NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
. Organization
Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware, and is a managed services firm that supports leading health systems and physician organizations in their migration toward value-based care and population health management. The Company operates through
two
segments. The Company’s Services segment provides our customers, who we refer to as partners, with a population management platform, integrated data and analytics capabilities, claims processing services, including pharmacy benefit management, specialty care management services and comprehensive health plan administration services. Together, these services enable health systems to manage patient health in a more cost-effective manner. The Company’s contracts are structured as a combination of advisory fees, monthly member service fees, percentage of plan premiums and shared medical savings arrangements. The Company’s wholly-owned subsidiary, True Health, operates as a separate segment and is a commercial health plan we operate in New Mexico that focuses on small and large businesses. The Company’s headquarters is located in Arlington, Virginia.
As of
December 31, 2018
, Evolent Health, Inc. owned
96.1%
of Evolent Health LLC, holds
100%
of the voting rights, is the sole managing member and controls its operations. Therefore, the financial results of Evolent Health LLC have been consolidated in the financial statements of Evolent Health, Inc.
Since its inception, the Company has incurred losses from operations. As of
December 31, 2018
, the Company had cash and cash equivalents of
$228.3 million
. The Company believes it has sufficient liquidity for the next twelve months as of the date the financial statements were available to be issued.
Evolent Health LLC Governance
Our operations are conducted through Evolent Health LLC and subsequent to the Offering Reorganization the financial results of Evolent Health LLC are consolidated in the financial statements of Evolent Health, Inc. Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC, and its only business is to act as sole managing member of Evolent Health LLC.
The Company serves as sole managing member of Evolent Health LLC. As such, it controls Evolent Health LLC’s business and affairs and is responsible for the management of its business.
Coordination of Evolent Health, Inc. and Evolent Health LLC
We must, at all times, maintain a
one
-to-one ratio between the number of outstanding shares of our Class A common stock and the number of outstanding Class A common units of Evolent Health LLC.
Issuances of Common Units
Evolent Health LLC may only issue Class A common units to us, as the sole managing member of Evolent Health LLC. Class B common units may be issued only to persons or entities we permit. Such issuances of Class B common units shall be made in exchange for cash or other consideration. Class B common units may not be transferred as Class B common units except to certain permitted transferees and in accordance with the restrictions on transfer set forth in the third amended and restated operating agreement of Evolent Health LLC. Any such transfer must be accompanied by the transfer of an equal number of shares of our Class B common stock.
We entered into exchange agreements with certain investors in connection with our IPO and our acquisition of New Century Health, pursuant to which certain holders of Evolent Health LLC Class B common units may exchange their Evolent Health LLC Class B common units, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock at any time and from time to time in accordance with and subject to the terms of the exchange agreements and the third amended and restated operating agreement of Evolent Health LLC. The amount of Class A common stock issued or conveyed will be subject to equitable adjustments for stock splits, stock dividends and reclassifications. As holders exchange their Evolent Health LLC Class B common units and our Class B common stock for our Class A common stock, our interest in Evolent Health LLC will increase.
2
. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principle
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with GAAP. Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below.
Summary of Significant Accounting Policies
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the valuation of assets (including intangibles and long lived assets), liabilities (including IBNR), consideration related to business combinations and asset acquisitions, revenue recognition including variable consideration, estimated selling prices for performance obligations in contracts with multiple performance obligations, claims reserves, contingent payments, allowance for doubtful accounts, depreciable lives of assets, impairment of long lived assets (including equity method investments), stock-based compensation, deferred income taxes and valuation allowance, contingent liabilities, valuation of intangible assets (including goodwill), purchase price allocation in taxable stock transactions and the useful lives of intangible assets.
Principles of Consolidation
The consolidated financial statements include the accounts of Evolent Health, Inc. and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.
Operating Segments
Operating segments are defined as components of a business that earn revenue and incur expenses for which discrete financial information is available that is evaluated, on a regular basis, by the chief operating decision maker (“CODM”) to decide how to allocate resources and assess performance. The Company operates through
two
segments: (1) Services, and (2) True Health. Our Services segment consists of our technology-enabled value-based care services, specialty care management services and comprehensive health plan administration services. Our True Health segment consists of a commercial health plan we operate in New Mexico that focuses on small and large businesses. See Note
18
for a discussion of our operating results by segment.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company holds materially all of our cash in bank deposits with FDIC participating banks, at cost, which approximates fair value. Cash and cash equivalents held in money market funds are carried at fair value, which approximates cost.
Restricted Cash and Restricted Investments
Restricted cash and restricted investments include cash and investments used to collateralize various contractual obligations (in thousands) as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Collateral for letters of credit
|
|
|
|
for facility leases
(1)
|
$
|
3,710
|
|
|
$
|
3,812
|
|
Collateral with financial institutions
(2)
|
34,142
|
|
|
24,725
|
|
Claims processing services
(3)
|
122,439
|
|
|
26,286
|
|
Collateral for reinsurance agreement
(4)
|
—
|
|
|
10,000
|
|
Other
|
532
|
|
|
862
|
|
Total restricted cash
|
|
|
|
and restricted investments
|
160,823
|
|
|
65,685
|
|
|
|
|
|
Current restricted investments
|
211
|
|
|
8,150
|
|
Current restricted cash
|
154,507
|
|
|
54,248
|
|
Total current restricted cash
|
|
|
|
and restricted investments
|
154,718
|
|
|
62,398
|
|
|
|
|
|
Noncurrent restricted investments
|
607
|
|
|
605
|
|
Noncurrent restricted cash
|
5,498
|
|
|
2,682
|
|
Total noncurrent restricted cash
|
|
|
|
and restricted investments
|
$
|
6,105
|
|
|
$
|
3,287
|
|
(1)
Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note
9
for further discussion of our lease commitments.
(2)
Represents collateral held with financial institutions for risk-sharing and other arrangements. As of
December 31, 2018
and
2017
, approximately
$31.2 million
and
$16.6 million
of the collateral amount was held in a trust account and invested in money market funds related to risk-sharing arrangements. The amounts invested in money market funds are considered restricted cash and are carried at fair value, which approximates cost. As of December 31, 2017, approximately
$8.2 million
of the collateral amount was invested in restricted certificates of deposit with remaining maturities of less than 12 months related to risk-sharing arrangements. The restricted investments are classified as held-to-maturity and stated at amortized cost. Fair value of the certificates of deposit is determined using Level 2 inputs and approximates amortized cost as of December 31, 2017. See Note
16
for discussion of fair value measurement and Note
9
for discussion of our risk-sharing arrangements. As of December 31, 2018, approximately
$2.9 million
of the collateral amount was held in a FDIC participating bank account, primarily related to a line of credit.
(3)
Represents cash held by Evolent related to claims processing on behalf of partners. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.
(4)
This amount represents restricted cash required as part of our capital-only reinsurance agreement with NMHC that terminated during the fourth quarter of 2018. The reinsurance agreement is further discussed in Note
9
.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
228,320
|
|
|
$
|
238,433
|
|
Restricted cash and restricted investments
|
160,823
|
|
|
65,685
|
|
Restricted investments included in
|
|
|
|
restricted cash and restricted investments
|
(818
|
)
|
|
(8,755
|
)
|
Total cash and cash equivalents and restricted cash
|
|
|
|
shown in the consolidated statements of cash flows
|
$
|
388,325
|
|
|
$
|
295,363
|
|
Notes Receivable
Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but contributed
$20.0 million
in the form of an implementation funding loan (the “Implementation Loan”) under an agreement with a current customer entered during the year ended December 31, 2017. The Implementation Loan helped support implementation services to assist the customer in expanding its Medicaid membership. The Implementation Loan carried a fixed interest rate of
2.5%
per annum and the terms of the agreement governing the Implementation Loan required it to be repaid in
ten
equal monthly installments of
$2.0 million
, plus accrued interest, during 2018.
T
he Implementation Loan has been repaid in full, thus there was
no
outstanding notes receivable balance recorded on our Consolidated Balance Sheets as of
December 31, 2018
.
Property and Equipment, Net
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. The following summarizes the estimated useful lives by asset classification:
|
|
|
Computer hardware
|
3 years
|
Furniture and equipment
|
3-7 years
|
Internal-use software development costs
|
5 years
|
Leasehold improvements
|
Shorter of useful life or remaining lease term
|
When an item is sold or retired, the cost and related accumulated depreciation or amortization is eliminated and the resulting gain or loss, if any, is recorded in our Consolidated Statements of Operations and Comprehensive Income (Loss).
We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset group is not recoverable and exceeds fair value. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset group exceeds its fair value.
Software Development Costs
The Company capitalizes the cost of developing internal-use software, consisting primarily of personnel and related expenses (including stock-based compensation and employee taxes and benefits) for employees and third parties who devote time to their respective projects. Internal-use software costs are capitalized during the application development stage – when the research stage is complete and management has committed to a project to develop software that will be used for its intended purpose and any costs incurred during subsequent efforts to significantly upgrade and enhance the functionality of the software are also capitalized. Capitalized software costs are included in property and equipment, net on our Consolidated Balance Sheets. Amortization of internal-use software costs are recorded on a straight-line basis over their estimated useful life and begin once the project is substantially complete and the software is ready for its intended purpose.
Research and Development Costs
Research and development costs consist primarily of personnel and related expenses (including stock-based compensation) for employees engaged in research and development activities as well as third-party fees. All such costs are expensed as incurred. We focus our research and development efforts on activities that support our technology infrastructure, clinical program development, data analytics and network development capabilities. Research and development costs are recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss) and were
$18.2 million
,
$17.2 million
and
$11.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Business Combinations
Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Our estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Critical estimates used to value certain identifiable assets include, but are not limited to, expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates.
The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. Goodwill is assigned to the reporting unit that benefits from the synergies arising from the business combination. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).
For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as operating income or expense. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level, which is consistent with the way management evaluates our business. The Company has
three
reporting units: Legacy Services, New Century Health and True Health. Our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in impairment of goodwill on our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note
7
for additional discussion regarding the goodwill impairment tests conducted during
2018
and
2017
.
Intangible Assets, Net
Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. The Company acquired additional intangible assets in conjunction with strategic acquisitions made during 2018. Information regarding the determination and allocation of the fair value of the acquired assets and liabilities is further described within Note
4
.
The following summarizes the estimated useful lives by asset classification:
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|
|
Corporate trade name
|
10-20 years
|
Customer relationships
|
15-25 years
|
Technology
|
5 years
|
Provider network contracts
|
5 years
|
Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group exceed the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. See Note
7
for additional discussion regarding our intangible assets.
Claims Reserves
Claims reserves for our Services and True Health segments reflect estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities. Claims reserves also reflect estimated amounts owed to NMHC under a reinsurance agreement as discussed further in Note
9
. The Company uses actuarial principles and assumptions that are consistently
applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.
The process of estimating reserves involves a considerable degree of judgment by the Company and, as of any given date, is inherently uncertain. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and adjustments are reflected in current results of operations in the period in which they are identified as experience develops or new information becomes known. See Note
19
for additional discussion regarding our claims reserves.
Long-term Debt
Convertible notes are carried at cost, net of debt discounts and issuance costs, as long-term debt on the Consolidated Balance Sheets. The debt discounts and issuance costs are amortized to non-cash interest expense using the straight line method over the contractual term of the note if that method is not materially different from the effective interest rate method. Cash interest payments are due semi-annually in arrears and we accrue interest expense monthly based on the annual coupon rate. See Note
8
for further discussion regarding our convertible notes.
Leases
The Company leases all of its office space and enters into various other operating lease agreements in conducting its business. At the inception of each lease, the Company evaluates the lease agreement to determine whether the lease is an operating or capital lease. The operating lease agreements may contain tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, the Company records a deferred rent asset or liability on our Consolidated Balance Sheets equal to the difference between the rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the terms of the leases. In addition, the Company has entered into sublease agreements for some of its leased office space. Total rental income attributable to the subleases is offset against rent expense recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss) over the terms of the leases. As of
December 31, 2018
and
2017
, the Company had not entered into any material capital leases.
The Company is subject to non-cancellable leases for offices or portions of offices for which use might cease, resulting in a lease abandonment. When a lease abandonment is determined to have occurred, the present value of the future lease payments, net of estimated sublease payments, along with any unamortized tenant improvement costs, are recognized as lease abandonment expense in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) with a corresponding liability in the Company’s Consolidated Balance Sheets. See No
te
9
for
discussion of the lease abandonment.
Impairment of Equity Method Investments
The Company considers potential impairment triggers for its equity method investments, and the equity method investments will be written down to fair value if there is evidence of a loss in value which is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent investee equity transactions, discounted cash flow analyses and recent operating results. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether other-than-temporary impairment has occurred. The estimation of fair value and whether other-than-temporary impairment has occurred requires the application of significant judgment and future results may vary from current assumptions. There was
no
material impairment recorded for the years ended
December 31, 2018
,
2017
and
2016
.
Revenue Recognition
Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. See
“Changes in Accounting Principles” below for our updated revenue recognition policy as a result of our adoption of Accounting
Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers.
Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. The portion of premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as premiums received in advance. These amounts are generally classified as short-term deferred revenue on our Consolidated Balance
Sheets.
Cost of Revenue (exclusive of depreciation and amortization)
Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments to providers and payments for pharmaceutical treatments through capitated arrangements.
Claims Expenses
Our claims expenses consist of the direct medical expenses incurred by our True Health segment. Claims expenses are recognized in the period in which services are provided and include amounts that have been paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have been incurred but not paid by us as of the reporting date. Claims expenses include, among other items, fee-for-service claims, pharmacy benefits, various other related medical costs and expenses related to our reinsurance agreement. We use judgment to determine the appropriate assumptions for determining the required estimates.
Stock-based Compensation
The Company sponsors a stock-based incentive plan that provides for the issuance of stock-based awards to employees, vendors and non-employee directors of the Company or its consolidated subsidiaries. Our stock-based awards generally vest over a
four
year period and expire
ten
years from the date of grant.
We expense the fair value of stock-based awards granted under our incentive compensation plans. Fair value of stock options is determined using a Black-Scholes options valuation methodology. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, on a straight-line basis and is recognized as an increase to additional paid-in capital. Stock-based compensation expense is reflected in “Cost of revenue” and “Selling, general and administrative expenses” in our Consolidated Statements of Operations and Comprehensive Income (Loss). Additionally, and if applicable, we capitalize personnel expenses attributable to the development of internal-use software, which include stock-based compensation costs. We recognize share-based award forfeitures as they occur.
Income Taxes
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We recognize interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense, when applicable. As of
December 31, 2018
and 2017, our identified balance of uncertain income tax positions would not have a material impact to the consolidated financial statements. We are subject to taxation in various jurisdictions in the U.S. and India and remain subject to examination by taxing jurisdictions for the year 2011 and all subsequent periods due to the availability of NOL carryforwards.
We are a holding company and our assets consist of our direct ownership in Evolent Health LLC, for which we are the managing member. Evolent Health LLC is classified as a partnership for U.S. federal and applicable state and local income tax purposes and, as such, is not subject to U.S. federal, state and local income taxes. Taxable income or loss generated by Evolent Health LLC is allocated to holders of its units, including us, on a pro rata basis. Accordingly, we are subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Evolent Health LLC. Evolent Health LLC has direct ownership in corporate subsidiaries, which are subject to U.S. and foreign taxes with respect to their own operations.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to Class A common shareholders by the weighted-average number of Class A common shares outstanding.
