Evolent Health, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Evolent provides technology-enabled clinical and administrative services supporting value-based care through its Services segment; True Health operates a New Mexico health plan.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $264.6 million | $220.1 million | $750.5 million | $609.9 million |
| Operating loss | $17.7 million | $20.1 million | $270.7 million | $92.0 million |
| Net loss | $38.2 million | $25.7 million | $320.4 million | $106.3 million |
| Net loss attributable to Evolent common shareholders | $37.3 million | $25.5 million | $319.6 million | $103.9 million |
| Adjusted EBITDA | $12.7 million | $3.3 million | $25.3 million | $(19.1) million |
| Operating cash flow | Not separately reported for the quarter | $(3.4) million | $(55.8) million |
Q3 diluted loss per share was $0.44, versus $0.30 a year earlier; nine-month diluted loss per share was $3.87, versus $1.27. Q3 revenue increased 20.2%, led by platform and operations services, up 34.3% to $230.3 million. Nine-month revenue rose 23.1%; platform and operations services grew 40.9% to $652.6 million. Premium revenue fell 32.2% in Q3 and 36.0% year to date, primarily following termination of the NMHC quota-share reinsurance agreement.
Cost of revenue was 77.9% of Services revenue in Q3, up from 74.6%; for the nine-month period it was 79.1%, up from 75.5%. SG&A was 21.1% of consolidated revenue in Q3 versus 26.7%, and 21.4% year to date versus 32.9%. Management attributed lower SG&A mainly to reduced headcount and lower stock-based compensation; cost of revenue rose with service growth and performance-based payments.
Liquidity, debt and material changes
- At September 30, cash and cash equivalents were $370.5 million, with $31.4 million of restricted cash and investments. Cash, cash equivalents and restricted cash reported in the cash-flow statement totaled $400.6 million. Management said liquidity was sufficient for the next 12 months.
- Nine-month investing cash inflow was $263.3 million, driven mainly by $159.8 million of cash from Passport’s initial consolidation and $140.9 million of investment maturities and sales. Financing cash inflow was $12.1 million.
- Long-term debt, net of discount, was $285.2 million. Aggregate principal outstanding was approximately $391.3 million, comprising $316.3 million of convertible notes and a $75 million secured term loan. The company issued $117.1 million of 3.50% convertible notes due 2024, exchanging $84.2 million of 2021 notes and issuing $32.8 million for cash; it also repurchased $14.0 million of 2021 notes. The exchanges produced a $4.8 million extinguishment loss.
- Passport’s Medicaid contract was novated to Molina on September 1, 2020; Evolent then consolidated Passport and began winding down its business. Evolent expects no material revenue from the former Passport contract, though a services agreement with Molina runs through December 31, 2020. Evolent must acquire the sponsors’ 30% interest for $20 million within 12 months of the novation. Return of remaining Passport cash is subject to claims, wind-down costs and regulatory approval.
- Nine-month results included a $215.1 million non-cash goodwill impairment and a $47.1 million impairment of the GlobalHealth equity-method investment. Goodwill was $354.7 million at quarter end, down from $572.1 million at year-end 2019.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management expects operating losses to continue for the foreseeable future and says profitability depends on revenue growth and cost management. It expects long-term SG&A leverage and potentially lower cost of revenue as a percentage of Services revenue, subject to business mix. Evolent is exploring strategic alternatives for True Health to focus capital on its core Services business.
Management reported no material COVID-19 impact to date, but described uncertain effects on partners, Medicaid funding, membership, medical utilization, collections and markets. Lower utilization had modestly benefited the business, while any later rebound in care could affect costs. The company also faces meaningful partner concentration: Passport and Cook County together represented approximately 41.7% of Q3 revenue; Cook County accounted for 56.6% of trade receivables at quarter end. The Passport transaction’s expected economic benefits are not assured.
A securities class action alleging misleading statements about Passport was awaiting a court decision on the company’s motion to dismiss; management said it could not estimate the probability or range of loss. The company also disclosed a $25 million Passport performance bond indemnity, a guarantee supporting Passport wind-down obligations, and a guarantee to maintain Passport Buyer’s minimum regulatory capital; no funding had been made under the latter guarantee at quarter end.
Disclosure controls and procedures were deemed ineffective because previously identified material weaknesses involving access and segregation of duties, claims-data changes, and third-party claims data remained under remediation and testing. Management stated the weaknesses had not caused adjustments to the 2019 or interim 2020 financial statements.
Important facts for investors to verify
- Whether Services growth converts into improved operating economics, given rising cost of revenue as a share of Services revenue.
- Passport wind-down claims, regulatory approvals, the $20 million sponsor buyout, and the timing and amount of any cash returned to Evolent.
- Debt maturity, cash requirements, covenant compliance and potential cash settlement or dilution from convertible notes; the company reported covenant compliance at September 30, 2020.
- Whether internal-control remediation is tested successfully and the securities litigation’s outcome.
- Any changes in COVID-19-related utilization, partner payments, Medicaid enrollment and True Health strategic alternatives.