving resources and expertise for complex, non-routine accounting. Remediation was underway. No litigation accruals were recorded at year-end. Under the tax receivables agreement, Evolent may owe certain investors 85% of specified realized tax savings; no liability had been recorded at year-end.
Key investor verification points
- Reconcile reported GAAP results with the adjusted full-year operating-company presentation; distinguish the $414.1 million consolidation gain from recurring performance.
- Track partner retention, membership growth, contract economics and the effects of the Piedmont WellStar and WakeMed amendments; assess the 72.3% revenue concentration among five partners.
- Review subsequent goodwill impairment testing and the assumptions behind projected revenue, margins, cash flows, and valuation.
- Monitor operating cash burn, deferred revenue and liquidity needs against management’s 12-month sufficiency assessment and continuing-loss outlook.
- Verify progress in remediating the material weakness and evaluate the accounting, share dilution and revenue contribution of the Passport transaction.
- Assess potential tax-receivables-agreement payments, realization of tax attributes, and any related liquidity or ownership effects.