For periods of net income, and when the effects are not anti-dilutive, we calculate diluted earnings per share by dividing net income available to Class A common shareholders by the weighted average number of Class A common shares plus the weighted average number of Class A common shares assuming the conversion of our convertible notes, as well as the impact of all potential dilutive
common shares, consisting primarily of common stock options and unvested restricted stock awards using the treasury stock method and our exchangeable Class B common stock. For periods of net loss, shares used in the diluted earnings (loss) per share calculation represent basic shares as using potentially dilutive shares would be anti-dilutive.
Fair Value Measurement
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. Our Consolidated Balance Sheets include various financial instruments (primarily cash not held in money-market funds, restricted cash, accounts receivable, accounts payable, accrued expenses and other liabilities) that are carried at cost and that approximate fair value.
See Note
16
for further discussion regarding fair value measurement.
Foreign Currency
The Company formed a subsidiary in India during the first quarter of 2018. The functional currency of our international subsidiary is the Indian Rupee. We translate the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity. We recorded a foreign currency translation loss of
$0.2 million
on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended
December 31, 2018
, which resulted in an “Accumulated other comprehensive loss” of
$0.2 million
on our Consolidated Balance Sheet as of
December 31, 2018
.
Change in Accounting Principle
Adoption of ASU 2014-09,
Revenue from Contracts with Customers
As discussed in Note
3
, the Company adopted ASU 2014-09,
Revenue from Contracts with Customers,
effective January 1, 2018. The following is our updated accounting policy with respect to revenue recognition for our Services segment.
Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. Revenue is recognized when control of the services is transferred to our customers. With the exception of revenues from our downside risk sharing arrangements through our insurance subsidiary, we use the following 5-Step model, outlined in Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”), to determine revenue recognition on our contracts with customers:
|
|
•
|
Identify the contract(s) with a customer
|
|
|
•
|
Identify the performance obligations in the contract
|
|
|
•
|
Determine the transaction price
|
|
|
•
|
Allocate the transaction price to performance obligations
|
|
|
•
|
Recognize revenue when (or as) the entity satisfies a performance obligation
|
Transformation Services Revenue
Transformation services consist of strategic assessments, or Blueprint contracts, and implementation services whereby we assist the customer in launching its population health or health plan strategy. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.
Platform and Operations Services Revenue
Platform and operations services generally include multi-year arrangements with customers to provide various population health, health plan operations, specialty care management (through capitated arrangements) and claims processing services on an ongoing basis, as well as transition or run-out services to customers receiving primarily third-party administration (“TPA”) services. Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our customers and members. Generally we will apply the series guidance to the performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically include a monthly payment that is calculated based on a specified per member per month rate, multiplied by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums. Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and
best judgment at the time. Due to the nature of our arrangements certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue for platform and operations services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.
Contracts with Multiple Performance Obligations
Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both transformation services and platform and operations services as these services are distinct from one another. When a contract has multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives when determining the standalone selling price.
Principal vs Agent
We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the principal or agent in the arrangement, we review each third-party relationship on a contract by contract basis. We are an agent when our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before it is provided and recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.
Previous revenue policy
Prior to the adoption of the new revenue guidance on January 1, 2018, the Company recognized revenue when persuasive evidence of an arrangement existed, the fees were fixed or determinable, the product or service had been delivered and collectability was assured. The Company considered the terms of each arrangement to determine the appropriate accounting treatment.
In accordance with the requirements under ASU 2014-09, the impact of adoption to our consolidated financial statements was as follows. See Note
5
for additional disclosures regarding Evolent's contracts with customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
Amounts without
|
Impact of
|
|
|
|
|
adoption of
|
adoption
|
|
As Reported
|
|
ASC 606
|
|
Higher/(Lower)
|
Revenue
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
32,916
|
|
|
|
$
|
35,238
|
|
|
|
$
|
(2,322
|
)
|
|
Platform and operations services
|
|
500,190
|
|
|
|
497,284
|
|
|
|
2,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization
|
|
|
|
|
|
|
|
|
|
presented separately below)
|
|
327,825
|
|
|
|
337,080
|
|
|
|
(9,255
|
)
|
|
Selling, general and administrative expenses
|
|
235,418
|
|
|
|
236,173
|
|
|
|
(755
|
)
|
|
Income (loss) before income taxes and non-controlling interests
|
|
(54,151
|
)
|
|
|
(64,745
|
)
|
|
|
10,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
|
Balances without
|
Impact of
|
|
|
|
|
adoption of
|
adoption
|
|
As Reported
|
|
ASC 606
|
|
Higher/(Lower)
|
Assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
80,208
|
|
|
|
$
|
77,197
|
|
|
|
$
|
3,011
|
|
|
Contract assets (current)
|
|
2,102
|
|
|
|
—
|
|
|
|
2,102
|
|
|
Contract assets (noncurrent)
|
|
961
|
|
|
|
—
|
|
|
|
961
|
|
|
Contract cost assets
|
|
19,147
|
|
|
|
—
|
|
|
|
19,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
20,584
|
|
|
|
$
|
23,391
|
|
|
|
$
|
(2,807
|
)
|
|
Other long-term liabilities
|
|
17,090
|
|
|
|
16,965
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
50,009
|
|
|
|
23,111
|
|
|
|
26,898
|
|
|
Non-controlling interests
|
|
45,532
|
|
|
|
44,527
|
|
|
|
1,005
|
|
|
3
. Recently Issued Accounting Standards
Adoption of New Accounting Standards
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07,
Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting
. The update expands the scope of ASC Topic 718,
Compensation - Stock Compensation
(“ASC 718”), to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU specifies that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments in the update also clarify that ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606. We adopted the requirements of this standard effective July 1, 2018, and the adoption did not have a material impact to our financial condition and results of operations during 2018. Going forward, we do not expect the adoption to have a material impact on our financial condition or results of operations.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, in order to clarify the principles of recognizing revenue. This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligations. By completing all five steps of the process, the core principles of revenue recognition will be achieved. The new revenue standard (including updates) is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The guidance permits two methods of adoption: i) the full retrospective method applying the standard to each prior reporting period presented, or ii) the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. The Company adopted the standard effective January 1, 2018, using the modified retrospective method for only contracts that were not completed at the date of initial application. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605,
Revenue Recognition
(“ASC 605”). The adoption of this standard resulted in changes related to revenue recognition for contracts that contain certain features, such as variable consideration. These changes generally accelerate revenue recognition. In addition, certain customer setup costs, which have historically been expensed as incurred, will now be capitalized. Evolent recognized the cumulative effect of applying the new revenue standard as a
$17.3 million
adjustment to the opening balance of retained earnings, including non-controlling interests, in the first quarter of 2018, primarily as a result of capitalization of expenses related to contract acquisition and fulfillment costs and acceleration of revenue due to variable consideration estimation. See Note
5
for additional disclosures regarding Evolent's contracts with customers. See Note
2
for updated
revenue recognition accounting policy and the impact of adopting the new revenue recognition standard on Evolent’s financial statements.
Future Adoption of New Accounting Standards
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal Use Software: Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Services Contract
. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of adoption on our financial condition and results of operations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
. With respect to assets measured at amortized cost, such as held-to-maturity assets, the update requires presentation of the amortized cost net of a credit loss allowance. The update eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses as opposed to the previous standard, when an entity only considered past events and current conditions. With respect to available for sale debt securities, the update requires that credit losses be presented as an allowance rather than as a write-down. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We intend to adopt the requirements of this standard effective January 1, 2020, and are currently evaluating the impact of the adoption on our financial condition and results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight‑line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (ASC Topic 842) supersedes the previous leases standard, ASC 840,
Leases
. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. A modified retrospective transition approach was required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU 2018-11, which is intended to make targeted improvements to ASU 2016-02. The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The requirements of ASU 2018-11 are effective on the same date as the requirements of ASU 2016-02. Pursuant to ASU 2018-11, the Company will apply the new standard at its adoption date rather than at the earliest comparative period presented in the financial statements and recognize a cumulative-effect adjustment to the opening balance of retaining earnings.
We intend to adopt the requirements of the new lease accounting standard effective January 1, 2019, using a modified retrospective approach. The Company has formulated an implementation team that is currently engaged in the evaluation process. We expect to take advantage of the package of practical expedients permitted within the new standard. We anticipate that this standard will have a material impact on our Consolidated Balance Sheets. We have considerable future minimum lease commitments related to our current noncancelable facility leases that expire through 2031, and we are currently in the process of renewing our lease at our headquarters in Arlington, Virginia. Recording our facility leases as right-of-use assets and the present value of remaining lease payments for leases in place at adoption as liabilities will have a material impact on our Consolidated Balance Sheets. We do not believe, however, that the adoption will have a material impact on our results of operations. See Note
9
for a disclosure of our undiscounted future minimum lease commitments.
4
. Transactions
Business Combinations
New Century Health
On
October 1, 2018
, the Company completed its acquisition of New Century Health, including
100%
of the voting equity interests. New Century Health is a technology-enabled, specialty care management company focused primarily on cancer and cardiac care and its assets include a proprietary technology platform which brings together clinical capabilities, pharmacy management and physician engagement to assist New Century Health’s customers in managing the large and complex specialties of cancer and cardiac care. We expect that the transaction will allow Evolent to enhance its clinical capabilities and enable it to offer a more integrated set of services to its current provider partners.
Total merger consideration, net of cash on hand and certain closing adjustments, was
$205.1 million
, based on the closing price of the Company’s Class A common stock on the NYSE on
October 1, 2018
. The merger consideration consisted of
$118.7 million
of cash consideration,
3.1 million
shares of Evolent Health LLC’s Class B common units and an equal number of the Company’s Class B common stock and an earn-out of up to
$11.4 million
, fair valued at
$3.2 million
as of
October 1, 2018
. The merger agreement includes an earn-out of up to
$20.0 million
,
$11.4 million
of which is payable to the former owners of New Century Health and
$8.6 million
of which is payable to former employees of New Century Health that became employees of the Company. The amount payable to the former owners of New Century Health is considered merger consideration. The amount payable to the former employees of New Century Health requires continued employment with the Company and is therefore considered post-combination compensation expense. See Note
16
for additional information regarding the fair value determination of the earn-out consideration and Note
11
for additional information about the portion of the earn-out that is classified as post-combination compensation expense. The Evolent Health LLC Class B common units, together with a corresponding number of the Company’s Class B common stock, can be exchanged for an equivalent number of the Company’s Class A common stock, and were valued at
$83.2 million
using the closing price of the Company’s Class A common stock on the NYSE on
October 1, 2018
.
As a result of the Class B common stock issued for the New Century Health transaction, the Company’s ownership in Evolent Health LLC decreased from
99.0%
to
95.3%
, immediately following the acquisition. The Company incurred approximately
$1.6 million
of transaction costs related to the New Century Health transaction during 2018, which are recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss). The Company accounted for the transaction as a business combination using the acquisition method of accounting.
The purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as of
October 1, 2018
, as follows (in thousands):
|
|
|
|
|
Purchase consideration:
|
|
Cash
|
$
|
124,652
|
|
Fair value of Class B common stock issued
|
83,173
|
|
Fair value of contingent consideration
|
3,200
|
|
Total consideration
|
$
|
211,025
|
|
|
|
Tangible assets acquired:
|
|
Cash and cash equivalents
|
$
|
5,963
|
|
Accounts receivable
|
5,559
|
|
Prepaid expenses and other current assets
|
7,901
|
|
Property and equipment
|
381
|
|
Other noncurrent assets
|
148
|
|
|
|
Identifiable intangible assets acquired:
|
|
Customer relationships
|
72,500
|
|
Technology
|
27,000
|
|
Corporate trade name
|
4,300
|
|
Provider network contracts
|
9,600
|
|
|
|
Liabilities assumed:
|
|
Accounts payable
|
1,167
|
|
Accrued liabilities
|
1,494
|
|
Accrued compensation and employee benefits
|
3,966
|
|
Claims reserves
|
18,631
|
|
Deferred tax liabilities
|
24,041
|
|
Other long-term liabilities
|
6,138
|
|
|
|
Goodwill
|
133,110
|
|
Net assets acquired
|
$
|
211,025
|
|
The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and is expected to be collectible in full. Identifiable intangible assets associated with customer relationships will be amortized on a straight-line basis over their preliminary estimated useful lives of
15
years. Identifiable intangible assets associated with technology, corporate trade name and provider network contracts will be amortized on a straight-line basis over their preliminary estimated useful lives of
5
,
10
and
5
years, respectively. The customer relationships are primarily attributable to long-term existing contracts with current customers. The technology consists of a clinical rules engine portal, data warehouse and claims system that New Century Health uses to provide services to its customers. The corporate trade name reflects the value that the New Century Health brand name carries in the market. The provider network contracts represents the established provider network that New Century Health relies on to provide services to its customers. The fair value of the intangible assets was determined using the income approach, the relief from royalty approach and the cost approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The relief from royalty approach estimates the fair value of an asset by calculating how much an entity would have to spend to lease a similar asset. The cost approach estimates the fair value of an asset by determining the amount that would be required currently to replace the service capacity of an asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to cross-selling opportunities and the acquired assembled workforce and was all allocated to the Services segment. Goodwill is considered to be an indefinite lived asset.
The merger was structured as a tax-free reorganization and therefore the Company received carryover basis in the assets and liabilities acquired; accordingly, the Company recognized net deferred tax liabilities associated with the difference between the book basis and the tax basis for the assets and liabilities acquired. The goodwill is not deductible for tax purposes.
The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information. Any necessary adjustments will be finalized within one year from the date of acquisition.
We have included the financial results of New Century Health in our consolidated financial statements from
October 1, 2018
. The Consolidated Statements of Operations and Comprehensive Income (Loss) include
$48.8 million
of revenues and
$2.5 million
of net loss attributable to New Century Health for the year ended December 31, 2018.
New Mexico Health Connections
On
January 2, 2018
, the Company, through its wholly-owned subsidiary, True Health, completed its previously announced acquisition of assets related to NMHC’s commercial, small and large group business. The assets include a health plan management services organization with a leadership team and employee base with experience working locally with providers to run NMHC’s suite of preventive, disease and care management programs. The consideration paid by the Company in connection with the acquisition consisted of
$10.3 million
in cash (subject to certain adjustments), of which
$0.3 million
was deposited in an escrow account. This acquisition is expected to allow the Company to leverage its platform to support a value-based, provider-centric model of care in New Mexico.
The Company commenced operations of the commercial health plan and began reporting the results of True Health as a new reportable segment during the first quarter of 2018. See Note
18
for further information about the Company’s segments. At the time of the acquisition, the Company also entered into a managed services agreement (“MSA”) with NMHC to support its ongoing business. During the fourth quarter of 2017, the Company also entered into a reinsurance agreement with NMHC to provide balance sheet support. See Note
9
for further discussion of the reinsurance agreement. The MSA and reinsurance agreement were considered separate transactions and accounted for outside of the business combination. Therefore, there is no allocation of purchase price to these agreements at fair value.
The Company incurred approximately
$1.2 million
in transaction costs related to the NHMC transaction, materially all of which were recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2017. The transaction was accounted for as a business combination using the acquisition method of accounting.
The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of
January 2, 2018
, as follows (in thousands):
|
|
|
|
|
Purchase consideration
|
|
Cash paid to NMHC
|
$
|
10,000
|
|
Cash paid to escrow agent
|
252
|
|
Total consideration
|
$
|
10,252
|
|
|
|
Identifiable intangible assets acquired and liabilities assumed
|
|
Customer relationships
|
$
|
2,700
|
|
Provider network contracts
|
2,300
|
|
Above market lease
|
(100
|
)
|
Accrued compensation and employee benefits
|
(474
|
)
|
|
|
Goodwill
|
5,826
|
|
Net assets acquired
|
$
|
10,252
|
|
Identifiable intangible assets associated with customer relationships and provider network contracts will be amortized on a straight-line basis over their estimated useful lives of
15
and
5
years, respectively. The customer relationships represent existing contracts in place to provide health plan services to a number of large and small group customers throughout the state of New Mexico. The provider network contracts represent a network of hospitals and physicians to service the health plan customers. The fair value of the customer relationship intangible asset was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The fair value of the provider network intangible asset was primarily determined using the cost approach. The cost approach estimates the fair value for an asset based on the amount it would cost to replace the asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Goodwill associated with the acquisition of True Health is allocated entirely to the True Health segment. The goodwill is attributable primarily to the acquired workforce and expected cost synergies, none of which qualify for
recognition as a separate intangible asset. All of the goodwill was allocated to the True Health segment. Goodwill is considered an indefinite-lived asset. The transaction is an asset acquisition for tax purposes, and as such the tax-basis in the acquired assets is equal to the book-basis fair value calculated and is recorded at the True Health legal entity. Therefore, no opening balance sheet deferred tax liability was recorded. The amount of goodwill determined for tax purposes is deductible.
The amounts above reflect management’s estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information. The purchase price allocation for True Health was finalized during 2018.
True Health is a separate segment, and its results of operations are provided in Note
18
- Segment Reporting.
Aldera
On
November 1, 2016
, the Company completed the acquisition of Aldera, including
100%
of the voting equity interests. The acquisition provides control over Aldera, a key vendor and the primary software provider for the Valence Health TPA platform. The merger consideration, net of certain closing and post-closing adjustments was
$34.3 million
based on the closing price of the Company’s Class A common stock on the NYSE on
November 1, 2016
, and consisted of approximately
0.5 million
shares of the Company’s Class A common stock,
$17.5 million
in cash and
$7.0 million
related to the settlement of a prepaid software license. As a result of the Class A common stock issued for the Aldera transaction, the Company’s ownership of Evolent Health LLC increased from
77.2%
to
77.4%
, immediately after the acquisition, as the Company was issued Class A membership units in Evolent Health LLC in exchange for the contribution of Aldera to Evolent Health LLC post acquisition.
Prior to the acquisition of Aldera, Evolent entered into a perpetual license agreement for development rights and use of Aldera proprietary software for
$7.0 million
. Upon closing the acquisition of Aldera, the Company concluded that the
$7.0 million
prepaid asset recorded by Evolent and the deferred revenue balance recorded by Aldera for the perpetual software license should be assessed as a prepayment for a software license that was effectively settled upon acquisition and was eliminated in the post-combination consolidated financial statements. No gain or loss was recognized on settlement as management determined the
$7.0 million
license fee to be priced at fair value and the license agreement did not include a settlement provision. The Company increased the consideration transferred for the acquisition of Aldera by
$7.0 million
for the effective settlement of the prepaid software license at the recorded amount, which brought the total consideration paid for the acquisition to
$34.3 million
.
The Company incurred approximately
$0.2 million
in transaction costs related to the Aldera acquisition, which were recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2016. The Company accounted for the transaction as a business combination using the acquisition method of accounting.
During the year ended December 31, 2017, the Company recorded net measurement period adjustments of approximately
$0.4 million
. The purchase price allocation, as previously determined, the measurement period adjustments and the purchase price allocation, as revised, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
|
|
|
|
As Previously
|
Period
|
|
|
|
Determined
|
Adjustments
|
As Revised
|
|
Purchase consideration:
|
|
|
|
|
|
|
|
|
Fair value of Class A common stock issued
|
|
$
|
9,864
|
|
|
|
$
|
—
|
|
|
|
$
|
9,864
|
|
Cash for settlement of software license
|
|
7,000
|
|
|
|
—
|
|
|
|
7,000
|
|
Cash
|
|
17,481
|
|
|
|
—
|
|
|
|
17,481
|
|
Total consideration
|
|
$
|
34,345
|
|
|
|
|
|
|
$
|
34,345
|
|
|
|
|
|
|
|
|
|
|
Tangible assets acquired:
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
624
|
|
|
|
$
|
(194
|
)
|
|
|
$
|
430
|
|
Prepaid expenses and other current assets
|
|
272
|
|
|
|
—
|
|
|
|
272
|
|
Property and equipment
|
|
1,065
|
|
|
|
—
|
|
|
|
1,065
|
|
Other non-current assets
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets acquired:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
7,000
|
|
|
|
—
|
|
|
|
7,000
|
|
Technology
|
|
2,500
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
429
|
|
|
|
—
|
|
|
|
429
|
|
Accrued liabilities
|
|
1,204
|
|
|
|
205
|
|
|
|
1,409
|
|
Accrued compensation and employee benefits
|
|
605
|
|
|
|
—
|
|
|
|
605
|
|
Deferred revenue
|
|
44
|
|
|
|
—
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
25,157
|
|
|
|
399
|
|
|
|
25,556
|
|
Net assets acquired
|
|
$
|
34,345
|
|
|
|
|
|
|
$
|
34,345
|
|
The fair value of the receivables acquired, as revised, shown in the table above, approximates the gross contractual amounts deemed receivable by management. Identifiable intangible assets associated with technology and customer relationships will be amortized on a straight-line basis over their estimated useful lives of
5
and
15
years, respectively. The technology is related to source code for licensed software used to support the third-party administration platform offered to Aldera’s clients. The fair value of the intangible assets was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to the acquired assembled workforce and expected cost and revenue synergies. All of the goodwill was allocated to the Services segment. Goodwill is considered an indefinite lived asset. The transaction was a taxable business combination for the Company and the amount of goodwill determined for tax purposes is deductible upon the beginning of the amortization period for tax purposes.
The amounts above reflect management’s estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information, inclusive of the measurement period adjustments. During the year ended December 31, 2017, the Company recorded certain measurement period adjustments that primarily impacted receivables, accrued liabilities and goodwill. These adjustments resulted in a net
$0.4 million
increase to goodwill, as reflected in the purchase price allocation table above. The purchase price allocation for Aldera was finalized during 2017.
Valence Health
On
October 3, 2016
, the Company completed its acquisition of Valence Health, including
100%
of the voting equity interests. Valence Health, based in Chicago, Illinois, was founded in 1996 and provides value-based administration, population health and advisory services. In its 20 year history, Valence Health developed particular expertise in the Medicaid and pediatric markets. The addition of Valence Health strengthens the Company’s operational capabilities and provides increased scale and client diversification.
The merger consideration, net of certain closing and post-closing adjustments was
$217.9 million
based on the closing price of the Company’s Class A common stock on the NYSE on
October 3, 2016
, and consisted of
6.8 million
shares of the Company’s Class A common stock and
$54.8 million
in cash. The shares issued to Valence Health stockholders represented approximately
10.5%
of the Company’s issued and outstanding Class A common stock and Class B common stock immediately following the transaction. As a result of the Class A common stock issued for the Valence Health transaction, the Company’s ownership in Evolent Health LLC increased from
74.6%
to
77.2%
, immediately after the acquisition, as the Company was issued Class A membership units in Evolent Health LLC in exchange for the contribution of Valence Health to Evolent Health LLC post acquisition. The transaction also included an earn-out of up to
$12.4 million
, fair valued at
$2.6 million
as of
October 3, 2016
, payable by January 30, 2017, in the Company’s Class A common stock, tied to new business activity contracted on or before December 31, 2016. The fair value was determined by assigning probabilities to potential business activity in the pipeline as of the acquisition date. As of December 31, 2016, Valence Health had not contracted sufficient business to be eligible for payment of the earn-out consideration. As a result, the Company recorded a gain of
$2.6 million
in accordance with the release of the contingent liability for the year ended December 31, 2016, which is recorded within “(Gain) loss on change in value of contingent consideration” on our Consolidated Statements of Operations and Comprehensive Income (Loss). The Company incurred approximately
$2.7 million
of transaction costs related to the Valence Health acquisition for the year ended December 31, 2016. Approximately
$2.6 million
of these transaction costs are recorded within “Selling, general and administrative expenses” and less than
$0.1 million
are recorded within “Cost of revenue” on our Consolidated Statements of Operations and Comprehensive Income (Loss). The Company accounted for the transaction as a business combination using the acquisition method of accounting.
The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of
October 3, 2016
. During the year ended December 31, 2017, the Company recorded net measurement period adjustments of approximately
$1.2 million
. The purchase price allocation, as previously determined, the measurement period adjustments and the purchase price allocation, as revised, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
|
|
|
|
As Previously
|
Period
|
|
|
|
Determined
|
Adjustments
|
As Revised
|
|
Purchase consideration:
|
|
|
|
|
|
|
|
|
Fair value of Class A common stock issued
|
|
$
|
159,614
|
|
|
|
$
|
911
|
|
|
|
$
|
160,525
|
|
Fair value of contingent consideration
|
|
2,620
|
|
|
|
—
|
|
|
|
2,620
|
|
Cash
|
|
54,799
|
|
|
|
—
|
|
|
|
54,799
|
|
Total consideration
|
|
$
|
217,033
|
|
|
|
|
|
|
$
|
217,944
|
|
|
|
|
|
|
|
|
|
|
Tangible assets acquired:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
1,829
|
|
|
|
$
|
—
|
|
|
|
$
|
1,829
|
|
Accounts Receivable
|
|
8,587
|
|
|
|
(251
|
)
|
|
|
8,336
|
|
Prepaid expenses and other current assets
|
|
3,465
|
|
|
|
—
|
|
|
|
3,465
|
|
Property and equipment
|
|
6,241
|
|
|
|
—
|
|
|
|
6,241
|
|
Other non-current assets
|
|
313
|
|
|
|
—
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Favorable leases assumed (net of unfavorable leases)
|
|
4,323
|
|
|
|
(126
|
)
|
|
|
4,197
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets acquired:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
69,000
|
|
|
|
—
|
|
|
|
69,000
|
|
Technology
|
|
18,000
|
|
|
|
—
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
5,703
|
|
|
|
—
|
|
|
|
5,703
|
|
Accrued liabilities
|
|
3,865
|
|
|
|
(69
|
)
|
|
|
3,796
|
|
Accrued compensation and employee benefits
|
|
9,200
|
|
|
|
—
|
|
|
|
9,200
|
|
Deferred revenue
|
|
2,022
|
|
|
|
640
|
|
|
|
2,662
|
|
Other long-term liabilities
|
|
2,328
|
|
|
|
—
|
|
|
|
2,328
|
|
Net deferred tax liabilities
|
|
13,316
|
|
|
|
(636
|
)
|
|
|
12,680
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
141,709
|
|
|
|
1,223
|
|
|
|
142,932
|
|
Net assets acquired
|
|
$
|
217,033
|
|
|
|
|
|
|
$
|
217,944
|
|
The fair value of the receivables acquired, as revised, shown in the table above, approximates the gross contractual amounts due under contracts of
$9.1 million
, of which
$0.8 million
is expected to be uncollectible. Identifiable intangible assets associated with customer relationships and technology will be amortized on a straight-line basis over their preliminary estimated useful lives of
20
and
5
years, respectively. The customer relationships are primarily attributable to existing contracts with current customers. The technology is an existing platform Valence Health uses to provide services to customers. The fair value of the intangible assets was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to the acquired assembled workforce and expected cost and revenue synergies. All of the goodwill was allocated to the Services Segment. Goodwill is considered an indefinite lived asset. The merger was structured as a tax-free reorganization and therefore the Company received carryover basis in the assets and liabilities acquired; accordingly, the Company recognized net deferred tax liabilities associated with the difference between the book basis and the tax basis for the assets and liabilities acquired, as well as the Valence Health net operating loss tax carryforward received in the merger, in the amount of
$13.3 million
, resulting in additional goodwill. The purchased and additional goodwill created due to the increase in the deferred tax liability were not deductible for tax purposes. The Company contributed the acquired assets and liabilities of Valence Health to Evolent Health LLC, resulting in a taxable gain of
$52.7 million
for the Company, not recognized for financial reporting purposes.
The amounts above reflect management’s estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information, inclusive of measurement period adjustments. The Company recorded various measurement period adjustments that resulted in a
$1.2 million
net increase to
goodwill
during the year ended December 31, 201
7, including an adjustment to increase deferred revenue and goodwill by approximately
$0.6 million
during 2017, all of which was recorded as revenue during the year. In a
ddition, during the second quarter of 2017, the Company reached an agreement to finalize the net working capital (“NWC”) settlement related to the Valence Health transaction. Per the executed settlement agreement, the Company received
0.2 million
shares of its Class A Common Stock previously held in escrow. The fair value of the NWC settlement was approximately
$0.9 million
less than the Company’s previously recorded estimate and, accordingly, the Company recorded a measurement period adjustment to increase purchase price and goodwill by approximately
$0.9 million
. The Company also recorded adjustments to accounts receivable and intangible assets, which resulted in a
$0.4 million
increase to goodwill. During 2017, the Company filed the 2016 pre-acquisition tax return for Valence Health, resulting in an adjustment to decrease deferred tax liabilities and goodwill by approximately
$0.6 million
due to updates in certain estimates that were made as of the transaction date.
The purchase price allocation for Valence Health was finalized during 2017.
Our results for the year ended December 31, 2016, included approximately
$3.9 million
in stock compensation expense related to the acceleration of unvested Valence Health equity awards that vested upon the close of the Valence Health acquisition. The expense was related to Valence Health employees that remained with the Company following the close of the acquisition.
In conjunction with our acquisition of Valence Health on October 3, 2016, we also signed a Master Service Agreement (the “MSA”), as well as a Transition Service Agreement (the “TSA”) with Cicerone Health, the surviving Valence Health, Inc. state insurance cooperative business not acquired by the Company (“CHS”). The MSA and the TSA are at market rates and, therefore, there is no allocation of purchase price to these arrangements.
The terms of the MSA stipulate that the Company will provide service information technology, system configuration and medical management services to CHS’s state insurance cooperative clients until
December 31, 2018
. Based on management’s analysis, the terms of the MSA are at fair market value.
The TSA has expired as of December 31, 2017. Under the terms of the TSA, the Company provided back office information technology support to CHS and CHS provided back office finance and human resources support to Evolent until
December 31, 2017
. Additionally, employees of both entities will have mutual employee health care claims administration through a self-funded plan. Based on management’s analysis, the terms of the TSA are at fair market value.
Passport
On
February 1, 2016
, the Company entered into a strategic alliance with Passport, a nonprofit community-based and provider-sponsored health plan administering Kentucky Medicaid and federal Medicare Advantage benefits to approximately
0.3 million
Kentucky Medicaid and Medicare Advantage beneficiaries. As part of the transaction, we issued
1.1 million
Class A common shares to acquire capabilities and assets from Passport to enable us to build out a Medicaid Center of Excellence based in Louisville, Kentucky. Additional equity consideration of up to
$10.0 million
may be earned by Passport should we obtain new third party Medicaid businesses in future periods. This transaction also includes a
10
-year arrangement under which we will provide various health plan management and managed care services to Passport. The Company incurred approximately
$0.3 million
in transaction costs related to the Passport acquisition for the year ended December 31, 2016. The transaction costs were recorded within “Selling,
general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss). The Company has accounted for the transactions with Passport as a business combination using the acquisition method of accounting.
The fair value of the total consideration transferred in connection with the close of the transaction was
$18.2 million
, of which the Class A common shares were valued at
$10.5 million
and the contingent equity consideration was initially valued at
$7.8 million
. The fair value of the shares issued was determined based on the closing price of the Company’s Class A common stock on the NYSE as of
February 1, 2016
, and the quantity of shares issued was determined under a pricing collar set forth in the purchase agreement. The contingent equity consideration was recorded as a mark-to-market liability of
$5.6 million
and
$8.7 million
within “Other long-term liabilities” on our Consolidated Balance Sheets as of
December 31, 2018
and
2017
, respectively. We recorded a re-measurement gain of approximately
$3.1 million
and a re-measurement loss of approximately
$0.4 million
during the years ended
December 31, 2018
and
2017
, respectively, based on changes in the underlying assumptions of the fair value calculation. The fair value of the contingent equity consideration was estimated based on the real options approach, a form of the income approach, which estimated the probability of the Company achieving future revenues under the agreement. Key assumptions include the discount rate and the probability-adjusted recurring revenue forecast. A further discussion of the fair value measurement of the contingent consideration is provided in Note
16
.
The purchase price was allocated to the assets acquired based on their fair values as of
February 1, 2016
, as follows (in thousands):
|
|
|
|
|
Purchase consideration
|
|
Fair value of Class A common stock issued
|
$
|
10,450
|
|
Fair value of contingent consideration
|
7,750
|
|
Total consideration
|
$
|
18,200
|
|
|
|
Tangible assets acquired
|
|
Prepaid asset
|
$
|
6,900
|
|
|
|
Goodwill
|
11,300
|
|
Net assets acquired
|
$
|
18,200
|
|
The prepaid asset is related to an acquired facility license agreement as the Company was provided with leased facilities which house the acquired Passport employees at no future cost to the Company. The fair value of the acquired facility license agreement was determined by comparing the current market value of similar lease spaces to the facilities occupied by the acquired Passport personnel to obtain a market value of the occupied space, with the present value of the determined market value of the occupied space classified as the acquired facility license agreement prepaid asset. The goodwill is attributable partially to the acquired assembled workforce, and was allocated to the Services segment. The transaction was a taxable business combination for the Company and the amount of goodwill determined for tax purposes is deductible upon the beginning of the amortization period for tax purposes.
Pro forma financial information (unaudited)
The unaudited pro forma Consolidated Statements of Operations and Comprehensive Income (Loss) presented below gives effect to (1) the New Century Health transaction as if it had occurred on January 1, 2017, (2) the True Health transaction as if it had occurred on January 1, 2017, (3) the Aldera transaction as if it had occurred on January 1, 2015, (4) the Valence Health transaction as if it had occurred on January 1, 2015, and (5) the Passport transaction as if it had occurred on January 1, 2015. The following pro forma information includes adjustments to:
|
|
•
|
Remove transaction costs related to the New Century Health transaction of
$1.6 million
recorded during 2018 and reclassify such amounts to 2017;
|
|
|
•
|
Record amortization expenses related to intangible assets beginning on January 1, 2017, for intangibles acquired as part of the New Century Health and True Health transactions;
|
|
|
•
|
Record revenue and expenses related to the NMHC MSA beginning January 1, 2017;
|
|
|
•
|
Record stock based compensation expense beginning on January 1, 2017, for equity awards granted as part of the New Century Health transaction;
|
|
|
•
|
Record the issuance of Class B common shares as part of the New Century Health transaction as of January 1, 2017;
|
|
|
•
|
Remove transaction costs related to the Aldera, Valence Health and Passport transactions of
$0.2 million
,
$2.7 million
and
$0.3 million
, respectively, recorded during 2016 and reclassify said amounts to 2015;
|
|
|
•
|
Remove one-time items, such as the gain on the release of our contingent liability related to Valence Health of
$2.6 million
, stock-based compensation of
$3.9 million
related to the acceleration of Valence Health’s unvested equity awards and the lease abandonment charge related to the 14
th
Floor Space of
$6.5 million
, recorded during 2016 and reclassify said amounts to 2015;
|
|
|
•
|
Record amortization expenses related to intangible assets beginning January 1, 2015, for intangibles related to Valence Health and Aldera;
|
|
|
•
|
Record revenue and expenses related to the Valence Health MSA and TSA in 2016 and 2015;
|
|
|
•
|
Remove the tax benefit recorded associated with the Valence Health acquisition and reclassify said amounts to 2015;
|
|
|
•
|
Record rent expense related to Passport prepaid lease beginning January 1, 2015; and
|
|
|
•
|
Record adjustments of income taxes associated with these pro forma adjustments.
|
This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the transactions described above occurred in the specified prior periods. The pro forma adjustments are based on available information and assumptions that the Company believes are reasonable to reflect the impact of these transactions on the Company’s historical financial information on a pro forma basis (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenue
|
$
|
763,624
|
|
|
$
|
679,323
|
|
|
$
|
361,944
|
|
Net income (loss)
|
(69,337
|
)
|
|
(80,990
|
)
|
|
(225,091
|
)
|
Net income (loss) attributable to non-controlling interests
|
(3,554
|
)
|
|
(11,544
|
)
|
|
(57,433
|
)
|
Net income (loss) attributable to Evolent Health, Inc.
|
(65,783
|
)
|
|
(69,446
|
)
|
|
(167,658
|
)
|
|
|
|
|
|
|
Net income (loss) per Common Share:
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.85
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(3.30
|
)
|
Securities Offerings and Sales
The Company entered into exchange agreements with certain investors in connection with its IPO and its acquisition of New Century Health, pursuant to which certain holders of Evolent Health LLC Class B common units may exchange their Evolent Health LLC Class B common units, together with an equal number of shares of the Company’s Class B common stock, for shares of the Company’s Class A common stock, at any time and from time to time, in accordance with and subject to the terms of the exchange agreements and the third amended and restated operating agreement of Evolent Health LLC. The amount of Class A common stock issued or conveyed will be subject to equitable adjustments for stock splits, stock dividends and reclassifications. The cancellation of the Evolent Health LLC Class B common units results in an increase in the Company’s economic interest in Evolent Health LLC.
2018 Private Sales
In March 2018, The Advisory Board sold
3.0 million
shares of the Company’s Class A common Stock in a private sale (the “March 2018 Private Sale”). The shares sold in the March 2018 Private Sale consisted of
1.2 million
existing shares of the Company’s Class A common stock owned by The Advisory Board and
1.8 million
newly-issued shares of the Company’s Class A common stock received by The Advisory Board pursuant to a Class B Exchange for all of its shares of the Company’s Class B common stock and Class B common units of Evolent Health LLC. The Company did not receive any proceeds from the March 2018 Private Sale. Subsequent to this Class B Exchange, in June 2018, The Advisory Board sold all of their remaining shares of the Company’s Class A common stock and
no
longer owns any of the shares of our Class A common stock, Class B common stock or Evolent Health LLC Class B common units held by the Advisory Board at the time of the IPO.
As a result of this Class B Exchange and Evolent Health LLC’s cancellation of the Class B common units during the March 2018 Private Sale, the Company’s economic interest in Evolent Health LLC increased from
96.6%
to
98.9%
immediately following the March 2018 Private Sale, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
In November 2018, TPG sold
0.8 million
shares of the Company’s Class A common stock in a number of private sales (the “November 2018 Private Sales”). The shares sold in the November 2018 Private Sales consisted of
0.1 million
existing shares of the Company’s Class A common stock owned by TPG and
0.7 million
newly-issued shares of the Company’s Class A common stock received by TPG pursuant to Class B Exchanges.
The Company did not receive any proceeds from the November 2018 Private Sales. These sales represented all of TPG’s remaining equity interest in the Company and TPG
no
longer owns any of the shares of the Company’s Class A common stock, Class B common stock or Evolent Health LLC Class B common units held by TPG at the time of the IPO.
As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the Class B common units during the November 2018 Private Sales, the Company’s economic interest in Evolent Health LLC increased from
95.3%
to
96.1%
immediately following the November 2018 Private Sales, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
The March 2018 Private Sale and November 2018 Private Sales are collectively referred to as the “2018 Private Sales.”
August 2017 Primary Offering
In August 2017, the Company completed a primary offering of
8.8 million
shares of its Class A common stock at a price to the public of
$19.85
per share and a corresponding price to the underwriters of
$19.01
per share (the “August 2017 Primary”). This offering resulted in net cash proceeds to the Company of approximately
$166.9 million
(gross proceeds of
$175.0 million
, net of
$8.1 million
in underwriting discounts and stock issuance costs). For each share of Class A common stock issued by Evolent Health, Inc., the Company received a corresponding Class A common unit from Evolent Health LLC in exchange for contributing the issuance proceeds to Evolent Health LLC. As a result of the Class A common stock and Class A common units of Evolent Health LLC issued during the August 2017 Primary, the Company’s economic interest in Evolent Health LLC increased from
96.1%
to
96.6%
immediately following the August 2017 Primary, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
2017 Secondary Offerings
The Investor Stockholders initiated several Class B Exchanges as part of various secondary offerings during 2017, thus increasing the Company’s economic interest in Evolent Health LLC, as discussed below. The Company did not receive any proceeds from the secondary offerings described below.
June 2017 Secondary Offering
In June 2017, the Company completed a secondary offering of
4.5 million
shares of its Class A common stock at a price to the underwriters of
$25.87
per share (the “June 2017 Secondary”).
The shares sold in the June 2017 Secondary consisted of
0.7 million
existing shares of the Company’s Class A common stock owned and held by certain Investor Stockholders and
3.8 million
newly issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.
As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the June 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from
90.5%
to
96.1%
immediately following the June 2017 Secondary, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
May 2017 Secondary Offering
In May 2017, the Company completed a secondary offering of
7.0 million
shares of its Class A common stock at a price to the underwriters of
$24.30
per share (the “May 2017 Secondary”). The shares were sold by certain of the Selling Stockholders (as defined below).
The shares sold in the May 2017 Secondary consisted of
3.1 million
existing shares of the Company’s Class A common stock owned and held by the Selling Stockholders,
3.8 million
newly issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges and
0.1 million
shares issued upon the exercise of options by certain management selling stockholders.
As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the May 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from
84.9%
to
90.5%
immediately following the May 2017 Secondary, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
March 2017 Secondary Offering
In March 2017, the Company completed a secondary offering of
7.5 million
shares of its Class A common stock at a price to the underwriters of
$19.53
per share (the “March 2017 Secondary”).
The shares sold in the March 2017 Secondary consisted of
3.1 million
existing shares of the Company’s Class A common stock owned and held by the Investor Stockholders and
4.4 million
newly issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.
As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the March 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from
77.4%
to
83.9%
immediately following the
March 2017 Secondary, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
In connection with the March 2017 Secondary, the underwriters exercised, in full, their option to purchase an additional
1.1 million
shares of Class A common stock (the “March 2017 Option to Purchase Additional Shares”) from the Investor Stockholders at a price of
$19.53
per share. The March 2017 Option to Purchase Additional Shares closed in May 2017.
The shares sold in the March 2017 Option to Purchase Additional Shares consisted of
0.5 million
existing shares of the Company’s Class A common stock owned and held by certain Investor Stockholders. It also included
0.6 million
newly issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.
As a result of the Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the March 2017 Option to Purchase Additional Shares, the Company’s economic interest in Evolent Health LLC increased from
83.9%
to
84.9%
immediately following the March 2017 Option to Purchase Additional Shares, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
The June 2017 Secondary, May 2017 Secondary, March 2017 Secondary and March 2017 Option to Purchase Additional Shares are collectively referred to as the “2017 Secondary Offerings.”
September 2016 Secondary Offering
In September 2016, the Company completed a secondary offering of
8.6 million
shares of its Class A common stock at a price to the underwriters of
$21.54
per share, including the exercise in full by the underwriters of their option to purchase additional shares (the “September 2016 Secondary”).
The shares sold in the September 2016 Secondary consisted of
6.4 million
existing shares of the Company’s Class A common stock owned and held by the Investor Stockholders and certain management selling stockholders (together with the Investor Stockholders, the “Selling Stockholders”) and
2.2 million
newly issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.
As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the September 2016 Secondary, the Company’s economic interest in Evolent Health LLC increased from
71.0%
to
74.6%
immediately following the September 2016 Secondary, and, accordingly, the Company reclassified a portion of its non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
The Company’s economic interest in Evolent Health LLC will increase if further Class B Exchanges occur, and will decrease if additional Class B common units or shares of Class B common stock are issued.
Asset Acquisitions
Accordion Health, Inc.
On
June 8, 2017
, the Company entered into an agreement to acquire Accordion for
$3.2 million
(the “Accordion Purchase Agreement”). Accordion provides technology that the Company believes enhances its RAF services to its partners. In addition to technology assets, the software development team from Accordion joined Evolent as full-time employees. Under the terms of the Accordion Purchase Agreement, members of the software development team will be eligible for an additional
$0.8 million
earn-out, contingent upon the completion of specified software development targets.
We accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired was concentrated in a single identified asset, thus satisfying the requirements of the screen test introduced in ASU 2017-01. The assets acquired in the transaction were measured based on the amount of cash paid to Accordion, including transaction costs, as the fair value of the assets given was more readily determinable than the fair value of the assets received. We classified and designated the identifiable assets acquired as a
$3.3 million
technology intangible asset, inclusive of approximately
$0.1 million
of capitalized transaction costs. We also assessed and determined the useful life of the acquired intangible assets to be
5
years, and the intangible assets will be amortized on a straight line basis over this period. The Company will account for the contingent earn-out as a post-acquisition expense if the specified software development targets are achieved. The transaction was a taxable stock acquisition and the Company recognized deferred tax liability of
$2.0 million
related to the book-tax basis difference in the acquired asset, which resulted in a
$2.0 million
increase in the value of the intangible asset. The additional deferred tax liability represents a future source of taxable income that enables the Company to release some of its previously established valuation allowance, the reduction of which is accounted for outside of acquisition accounting, resulting in income tax benefit.
Vestica
On March 1, 2016, the Company entered into an Asset Purchase Agreement between Vestica and Evolent Health LLC. As part of the transaction, the Company paid
$7.5 million
to acquire certain assets from Vestica to further align our interests with one of our existing partners. Vestica can earn an additional
$4.0 million
in consideration, based on certain future events. The amount is currently being held in escrow, and is recorded within other non-current assets on our Consolidated Balance Sheets. This transaction also includes an arrangement under which Vestica will continue to perform certain services on our behalf related to the acquired assets.
We accounted for the transaction as an asset acquisition where the assets acquired were measured based on the amount of cash paid to Vestica as well as transaction costs incurred, as the fair value of the assets given was more readily determinable than the fair value of the assets received. We classified and designated identifiable assets acquired and we assessed and determined the useful lives of the acquired intangible assets subject to amortization. As a result, we recorded a
$7.5 million
customer relationship intangible asset with a useful life of
thirteen
years, which assumes renewal of acquired customer contracts. The transaction was a taxable asset purchase.
5
. Revenue Recognition
As discussed in Note
3
, we adopted ASU 2014-09, effective January 1, 2018, which introduces ASC 606. See Note
2
for the updated revenue recognition policy and the impact of adopting the new revenue recognition standard on the Company’s financial statements. The following are other relevant disclosures as required by the adoption of ASU 2014-09. Provisions within ASC 606 are only applicable to revenues derived from our Services segment.
Disaggregation of Revenue
The following table represents Evolent’s Services segment revenue disaggregated by revenue type for the year ended
December 31, 2018
(in thousands), excluding revenues from our downside risk sharing arrangements through our captive insurance subsidiary. Revenues from our downside risk sharing arrangements through our captive insurance subsidiary, which are recorded within “Platform and operations services” on our Consolidated Statements of Operations and Comprehensive Income (Loss), and premiums revenue from our True Health segment, which are recorded within “Premiums” on our Consolidated Statements of Operations and Comprehensive Income (Loss), are accounted for under ASC 944,
Financial Services-Insurance
.
|
|
|
|
|
|
|
Services Revenue
|
|
|
|
Transformation services
|
|
$
|
32,916
|
|
|
Platform and operations services
|
|
492,568
|
|
|
Transaction Price Allocated to the Remaining Performance Obligations
For contracts with a term that is greater than one year, we have allocated approximately
$91.0 million
of transaction price to performance obligations that are unsatisfied or partially unsatisfied as of
December 31, 2018
. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note
2
. We expect to recognize revenue on approximately
60%
and
88%
of these remaining performance obligations by December 31, 2019, and December 31, 2020, respectively, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of this revenue that we actually receive may be less or greater than this estimate.
Contract Balances
Contract balances consist of accounts receivable, contract assets and deferred revenue. Contract assets are recorded when the right to consideration for services is conditional on something other than the passage of time. Contract assets relating to unbilled receivables are transferred to accounts receivable when the right to consideration becomes unconditional. We classify contract assets as current or noncurrent based on the timing of our rights to the unconditional payments. Our contract assets are generally classified as current and recorded within “Contract assets” on our consolidated balance sheets. Our current accounts receivable are classified within “Accounts receivable, net” on our consolidated balance sheets and our noncurrent accounts receivable are classified within “Prepaid expenses and other noncurrent assets” on our consolidated balance sheets.
The Company does not have a material allowance for doubtful accounts as of
December 31, 2018
or
2017
, as all amounts were determined to be materially collectible. In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable on an individual account basis. The allowance is adjusted periodically based on management’s determination of collectability, and any accounts that are determined to be uncollectible are written off against the allowance.
Deferred revenue includes advance customer payments and billings in excess of revenue recognized. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Our current deferred revenue is recorded within “Deferred revenue” on our consolidated balance sheets, and noncurrent deferred revenue is recorded within “Other long-term liabilities” on our consolidated balance sheets.
The following table provides information about receivables, contract assets and deferred revenue from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
December 31,
|
January 1,
|
|
|
2018
|
|
2018
|
Short-term receivables
(1)
|
|
$
|
78,380
|
|
|
|
$
|
47,131
|
|
|
Long-term receivables
(1)
|
|
6,550
|
|
|
|
—
|
|
|
Short-term contract assets
|
|
2,102
|
|
|
|
3,710
|
|
|
Long-term contract assets
|
|
961
|
|
|
|
1,791
|
|
|
Short-term deferred revenue
|
|
20,584
|
|
|
|
26,147
|
|
|
Long-term deferred revenue
|
|
1,502
|
|
|
|
493
|
|
|
(1)
Excludes pharmacy claims receivable and premiums receivable
During the year ended
December 31, 2018
, our contract asset balance decreased by
$2.4 million
, primarily as the right to the consideration became unconditional and the associated balance was reclassified to accounts receivable. During the year ended
December 31, 2018
, our deferred revenue balance decreased by
$4.6 million
, primarily as a result of the recognition of variable consideration estimate.
The amount of revenue recognized during the year ended
December 31, 2018
, from amounts included in deferred revenue at the beginning of the period was
$19.3 million
. The amount of revenue recognized during the year ended
December 31, 2018
, from performance obligations satisfied (or partially satisfied) in previous periods, due primarily to net gain share as well as other estimates, was
$18.0 million
.
Contract Costs
Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as noncurrent assets and recorded within “Contract cost assets” on our consolidated balance sheets. Amortization expense is recorded within “Selling, general and administrative expenses” on the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2018
, the Company had
$1.5 million
of contract acquisition cost assets, net of accumulated amortization, and
amortiza
tion expense of
$0.3 million
for the year ended
December 31, 2018
.
In our platforms and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract. Our contract fulfillment costs primarily include our employee labor costs and third-party vendor costs. The capitalized contract fulfillment costs are classified as noncurrent and recorded within “Contract cost assets” on our consolidated balance sheets. Amortization expense is recorded within “Cost of revenue” on the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). As of
December 31, 2018
, the Company had
$17.6 million
of contract fulfillment cost assets, net of accumulated amortization, and amortization expense of
$2.4 million
for the year ended
December 31, 2018
.
These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be
five
years. The period of benefit was based on our technology, the nature of our customer arrangements and other factors.
6
. Property and Equipment, Net
The following summarizes our property and equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Computer hardware
|
$
|
10,421
|
|
|
$
|
5,667
|
|
Furniture and equipment
|
3,187
|
|
|
2,448
|
|
Internal-use software development costs
|
81,640
|
|
|
48,557
|
|
Leasehold improvements
|
10,118
|
|
|
8,708
|
|
Total property and equipment
|
105,366
|
|
|
65,380
|
|
Accumulated depreciation and amortization expenses
|
(31,738
|
)
|
|
(14,458
|
)
|
Total property and equipment, net
|
$
|
73,628
|
|
|
$
|
50,922
|
|
The Company capitalized
$33.1 million
,
$27.1 million
and
$15.0 million
of internal-use software development costs for the years ended
December 31, 2018
,
2017
and
2016
, respectively. The net book value of capitalized internal-use software development costs was
$62.8 million
and
$42.1 million
as of
December 31, 2018
and
2017
, respectively.
Depreciation expense related to property and equipment was
$17.3 million
,
$9.2 million
and
$2.6 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively, of which amortization expense related to capitalized internal-use software development costs was
$12.4 million
,
$4.9 million
and
$1.4 million
, respectively.
7
. Goodwill and Intangible Assets, Net
Goodwill
Goodwill has an estimated indefinite life and is not amortized; rather it is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
The Company has
three
reporting units: Legacy Services, New Century Health and True Health. Our annual goodwill impairment review occurs during the fourth quarter of each fiscal year. In interim periods between annual goodwill reviews, we also evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in strategy, partners, or litigation.
A description of our goodwill impairment tests during
2018
and
2017
follows below.
2018
Goodwill Impairment Test
On October 31,
2018
, the Company performed its annual goodwill impairment review for fiscal year
2018
. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of any of our reporting units was below their respective carrying values. As a result, a quantitative goodwill impairment analysis was not required.
2017
Goodwill Impairment Tests
On October 31,
2017
, the Company performed its annual goodwill impairment review for fiscal year
2017
. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest fair value of our single reporting unit was below the carrying value. As a result, a quantitative goodwill impairment analysis was not required.
Following the date of our 2017 annual goodwill review, the price of our Class A common stock declined significantly. The average closing price per share of our Class A common stock for the month of November was approximately
$12.01
, a
42.4%
decrease compared to the average closing price for the period from January to October 2017. A sustained decline in the price of our Class A common stock and the resulting impact on our market capitalization is one of several qualitative factors we consider each quarter when evaluating whether events or changes in circumstances indicate it is more likely than not that a potential goodwill impairment exists. We concluded that the decline in the price of our Class A common stock in November 2017 did represent a sustained decline and therefore was an indicator that our goodwill might be impaired. The Company proceeded to perform a quantitative goodwill impairment test as of
December 14, 2017
.
Quantitative Assessment Results
To determine the implied fair value for our single reporting unit, we used both a market multiple valuation approach (“market approach”) and a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the market approach, we considered the level of our Class A common stock price and assumptions that we believe market participants would make in valuing our reporting unit, including the application of a control premium. In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, the timing of exchanges of our Class B common units, the impact of updated tax legislation, capital market assumptions and other subjective inputs. If the fair value of the reporting unit derived using one approach is significantly different from the fair value estimate using the other approach, the Company re-evaluates its assumptions used in the two models. The fair values determined by the market approach and income approach, as described above, are weighted to determine the concluded fair value for the reporting unit. For purposes of this analysis, the Company weighted the results
70%
towards the market approach and
30%
towards the income approach, to give greater prominence to the Level 1 inputs used in the market approach.
In our
December 14, 2017
, quantitative assessment, our most sensitive assumption for purposes of the market approach was our estimate of the control premium, and the most sensitive assumption related to the income approach, other than the projected cash flows, was the discount rate. A significant decrease in the control premium or a significant increase in the discount rate in isolation would result in a significantly lower fair value. The concluded fair value under the market approach exceeded carrying value by approximately
$140.4 million
, or
13.4%
. Decreasing the selected control premium of
27.5%
by
300 basis points
(approximately
10%
) would result in the concluded fair value exceeding the carrying value by approximately
$112.3 million
, or
10.7%
. The concluded fair value under the income approach exceeded carrying value by approximately
$233.2 million
, or
22.2%
. Increasing the selected discount rate of
13.0%
by
50 basis points
(approximately
5%
) would result in the concluded fair value exceeding the carrying value by approximately
$164.5 million
, or
15.7%
.
As fair value was greater than carrying value under both the market and income approaches, goodwill was not impaired as of
December 14, 2017
.
As of
December 31, 2017
, Evolent assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of its goodwill below its carrying amount and require an additional impairment test. The Company determined there had been no such indicators. Therefore, it was unnecessary to perform an additional goodwill impairment assessment as of
December 31, 2017
.
The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
True Health
|
|
Consolidated
|
|
Balance as of December 31, 2016
|
$
|
626,569
|
|
|
$
|
—
|
|
|
$
|
626,569
|
|
(1)
|
Measurement period adjustments
(2)
|
1,617
|
|
|
—
|
|
|
1,617
|
|
|
Balance as of December 31, 2017
|
628,186
|
|
|
—
|
|
|
628,186
|
|
|
Goodwill Acquired
(3)
|
134,343
|
|
|
5,826
|
|
|
140,169
|
|
|
Measurement period adjustments
(2)
|
4
|
|
|
(121
|
)
|
|
(117
|
)
|
|
Foreign currency translation
(4)
|
(114
|
)
|
|
—
|
|
|
(114
|
)
|
|
Balance as of December 31, 2018
|
$
|
762,419
|
|
|
$
|
5,705
|
|
|
$
|
768,124
|
|
|
(1)
Beginning goodwill balance is net of cumulative inception to date impairment of
$160.6 million
.
(2)
Measurement period adjustments related to transactions completed during 2017 and the first quarter of 2018.
(3)
Goodwill acquired primarily as a result of the New Century Health and True Health transactions, as discussed in Note
4
.
(4)
Foreign currency translation related to a transaction completed during the first quarter of 2018.
Intangible Assets, Net
Details of our intangible assets (in thousands), including their weighted-average remaining useful lives (in years), are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
Net
|
|
Remaining
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Useful Life
|
|
Amount
|
Amortization
|
Value
|
Corporate trade name
(1)
|
15.2
|
|
$
|
23,300
|
|
|
$
|
3,511
|
|
|
$
|
19,789
|
|
Customer relationships
(2)
|
18.1
|
|
281,219
|
|
|
29,184
|
|
|
252,035
|
|
Technology
(3)
|
3.0
|
|
82,922
|
|
|
31,764
|
|
|
51,158
|
|
Below market lease, net
|
4.0
|
|
4,097
|
|
|
3,003
|
|
|
1,094
|
|
Provider network contracts
(4)
|
4.6
|
|
11,900
|
|
|
940
|
|
|
10,960
|
|
Total
|
|
|
$
|
403,438
|
|
|
$
|
68,402
|
|
|
$
|
335,036
|
|
(1)
The increase in the gross carrying amount of the corporate trade name is attributable to a
$4.3 million
trade name acquired as part of the New Century Health transaction. See Note
4
for further information about the New Century Health transaction.
(2)
The increase in the gross carrying amount of the customer relationships intangible is attributable to
$72.5 million
acquired customer relationships from the New Century Health transaction,
$2.7 million
of acquired customer relationships from the NMHC transaction and
$2.5 million
related the Vestica transaction. The Company acquired certain assets from Vestica in March 2016. The transaction included additional consideration of up to
$4.0 million
, which was being held in escrow and was recorded within “Prepaid expenses and other noncurrent assets” on our Consolidated Balance Sheets. In February 2018, the Company and Vestica reached an agreement to settle
$3.5 million
of the
$4.0 million
in escrow. Based on the terms of the settlement agreement, the Company reclassified the unamortized portion of the additional consideration from “Prepaid expenses and other noncurrent assets” into “Customer relationships” as of the settlement date. See Note
4
for further information about the New Century Health, NMHC and Vestica transactions.
(3)
The increase in the gross carrying amount of the technology is attributable to
$27.0 million
of technology assets acquired as part of the New Century Health transaction. See Note
4
for further information about the New Century Health transaction.
(4)
The increase in the gross carrying amount of the provider network contracts is attributable to a
$9.6 million
provider network acquired as part of the New Century Health transaction and a
$2.3 million
provider network acquired as part of the NMHC transaction. See Note
4
for further information about the New Century Health and NMHC transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
Net
|
|
Remaining
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Useful Life
|
|
Amount
|
Amortization
|
Value
|
Corporate trade name
|
17.4
|
|
$
|
19,000
|
|
|
$
|
2,454
|
|
|
$
|
16,546
|
|
Customer relationships
|
20.5
|
|
203,500
|
|
|
18,312
|
|
|
185,188
|
|
Technology
|
3.1
|
|
55,802
|
|
|
17,810
|
|
|
37,992
|
|
Below market lease, net
|
4.8
|
|
4,197
|
|
|
2,662
|
|
|
1,535
|
|
Total
|
|
|
$
|
282,499
|
|
|
$
|
41,238
|
|
|
$
|
241,261
|
|
Amortization expense related to intangible assets for the years ended
December 31, 2018
,
2017
and
2016
, was
$27.2 million
,
$22.8 million
and
$12.5 million
, respectively.
Future estimated amortization of intangible assets (in thousands) as of
December 31, 2018
, is as follows:
|
|
|
|
|
2019
|
$
|
36,498
|
|
2020
|
32,312
|
|
2021
|
28,143
|
|
2022
|
24,262
|
|
2023
|
21,498
|
|
Thereafter
|
192,323
|
|
Total
|
$
|
335,036
|
|
Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. As discussed above, we identified a triggering event and performed a quantitative analysis over the carrying value of our goodwill balance during the fourth quarter of 2017. Identification of the triggering event also triggered an impairment analysis of the carrying value of our intangible asset group. In conjunction with the impairment testing of the carrying value of our goodwill, we performed an analysis to determine whether the carrying amount of our intangible asset group was recoverable. We performed a quantitative analysis, which required management to compare the total pre-tax, undiscounted future cash flows of the intangible asset group to the current carrying amount. The total undiscounted cash flows included only the future cash flows that are directly associated with and that were expected to arise as a result of the use and eventual disposal of the asset group. Based on our quantitative analysis, we determined that the pre-tax, undiscounted cash flows exceeded the carrying value and therefore concluded that our intangible assets were recoverable.
8
. Long-term Debt
2025 Notes
In October 2018, the Company issued
$172.5 million
aggregate principal amount of its
1.50%
Convertible Senior Notes due 2025 in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. The 2025 Notes were issued at par for net proceeds of
$166.6 million
. We incurred
$5.9 million
of debt issuance costs in connection with the 2025 Notes. The closing of the private placement of
$150.0 million
aggregate principal amount of the 2025 Notes occurred on
October 22, 2018
, and the Company completed the offering and sale of an additional
$22.5 million
aggregate principal amount of the 2025 Notes on
October 24, 2018
, pursuant to the initial purchasers’ exercise in full of their option to purchase additional notes.
Holders of the 2025 Notes are entitled to cash interest payments, which are payable semiannually in arrears on April 15 and October 15 of each year, beginning on
April 15, 2019
, at a rate equal to
1.50%
per annum. The Company recorded interest expense of
$0.5 million
related to the 2025 Notes for the year ended
December 31, 2018
. The 2025 Notes will mature on
October 15, 2025
, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date.
Prior to the close of business on the business day immediately preceding
April 15, 2025
, the 2025 Notes will be convertible at the option of the holders only upon the satisfaction of certain conditions, as described in the indenture, dated as of
October 22, 2018
, between the Company and U.S. Bank National Association, as trustee. At any time on or after
April 15, 2025
, until the close of business on the business day immediately preceding the maturity date, holders may convert, at their option, all or any portion of their notes at the conversion rate.
The 2025 Notes will be convertible at an initial conversion rate of
29.9135
shares of Class A common stock per
$1,000
principal amount of notes, which is equivalent to an initial conversion price of approximately
$33.43
per share of the Company’s Class A common stock. In the aggregate, the 2025 Notes are initially convertible into
5.2 million
shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole fundamental change or a notice of redemption as described in the governing indenture). The conversion rate may be adjusted under certain circumstances. The 2025 Notes are convertible, in multiples of
$1,000
principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.
The option to settle the 2025 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2025 Notes into a debt component and an equity component. The debt component was determined to be
$100.7 million
, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be
$71.8 million
, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the aggregate principal amount of the debt and the debt component. Issuance costs of
$5.9 million
are also allocated to the debt and equity components in proportion to the allocation of proceeds. Of the
$5.9 million
in issuance costs,
$3.4 million
of issuance costs is allocated to the debt component which, along with the equity component of
$71.8 million
, will be amortized to non-cash interest expense using the effective interest method over the contractual term of the 2025 Notes. The equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. For the year ended
December 31, 2018
, the Company recorded
$1.5 million
in non-cash interest expense related to the amortization of the debt discount and the issuance costs allocated to the debt component.
Holders of the 2025 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to
100.0%
of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2025 Notes prior to
October 20, 2022
. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after
October 20, 2022
, if the last reported sale price of the Company’s Class A common stock has been at least
130.0%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period (including the last trading day of such period) ending
on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to
100.0%
of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
2021 Notes
In
December 2016
, the Company issued
$125.0 million
aggregate principal amount of its
2.00%
Convertible Senior Notes due
2021
in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended. The 2021 Notes were issued at par for net proceeds of
$120.4 million
. We incurred
$4.6 million
of debt issuance costs in connection with the 2021 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes, since this method was not materially different from the effective interest method. The closing of the private placement of the 2021 Notes occurred on
December 5, 2016
.
Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on
June 1
and
December 1
of each year, beginning on
June 1, 2017
, at a rate equal to
2.00%
per annum. The 2021 Notes will mature on
December 1, 2021
, unless earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require the Company to repurchase their 2021 Notes upon the occurrence of a fundamental change at a price equal to
100.00%
of the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest. Upon maturity, and at the option of the holders of the 2021 Notes, the principal amount of the notes may be settled via shares of the Company’s Class A common stock. For the years ended
December 31, 2018
and
2017
and
2016
, the Company recorded approximately
$2.5 million
,
$2.5 million
and
$0.2 million
in interest expense, respectively, and
$0.9 million
,
$0.9 million
and less than
$0.1 million
in non-cash interest expense related to the amortization of deferred financing costs, respectively.
The 2021 Notes are convertible into shares of the Company’s Class A common stock, based on an initial conversion rate of
41.6082
shares of Class A common stock per
$1,000
principal amount of the 2021 Notes, which is equivalent to an initial conversion price of approximately
$24.03
per share of the Company’s Class A common stock. In the aggregate, the 2021 Notes are initially convertible into
5.2 million
shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole provision upon a fundamental change under the governing indenture). The conversion rate may be adjusted under certain circumstances.
The 2021 Notes are convertible, in multiples of
$1,000
principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, we will deliver for each
$1,000
principal amount of notes converted a number of shares of our Class A common stock equal to the applicable conversion rate (together with a cash payment in lieu of delivering any fractional share) on the third business day following the relevant conversion date.
Convertible Senior Notes Carrying Value
While the 2025 Notes and 2021 Notes are recorded on our accompanying Consolidated Balance Sheets at their net carrying values of
$98.7 million
and
$122.3 million
, respectively, as of
December 31, 2018
, the 2025 Notes and 2021 Notes are privately traded by qualified institutional buyers (within the meaning of Rule 144A under the Securities Act of 1933, as amended) and their fair values were
$158.8 million
and
$133.6 million
, respectively, based on traded prices on December 28, 2018 and December 26, 2018, respectively, which are Level 2 inputs. As of
December 31, 2017
, the estimated fair value of the 2021 Notes was
$120.4 million
, based on a traded price on December 29, 2017, a Level 2 input. The 2025 Notes and the 2021 Notes also have embedded conversion options and contingent interest provisions, which have not been recorded as separate financial instruments.
The following table summarizes the carrying value of the long-term debt (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
2025 Notes
|
|
|
|
Carrying value
|
$
|
98,730
|
|
|
$
|
—
|
|
Unamortized debt discount and
|
|
|
|
issuance costs allocated to debt
|
73,770
|
|
|
—
|
|
Principal amount
|
$
|
172,500
|
|
|
$
|
—
|
|
Remaining amortization period (years)
|
6.8
|
|
|
|
|
|
|
|
2021 Notes
|
|
|
|
Carrying value
|
$
|
122,311
|
|
|
$
|
121,394
|
|
Unamortized issuance costs
|
2,689
|
|
|
3,606
|
|
Principal amount
|
$
|
125,000
|
|
|
$
|
125,000
|
|
Remaining amortization period (years)
|
2.9
|
|
|
3.9
|
|
9
. Commitments and Contingencies
Commitments
Commitments to Equity-Method Investees
The Company has contractual arrangements with certain equity-method investees that will require the Company to provide operating capital and reserve support in the form of debt financing of up to
$11.0 million
as of
December 31, 2018
, in accordance with the Company’s contribution agreements with certain equity-method investees. These obligations are outside of Company’s control and payment could be requested during 2019. The Company did
no
t have any contingent commitments to equity-method investees as of
December 31, 2017
.
Letter of Credit
During the first quarter of 2017, the Company entered into an agreement to provide a letter of credit, for up to
$5.0 million
, to assist a customer in demonstrating adequate reserves to the customer’s state regulatory authorities. The letter of credit is effective from September 30, 2017 through June 30, 2019, and carries a quarterly facility rental fee of
0.8%
per annum on the amount of the outstanding balance. The letter of credit will terminate after June 30, 2019. The letter of credit is presented at the face amount plus accrued facility rental fee, less received payments. As of
December 31, 2018
and
2017
, there were
no
outstanding balances related to this letter of credit.
Lease Commitments
The Company leases office space and computer and other equipment under operating lease agreements expiring at various dates through 2031. Under the lease agreements, in addition to base rent, the Company is generally responsible for operating and maintenance costs and related fees. Several of these agreements include tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability on our Consolidated Balance Sheets equal to the difference between rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis over the terms of the leases. The Company’s primary office location is in Arlington, Virginia, which has served as its corporate headquarters since 2013. The Arlington, Virginia office lease expires in December 2020. Certain leases acquired as part of the Valence Health transaction included existing sublease agreements for office locations in Chicago, Illinois. Total rental expense, net of sublease income, on operating leases for the years ended
December 31, 2018
,
2017
and
2016
, was
$14.2 million
,
$10.9 million
and
$5.9 million
, respectively. The Company does not have any material capital leases.
In connection with various lease agreements, the Company is required to maintain
$3.7 million
in letters of credit. As of
December 31, 2018
, the Company held
$3.7 million
in restricted cash and restricted investments as collateral for the letters of credit.
Arlington, Virginia Office Lease
During 2013, the Company entered into a facility lease in Arlington, Virginia. Total future minimum lease commitments over
two
years is approximately
$7.1 million
as of
December 31, 2018
. The future minimum lease payments associated with the Arlington, Virginia lease are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of
$1.6 million
. The collateral for the letter of credit is currently recorded as restricted cash.
Chicago, Illinois Office Leases
On
October 3, 2016
, the Company assumed a facility lease at 300 S. Riverside Plaza in Chicago, Illinois as part of the Valence Health transaction. Total future minimum lease commitments over
12.3
years are approximately
$43.7 million
as of
December 31, 2018
. The future minimum lease payments associated with this lease are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of
$0.2 million
. The collateral for the letter of credit is currently recorded as restricted cash.
On
October 3, 2016
, the Company assumed a facility lease at 540 W. Madison Street in Chicago, Illinois as part of the Valence Health transaction. This lease includes three floors. Two of the floors are occupied by the Company and one was abandoned and subsequently terminated. Total future minimum lease commitment over
nine
years is approximately
$16.3 million
as of
December 31, 2018
. The future minimum lease payments associated with this lease, less the payments associated with the terminated floor, are included in the table below. In conjunction with this lease, the Company is required to maintain a letter of credit in the amount of
$1.5 million
. The collateral for the letter of credit is currently recorded as restricted cash.
In connection with the 540 W. Madison lease, the Company acquired a sublease tenant for one of the floors (the “13
th
Floor Sublease”). Total future sublease income over
11.0
years was approximately
$10.1 million
as of December 31, 2016. We signed an amendment to the 13
th
Floor Sublease during the fourth quarter of 2017, which reduced the term of the sublease. Total future sublease
income over the remaining sublease term of
one
year was approximately
$0.1 million
as of December 31, 2017. The sublease was terminated as of
December 31, 2018
, and the Company subsequently resumed occupying this floor.
Immediately following the Valence Health acquisition, the Company decided to abandon and sublet one of the floors of its rented space at 540 W. Madison Street (the “14
th
Floor Space”). Therefore, our results from operations for the year ended December 31, 2016, included a lease abandonment expense of approximately
$6.5 million
in conjunction with the abandonment of the 14th Floor Space, based on remaining lease payments and expected future sublease income. During the second quarter of 2017, the Company reached an agreement to terminate the lease for the 14th Floor Space, effective September 2017. The Company continued making rent payments until September 1, 2017, at which point it paid a one-time lease cancellation and related brokerage fee. Remaining cash outflows related to the 14th Floor Space were estimated to be approximately
$4.8 million
as of June 30, 2017, while the remaining balance of the initial
$6.5 million
lease abandonment liability recorded after the Valence Health acquisition was approximately
$5.3 million
as of June 30, 2017, prior to adjustments pertaining to the lease cancellation fees. As such, the Company recorded a one-time adjustment of
$0.5 million
to reduce the lease abandonment liability, from
$5.3 million
to
$4.8 million
. The adjustment was recorded as a reduction to our rent expense within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2017. The Company made regular rent payments until September 1, 2017, at which point it paid a one-time lease cancellation and related brokerage fee of
$4.4 million
. There is
no
remaining lease abandonment liability related to the 14th Floor Space as of
December 31, 2017
.
The following table presents a roll forward of the lease abandonment liability for the year ended
December 31, 2017
(in thousands):
|
|
|
|
|
Accrual as of beginning-of-year
|
$
|
6,100
|
|
Abandonment expense
|
—
|
|
Impact of lease termination
|
(496
|
)
|
Abandonment amortization
|
(1,239
|
)
|
Lease cancellation fee
|
(4,365
|
)
|
Accrual as of end-of-year
|
$
|
—
|
|
Future minimum rental commitments (in thousands) as of
December 31, 2018
, were as follows:
|
|
|
|
|
2019
|
$
|
11,470
|
|
2020
|
12,553
|
|
2021
|
8,594
|
|
2022
|
7,033
|
|
2023
|
7,451
|
|
Thereafter
|
40,657
|
|
Total
|
$
|
87,758
|
|
Purchase Obligations
Our contractual obligations related to vendor contracts (in thousands) as of
December 31, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
More
|
|
|
|
Than
|
|
1 to 3
|
|
3 to 5
|
|
Than
|
|
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
Total
|
Purchase obligations related to vendor contracts
|
$
|
6,236
|
|
|
$
|
2,417
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,653
|
|
Indemnifications
The Company’s customer agreements generally include a provision by which the Company agrees to defend its partners against third-party claims (a) for death, bodily injury, or damage to personal property caused by Company negligence or willful misconduct, (b) by former or current Company employees arising from such managed service agreements, (c) for intellectual property infringement under specified conditions and (d) for Company violation of applicable laws, and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
Registration rights agreement
We entered into a registration rights agreement with The Advisory Board, UPMC, TPG and another investor to register for sale under the Securities Act shares of our Class A common stock, including those delivered in exchange for Class B common stock and Class B common units. Subject to certain conditions and limitations, this agreement provides these investors with certain demand, piggyback and shelf registration rights. The registration rights granted under the registration rights agreement will terminate upon the date the holders of shares that are a party thereto no longer hold any such shares that are entitled to registration rights. Pursuant to our contractual obligations under this agreement, we filed a registration statement on Form S-3 with the SEC on July 28, 2016, which was declared effective on August 12, 2016.
Pursuant to certain terms of the registration rights agreement, the Investor Stockholders sold
19.7 million
shares of the Company’s Class A common stock as part of the 2017 Secondary Offerings and
8.6 million
shares of the Company’s Class A common stock as part of the September 2016 Secondary Offering
, as discussed in Note
4
.
Pursuant to the terms of the registration rights agreement, we incurred
$1.5 million
and
$1.6 million
in expenses related to secondary offerings during the years ended December 31, 2017 and 2016, respectively. These expenses are recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss).
We did
no
t incur any expenses related to secondary offerings or other sales of shares by our Investor Stockholders for the year ended
December 31, 2018.
We will continue to pay all expenses relating to any demand, piggyback or shelf registration, other than underwriting discounts and commissions and any transfer taxes, subject to specified conditions and limitations. The registration rights agreement includes customary indemnification provisions, including indemnification of the participating holders of shares of Class A common stock and their directors, officers and employees by us for any losses, claims, damages or liabilities in respect thereof and expenses to which such holders may become subject under the Securities Act, state law or otherwise.
Guarantees
As part of our strategy to support certain of our partners in the Next Generation Accountable Care Program (“Next Gen”), we entered into upside and downside risk-sharing arrangements. Certain of our downside risk-sharing arrangements are executed through our wholly-owned captive insurance company. To satisfy the capital requirements of our insurance entity as well as state insurance regulators, Evolent entered into letters of credit of
$34.1 million
as of
December 31, 2018
, to secure potential losses related to insurance services, which are recorded within “Restricted cash and restricted investments” on our Consolidated Balance Sheets. These amounts are in excess of our actuarial assessment of loss.
Reinsurance Agreements
During the fourth quarter of 2017, the Company had entered into a
15
-month,
$10.0 million
capital-only reinsurance agreement with NMHC, expiring on December 31, 2018. The purpose of the capital-only reinsurance was to provide balance sheet support to NMHC. There was no uncertainty to the outcome of the arrangement as there was no transfer of underwriting risk to Evolent or True Health, and neither Evolent nor True Health was at risk for any cash payments on behalf of NMHC. As a result, this arrangement did not qualify for reinsurance accounting. The Company recorded a quarterly fee of approximately
$0.2 million
as non-operating income on its Consolidated Statements of Operations and Comprehensive Income (Loss) and maintained
$10.0 million
in restricted cash and restricted investments on its Consolidated Balance Sheets for the duration of the reinsurance agreement.
During the fourth quarter of 2018, the Company terminated its prior reinsurance agreement with NMHC and entered into a
15
-month quota-share reinsurance agreement with NMHC (“Reinsurance Agreement”). Under the terms of the Reinsurance Agreement, NMHC will cede
90%
of its gross premiums to the Company and the Company will indemnify NMHC for
90%
of its claims liability. The maximum amount of exposure to the Company is capped at
105%
of premiums ceded to the Company by NMHC. The Reinsurance Agreement qualified for reinsurance accounting due to the deemed risk transfer and, as such, the Company recorded the full amount of the gross reinsurance premiums and claims assumed by the Company within “Premiums” and “Claims Expenses,” respectively, and recorded claims-related administrative expenses within “Selling, general and administrative expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss) from the legal effective date of the Reinsurance Agreement. Amounts owed to NMHC under the Reinsurance Agreement are recorded within “Claims Reserves” on our consolidated balance sheets.
The following summarizes premiums and claims assumed under the Reinsurance Agreement for the year ended
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
Reinsurance premiums assumed
|
|
$
|
3,242
|
|
|
Claims assumed
|
|
3,934
|
|
|
Claims-related administrative expenses
|
|
551
|
|
|
(Increase) decrease in claims reserves attributable
|
|
|
|
to the Reinsurance Agreement
|
|
(1,243
|
)
|
|
Claims reserves attributable to the Reinsurance
|
|
|
|
Agreement at the beginning of the year
|
|
—
|
|
|
Claims reserves attributable to the Reinsurance
|
|
|
|
Agreement at the end of the year
|
|
$
|
1,243
|
|
|
UPMC Reseller Agreement
The Company and UPMC are parties to a reseller, services and non-competition agreement, dated August 31, 2011, which was amended and restated by the parties on June 27, 2013 (as amended through the date hereof, the “UPMC Reseller Agreement”). Under the terms of the UPMC Reseller Agreement, UPMC has appointed the Company as a non-exclusive reseller of certain services, subject to certain conditions and limitations specified in the UPMC Reseller Agreement. In consideration for the Company’s obligations under the UPMC Reseller Agreement and subject to certain conditions described therein, UPMC has agreed not to sell certain products and services directly to a defined list of 20 of the Company’s customers.
Contingencies
Tax Receivables Agreement
In connection with the Offering Reorganization, the Company entered into the TRA with certain of its investors, which provides for the payment by the Company to these investors of
85%
of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs. These payment obligations are obligations of the Company. For purposes of the TRA, the benefit deemed realized by the Company will be computed by comparing its actual income tax liability to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of the Company as a result of the exchanges or had the Company had no NOL carryforward balance. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including:
|
|
•
|
the timing of the exchanges and the price of the Class A shares at the time of the transaction, triggering a tax basis increase in the Company’s asset and a corresponding benefit to be realized under the TRA; and
|
|
|
•
|
the amount and timing of our taxable income - the Company will be required to pay
85%
of the tax savings as and when realized, if any. If the Company does not have taxable income, it will not be required to make payments under the TRA for that taxable year because no tax savings were actually realized.
|
Due to the items noted above, and the fact that the Company is in a full valuation allowance position such that the deferred tax assets related to the Company’s historical pre-IPO losses and tax basis increase benefit from exchanges have not been realized, the Company has not recorded a liability pursuant to the TRA.
Litigation Matters
We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment claims. When the likelihood of a loss contingency becomes probable and the amount of the loss can be reasonably estimated, we accrue a liability for the loss contingency. We continue to review accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. The Company is not aware of any legal proceedings or claims as of
December 31, 2018
and
2017
, that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.
Credit and Concentration Risk
The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of
December 31, 2018
, approximately
88.9%
of our
$388.3 million
of cash and cash equivalents (including restricted cash) were held in bank deposits with FDIC participating banks, approximately
11.0%
were held in money market funds and
less than
1.0%
were held in international banks.
While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any realized losses on cash and cash equivalents to date.
The Company is also subject to significant concentration of accounts receivable risk as a substantial portion of our trade accounts receivable is derived from a small number of our partners. The following table summarizes those partners who represented at least
10.0%
of our consolidated trade accounts receivable for the periods presented:
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Customer B
|
*
|
|
|
11.8
|
%
|
Customer C
|
23.3
|
%
|
|
32.1
|
%
|
Customer D
|
*
|
|
|
16.5
|
%
|
* Represents less than 10.0% of the respective balance
In addition, the Company is subject to significant concentration of revenue risk as a substantial portion of our revenue is derived from a small number of contractual relationships with our operating partners.
The following table summarizes those partners who represented at least
10.0%
of our consolidated revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Customer A
|
17.5
|
%
|
|
20.6
|
%
|
|
19.6
|
%
|
Customer D
|
*
|
|
|
*
|
|
|
14.5
|
%
|
Customer E
|
*
|
|
|
*
|
|
|
12.7
|
%
|
* Represents less than 10.0% of the respective balance
We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or contract with Company A or another significant partner, or multiple partners in the aggregate, could have a material adverse effect on the Company's financial condition and results of operations. For, example, recent changes in the way the state of Kentucky distributes federal Medicaid benefits have had a significant negative impact on Customer A, our largest partner in terms of revenue as of
December 31, 2018
. Customer A has stated publicly that if the rates are not changed, it could be deemed insolvent in the near term. In February 2019, Customer A filed a request for immediate and long-term relief from a reduction in reimbursement rates. We are unable to predict the outcome of this matter, the ongoing solvency of Customer A, or to reasonably estimate the amount or range of any potential impact on the Company. Receivables from Customer A represented less than 10% of our trade accounts receivable as of
December 31, 2018
. As of
December 31, 2018
, there were
no
accounts receivable balances from Customer A that were deemed uncollectable.
10
. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per share available for common stockholders (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
(54,191
|
)
|
|
$
|
(69,767
|
)
|
|
$
|
(226,778
|
)
|
Less:
|
|
|
|
|
|
Net income (loss) attributable to non-controlling interests
|
(1,533
|
)
|
|
(9,102
|
)
|
|
(67,036
|
)
|
Net income (loss) available for common shareholders - Basic and diluted
(1)(2)
|
(52,658
|
)
|
|
(60,665
|
)
|
|
(159,742
|
)
|
|
|
|
|
|
|
Weighted-average common shares outstanding - Basic and diluted
(2)(3)
|
77,338
|
|
|
64,351
|
|
|
45,031
|
|
|
|
|
|
|
|
Earnings (Loss) per Common Share
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.68
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
(3.55
|
)
|
(1)
For periods of net loss, net income (loss) available for common shareholders is the same for both basic and diluted purposes.
(2)
Each Class B common unit of Evolent Health LLC can be exchanged (together with a corresponding number of shares of our Class B common stock) for
one
share of our Class A common stock. As holders exchange their Class B common shares for Class A common shares, our interest in Evolent Health LLC will increase. Therefore, shares of our Class B common stock are not considered dilutive shares for the purposes of calculating our diluted earnings (loss) per common share as related adjustment to net income (loss) available for common shareholders would equally offset the additional shares, resulting in the same earnings (loss) per common share.
(3)
For periods of net loss, shares used in the earnings (loss) per common share calculation represent basic shares as using diluted shares would be anti-dilutive.
Anti-dilutive shares (in thousands) excluded from the calculation of weighted-average common shares presented above are presented below:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Exchangeable Class B common stock
|
1,831
|
|
|
7,285
|
|
|
16,882
|
|
RSUs
|
1,027
|
|
|
525
|
|
|
245
|
|
Stock options
|
2,517
|
|
|
2,829
|
|
|
1,973
|
|
Convertible senior notes
|
6,176
|
|
|
5,201
|
|
|
369
|
|
Total
|
11,551
|
|
|
15,840
|
|
|
19,469
|
|
11
. Stock-based Compensation
2011 and 2015 Equity Incentive Plans
The Company issues awards, including stock options, performance-based stock options, restricted stock and RSUs, under the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the 2015 Evolent Health, Inc. Omnibus Incentive Compensation Plan (the “2015 Plan”). We assumed the 2011 Plan in connection with the merger of Evolent Health Holdings with and into Evolent Health, Inc. The 2011 Plan allows for the grant of an array of equity-based and cash incentive awards to our directors, employees and other service providers. The 2011 Plan was amended on September 23, 2013, to increase the number of shares authorized to
9.1 million
shares of the Company’s common stock. As of
December 31, 2018
and
2017
,
4.8 million
stock options and
3.8 million
shares of restricted stock have been issued, net of forfeitures, under the 2011 Plan.
On May 1, 2015, the Board of Directors approved and authorized the 2015 Plan which provides for the issuance of up to
6.0 million
shares of the Company’s Class A common stock to employees and non-employee directors of the Company and its consolidated subsidiaries. The 2015 Plan was amended on June 13, 2018, to increase the number of shares authorized to
10.5 million
. Upon confirmation of the amended 2015 Plan, the 2011 was automatically terminated and no further awards may be granted under the 2011 Plan. The 2011 Plan will continue to govern awards previously granted under the 2011 Plan. As of
December 31, 2018
and
2017
,
3.3 million
and
2.5 million
stock options and
2.1 million
and
1.1 million
RSUs have been issued, net of forfeitures, under the 2015 Plan.
We follow an employee model for our stock-based compensation as awards are granted in the stock of the Company to employees and non-employee directors of the Company or its consolidated subsidiaries. Following the adoption of ASU 2018-07 during 2018, we also follow the employee model for stock-based compensation for awards granted to acquire goods and services from nonemployees. See Note
3
for additional discussion about our adoption of ASU 2018-07.
Stock-based Compensation Expense
Total compensation expense by award type and line item in our consolidated financial statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Award Type
|
|
|
|
|
|
Stock options
|
$
|
9,008
|
|
|
$
|
15,487
|
|
|
$
|
15,647
|
|
Performance-based stock options
|
447
|
|
|
447
|
|
|
374
|
|
RSUs
|
7,766
|
|
|
4,503
|
|
|
2,583
|
|
Performance-based RSUs
|
388
|
|
|
—
|
|
|
—
|
|
Acceleration of unvested equity awards
|
—
|
|
|
—
|
|
|
3,897
|
|
Total
|
$
|
17,609
|
|
|
$
|
20,437
|
|
|
$
|
22,501
|
|
|
|
|
|
|
|
Line Item
|
|
|
|
|
|
Cost of revenue
|
$
|
1,475
|
|
|
$
|
1,371
|
|
|
$
|
2,670
|
|
Selling, general and
|
|
|
|
|
|
administrative expenses
|
16,134
|
|
|
19,066
|
|
|
19,831
|
|
Total
|
$
|
17,609
|
|
|
$
|
20,437
|
|
|
$
|
22,501
|
|
We recorded
$3.9 million
in stock-based compensation expense during 2016 for the acceleration of Valence Health’s unvested equity awards that vested upon the close of the Valence Health acquisition.
No
stock-based compensation in the totals above was capitalized as software development costs for the years ended
December 31, 2018
,
2017
and
2016
.
Total unrecognized compensation expense (in thousands) and expected weighted-average period (in years) by award type for all of our stock-based incentive plans were as follows:
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
Weighted-
|
|
|
|
|
Average
|
|
|
Expense
|
|
Period
|
Stock options
|
|
$
|
10,061
|
|
|
1.13
|
Performance-based stock options
|
|
521
|
|
|
1.17
|
RSUs
|
|
16,353
|
|
|
2.27
|
Performance-based RSUs
|
|
1,945
|
|
|
1.25
|
Total
|
|
$
|
28,880
|
|
|
|
Stock Options
Other than the performance-based stock options described below, options awarded under the incentive compensation plans are generally subject to a
four
-year graded service vesting period where
25%
of the award vests after each year of service and have a maximum term of
10 years
. Information with respect to our options is presented in the following disclosures.
The option price assumptions used for our stock option awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average fair value
|
|
|
|
|
|
per option granted
|
$
|
6.30
|
|
|
$
|
8.38
|
|
|
$
|
4.69
|
|
Assumptions:
|
|
|
|
|
|
Expected term (in years)
|
6.25
|
|
|
6.25
|
|
|
6.25
|
|
Expected volatility
|
38.9
|
%
|
|
42.8
|
%
|
|
45.0
|
%
|
Risk-free interest rate
|
2.6 - 2.9%
|
|
|
1.9 - 2.1%
|
|
|
1.3 - 1.5%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend rate is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the historical volatility of a peer group of public companies over the most recent period commensurate with the estimated expected term of the Company’s awards due to the limited history of our own stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based on the midpoint convention.
Information with respect to our stock options (in thousands), including weighted-average remaining contractual term (in years) and aggregate intrinsic value (in thousands) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
Outstanding as of December 31, 2017
|
5,951
|
|
|
$
|
8.38
|
|
|
7.19
|
|
$
|
23,325
|
|
Granted
|
1,054
|
|
|
14.38
|
|
|
|
|
|
Exercised
|
(1,720
|
)
|
|
6.93
|
|
|
|
|
|
Forfeited
|
(196
|
)
|
|
15.98
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
5,089
|
|
|
$
|
9.82
|
|
|
6.86
|
|
$
|
51,556
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
|
|
|
|
|
after December 31, 2018
|
4,959
|
|
|
$
|
9.42
|
|
|
6.77
|
|
$
|
48,435
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
2,640
|
|
|
$
|
6.33
|
|
|
5.81
|
|
$
|
35,955
|
|
The total fair value of options vested during the years ended December 31,
2018
,
2017
and
2016
, was
$11.3 million
,
$13.0 million
and
$12.4 million
, respectively. The total intrinsic value of options exercised during
2018
,
2017
and
2016
was
$25.1 million
,
$14.2 million
and
$3.8 million
, respectively. We issue new shares to satisfy option exercises.
Performance-based stock option awards
In March 2016, the Company granted approximately
0.3 million
performance-based options to certain employees to create incentives for continued long-term success and to more closely align executive pay with our stockholders’ interests. Each of the grants is subject to market-based vesting, as follows:
|
|
•
|
one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least
$13.35
per share for a consecutive ninety day period;
|
|
|
•
|
one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least
$16.43
per share for a consecutive ninety day period; and
|
|
|
•
|
one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least
$19.51
per share for a consecutive ninety day period.
|
In addition, the percentage of options per tranche that has satisfied the market-based performance hurdle is also subject to a service completion schedule. The aggregate percentage of options eligible to vest is based upon each of the service completions dates below:
|
|
•
|
50%
of the shares subject to the option award will vest on March 1, 2019, and
|
|
|
•
|
50%
of the shares subject to the option award will vest on March 1, 2020.
|
We measured the fair value of the performance-based stock options using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of
1.83%
, volatility of
65%
, expected term of
ten
years and dividend yield of
0%
. These inputs resulted in a weighted-average fair value per option granted of
$6.68
. During 2016 all of the average stock price milestones were achieved and therefore the awards are now only subject to the service completion obligations.
Information with respect to our performance-based stock options (shares and aggregate intrinsic value shown in thousands, weighted-average remaining contractual term shown in years) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
Outstanding as of December 31, 2017
|
268
|
|
|
$
|
10.27
|
|
|
8.17
|
|
$
|
544
|
|
Outstanding as of December 31, 2018
|
268
|
|
|
10.27
|
|
|
7.17
|
|
2,592
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
|
|
|
|
|
after December 31, 2018
|
268
|
|
|
$
|
10.27
|
|
|
7.17
|
|
$
|
2,592
|
|
Restricted Stock Units
Other than the performance-based RSUs described below, and other than RSUs granted to our non-employee directors which have a
one
year vesting period, RSUs awarded under the incentive compensation plans are generally subject to a
four
-year graded service vesting period where
25%
of the award vests after each year of service and are issued to the participants for no consideration. During 2018, we also granted certain RSUs with a one year vesting period in conjunction with the New Century Health transaction. Information with respect to our RSUs is presented below (in thousands, except for weighted-average grant-date fair value):
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Grant-Date
|
|
Shares
|
|
Fair Value
|
Outstanding as of December 31, 2017
|
816
|
|
|
$
|
16.23
|
|
Granted
|
963
|
|
|
16.12
|
|
Forfeited
|
(99
|
)
|
|
16.26
|
|
Vested
|
(289
|
)
|
|
16.92
|
|
Outstanding as of December 31, 2018
|
1,391
|
|
|
$
|
16.01
|
|
During the years ended
December 31, 2018
,
2017
and
2016
, we granted RSUs with a weighted-average grant date fair value of
$16.12
,
$19.35
and
$11.60
, respectively.
The total fair value of RSUs vested during the years ended
December 31, 2018
,
2017
and
2016
was
$4.8 million
,
$2.9 million
and
$1.8 million
, respectively.
Performance-based RSUs
During 2018, in conjunction with the New Century Health transaction, we issued performance-based RSU awards to certain employees of New Century Health that became Evolent Health employees following the transaction. The awards will vest based on the passage of time (
18
-month vesting period) and the achievement of certain operating results by New Century Health in 2019. Upon completion of the vesting period, the award recipients will receive a variable number of Evolent Health Class A common shares based on the predetermined monetary value of the award. Accordingly, these performance-based RSUs are recorded as liability awards. As one of the vesting criteria is continued employment at Evolent Health, these performance-based RSUs are considered compensation
expense for the Company as opposed to contingent consideration related to the acquisition of New Century Health. See Note
4
for additional discussion of the New Century Health transaction.
The maximum monetary value of the performance-based award, provided New Century Health meets or exceeds the defined operating results targets, is capped at
$8.6 million
. As of
December 31, 2018
, the fair value of the performance-based RSUs was approximately
$2.3 million
. The fair value of the performance-based RSUs was estimated based on the real options approach, a form of the income approach, which estimated the probability of New Century Health achieving certain operating results during 2019. The most significant unobservable inputs used in the valuation of the performance-based RSUs was the risk-neutral probability of New Century Health achieving the defined operating results target or meeting the operating results target cap. A significant increase in either of those metrics, in isolation, would result in a significantly higher fair value of the performance-based RSUs. In determining the fair value of the performance-based RSUs as of
December 31, 2018
, we determined the risk-neutral probability of New Century Health achieving operating results target was approximately
39.0%
and we determined the risk-neutral probability of New Century Health meeting the operating results target cap was approximately
24.0%
.
Information with respect to our performance-based RSUs is presented below (in thousands, except for weighted-average grant-date fair value):
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Grant-Date
|
|
Shares
|
|
Fair Value
|
Outstanding as of December 31, 2017
|
—
|
|
|
$
|
—
|
|
Granted
|
86
|
|
|
27.04
|
|
Outstanding as of December 31, 2018
|
86
|
|
|
$
|
27.04
|
|
12
.
Income Taxes
Components of income tax expense (benefit) (in thousands) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
Federal
|
$
|
458
|
|
|
$
|
368
|
|
|
$
|
—
|
|
State and local
|
9
|
|
|
266
|
|
|
—
|
|
Foreign
|
251
|
|
|
—
|
|
|
—
|
|
Total current tax expense
|
718
|
|
|
634
|
|
|
—
|
|
Deferred
|
|
|
|
|
|
Federal
|
(14,820
|
)
|
|
3,202
|
|
|
(9,708
|
)
|
State and local
|
(2,252
|
)
|
|
(3,102
|
)
|
|
(1,138
|
)
|
Foreign
|
(49
|
)
|
|
—
|
|
|
—
|
|
Total deferred tax expense
|
(17,121
|
)
|
|
100
|
|
|
(10,846
|
)
|
Change in valuation allowance
|
16,443
|
|
|
(7,371
|
)
|
|
91
|
|
Total tax expense (benefit)
|
$
|
40
|
|
|
$
|
(6,637
|
)
|
|
$
|
(10,755
|
)
|
A reconciliation of the U.S. statutory tax rate to our effective tax rate is presented below:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S. statutory tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
U.S. state income taxes, net of U.S. federal tax benefit
|
3.6
|
%
|
|
3.3
|
%
|
|
4.0
|
%
|
Foreign earnings at other than U.S. rates
|
(0.2
|
)%
|
|
—
|
%
|
|
—
|
%
|
Change in valuation allowance
|
(30.4
|
)%
|
|
(34.0
|
)%
|
|
(0.1
|
)%
|
Change in valuation allowance, tax reform
|
—
|
%
|
|
43.7
|
%
|
|
—
|
%
|
Impact of tax reform
|
—
|
%
|
|
(36.0
|
)%
|
|
—
|
%
|
Goodwill impairment
|
—
|
%
|
|
—
|
%
|
|
(18.7
|
)%
|
Gain on contribution
|
—
|
%
|
|
—
|
%
|
|
(5.0
|
)%
|
Non-controlling interest
|
(0.7
|
)%
|
|
(4.6
|
)%
|
|
(11.0
|
)%
|
Excess tax benefits on stock-based compensation
|
3.9
|
%
|
|
3.1
|
%
|
|
0.1
|
%
|
Federal and state R&D tax credits
|
4.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Change in uncertain tax positions
|
(1.1
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other, net
|
(0.7
|
)%
|
|
(1.8
|
)%
|
|
0.2
|
%
|
Effective rate
|
(0.1
|
)%
|
|
8.7
|
%
|
|
4.5
|
%
|
Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at the tax rates in effect when the temporary differences are expected to be recovered or settled.
Significant components of the Company’s deferred tax assets and liabilities (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Deferred Tax Assets
|
|
|
|
Start-up and organizational costs
|
$
|
160
|
|
|
$
|
185
|
|
Internally developed software costs
|
3,283
|
|
|
3,974
|
|
Net operating loss carryforwards
|
76,019
|
|
|
51,197
|
|
Federal and state R&D tax credits
|
1,828
|
|
|
—
|
|
Other
|
861
|
|
|
(69
|
)
|
Subtotal
|
82,151
|
|
|
55,287
|
|
Valuation allowance
|
(37,037
|
)
|
|
(53,201
|
)
|
Total deferred tax assets
|
45,114
|
|
|
2,086
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
Equity-method investment
|
43,492
|
|
|
4,523
|
|
Intangible assets
|
26,710
|
|
|
—
|
|
Total deferred tax liabilities
|
70,202
|
|
|
4,523
|
|
Net deferred tax assets (liabilities)
|
$
|
(25,088
|
)
|
|
$
|
(2,437
|
)
|
Changes in our valuation allowance (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning-of-year
|
$
|
53,201
|
|
|
$
|
26,376
|
|
|
$
|
19,974
|
|
Charged to costs and expenses
|
16,443
|
|
|
(7,371
|
)
|
|
91
|
|
Charged to other accounts
(1)
|
(32,607
|
)
|
|
34,196
|
|
|
6,311
|
|
Balance at end-of-year
|
$
|
37,037
|
|
|
$
|
53,201
|
|
|
$
|
26,376
|
|
|
|
(1)
|
Amounts charged to other accounts includes a decrease of
$32.6 million
, increase of
$34.2 million
and increase of
$6.3 million
charged to additional paid-in-capital for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
The Company continues to record a valuation allowance against the net deferred tax assets that are not more likely than not to be realized. This assessment is made without considering potentially offsetting deferred tax liabilities established with respect to certain indefinite lived components, or components of the deferred tax liability expected to reverse outside of the net operating loss carryover
period, as these were appropriately not considered a source of future taxable income for realizing the deferred tax assets, with the exception of up to 80% of future indefinite-lived NOL deferred tax assets.
For the year ended
December 31, 2018
, the effective tax rate was
(0.1)%
, and the corresponding tax expense recorded was less than
$0.1 million
, due to the impact of the valuation allowance recorded against the Company’s net deferred tax assets, with the exception of indefinite lived components and those expected to reverse outside of the net operating loss carryover period as part of the outside basis difference in our partnership interest in Evolent Health LLC.
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act establishes new U.S. tax laws impacting the Company, which included a reduction of the U.S. corporate income tax rate from
35%
to
21%
effective for tax years beginning after December 31, 2017, an indefinite carryforward period and
80%
taxable income limitation on NOLs arising after December 31, 2017, and the repeal of the corporate alternative minimum tax. As of December 31, 2017, the Company had recorded a provisional estimate of
$5.8 million
tax benefit for the financial statement impact of the Tax Act in accordance with SEC Staff Accounting Bulletin No. 118. As of December 22, 2018, the Company has completed the analysis based on legislative updates relating to the Tax Act currently available, which resulted in an additional SAB 118 tax benefit of
$0.3 million
.
For the year ended
December 31, 2017
, the effective tax rate was
8.7%
,
due to the impact of the valuation allowance recorded against the Company’s net deferred tax assets, with the exception of indefinite lived components and those expected to reverse outside of the net operating loss carryover period as part of the outside basis difference in our partnership interest in Evolent Health LLC. The benefit recorded during the year primarily relates to the effects of the Tax Act, largely due to the revaluation of our deferred tax assets and liabilities for the new statutory income tax rate, and release of valuation allowance related to indefinite-lived intangible deferred tax liabilities now considered a source of income as support for the realization of future indefinite-lived NOL deferred tax assets.
For the year ended
December 31, 2016
, the effective tax rate was
4.5%
,
due to the impact of the valuation allowance recorded against the Company’s net deferred tax assets, with the exception of indefinite lived components and those expected to reverse outside of the net operating loss carryover period as part of the outside basis difference in our partnership interest in Evolent Health LLC. The benefit recorded during the year primarily relates to release of this valuation allowance as a result of the Valence Health acquisition and movement in the indefinite lived book-over-tax basis difference not considered a source of future taxable income to support realizability of the deferred tax assets.
As of
December 31, 2018
, the Company had NOLs fully available to offset future taxable income of approximately
$203.1 million
that begin to expire in
2031
through
2038
, and
$107.9 million
of NOLs with an indefinite carryforward period, subject to a utilization limit of
80%
of taxable income in any given year. However, as realization of such tax benefit is not more likely than not, based on our evaluation, we have established a valuation allowance. Internal Revenue Code Section 382 imposes limitations on the utilization of NOLs in the event of certain changes in ownership of the Company, which may have occurred or could occur in the future. This could impose an annual limit on the Company’s ability to utilize NOLs and could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect.
Changes in our unrecognized tax benefits (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning-of-year
|
$
|
762
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross increases - tax positions in prior period
|
934
|
|
|
1,108
|
|
|
—
|
|
Gross decreases - tax positions in prior period
|
(762
|
)
|
|
—
|
|
|
—
|
|
Gross increases - tax positions in current period
|
—
|
|
|
74
|
|
|
—
|
|
Change in tax rate
|
—
|
|
|
(420
|
)
|
|
—
|
|
Balance at end-of-year
|
$
|
934
|
|
|
$
|
762
|
|
|
$
|
—
|
|
Included in the balance of unrecognized tax benefits as of
December 31, 2018
, are
$0.9 million
of tax benefits that, if recognized, would not affect the effective tax rate. The Company has not recognized interest and penalties related to uncertain tax positions due to the current NOL position.
The Company had recognized
$0.8 million
of uncertain tax positions as of
December 31, 2017
, and
no
ne as of
December 31, 2016
. The
Company and its subsidiaries are not currently subject to income tax audits in any U.S. state or local jurisdiction, or any foreign jurisdiction, for any tax year.
Tax Receivables Agreement
Pursuant to the Offering Reorganization, Class B Exchanges are expected to increase our tax basis in our share of Evolent Health LLC’s tangible and intangible assets. These increases in tax basis are expected to increase our depreciation and amortization
deductions and create other tax benefits and, therefore, may reduce the amount of tax that we would otherwise be required to pay in the future. In addition, certain NOLs of Evolent Health Holdings (and of an affiliate of TPG) are available to us as a result of the Offering Reorganization.
In connection with the Offering Reorganization, we entered into the TRA with the holders of Class B common units. The agreement requires us to pay to such holders
85%
of the cash savings, if any, in U.S. federal, state and local and foreign income tax (as applicable) we realize as a result of any deductions attributable to future increases in tax basis following the Class B Exchanges (calculated assuming that any post-offering transfer of Class B common units had not occurred) or deductions attributable to imputed interest or future increases in tax basis following payments made under the TRA. We are accounting for these payments as contingent liabilities and will recognize them in our Consolidated Statements of Operations and Comprehensive Income (Loss) when their realization is probable. Additionally, pursuant to the same agreement we will pay the former stockholders of Evolent Health Holdings
85%
of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of the utilization of the NOLs of Evolent Health Holdings (and the affiliate of TPG) attributable to periods prior to the Offering Reorganization, approximately
$79.3 million
, as well as deductions attributable to imputed interest on any payments made under the agreement.
We will benefit from the remaining
15%
of any realized cash savings. The TRA was effective upon the completion of the Offering Reorganization and will remain in effect until all such tax benefits have been used or expired, or until the agreement is terminated. See Note
9
for additional discussion of the implications of the TRA.
13
. Employee Benefit Plans
We sponsor a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. We make matching contributions to the plan in accordance with the plan documents and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. The Company made
$8.6 million
,
$8.0 million
and
$4.3 million
in contributions to the 401(k) plan for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
14
. Investments In and Advances to Equity Method Investees
During the years ended
December 31, 2018
and
2017
, the Company entered into joint venture agreements with various entities. As of
December 31, 2018
, the Company’s economic and voting interests in these entities ranged between
4%
and
40%
. As of
December 31, 2017
, the Company’s economic and voting interests in these entities ranged between
26%
and
40%
. The Company determined that it has significant influence over these entities but that it does not have control over any of the entities. Accordingly, the investments are accounted for under the equity method of accounting and the Company is allocated its proportional share of the entities’ earnings and losses for each reporting period. The Company’s proportional share of the losses from these investments was approximately
$4.7 million
,
$1.8 million
and
$0.8 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The Company signed services agreements with certain of the aforementioned entities to provide certain management, operational and support services to help manage elements of their service offerings. Revenue related to these services agreements for the years ended
December 31, 2018
,
2017
and
2016
, was
$10.7 million
,
$0.4 million
and
$0.2 million
, respectively.
15
. Non-controlling Interests
Immediately following the Offering Reorganization and IPO, the Company owned
70.3%
of Evolent Health LLC. The Company’s ownership percentage changes with the issuance of Class A or Class B common stock and Class B Exchanges. In order to account for any changes in the Company’s ownership of Evolent Health LLC, we record a reclassification of equity between non-controlling interests and shareholders’ equity attributable to Evolent Health, Inc.
During the year ended
December 31, 2016
, the Company issued shares of its Class A common stock to acquire Passport, Valence Health and Aldera. For each share of Class A common stock issued by the Company, we received a reciprocal number of Class A common units from Evolent Health LLC in exchange for contributing the acquired entities to Evolent Health LLC. As a result, our economic interest in Evolent Health LLC increased during the year from
70.3%
to
70.8%
due to Class A common shares issued for the acquisition of Passport and from
74.6%
to
77.4%
as a result of Class A common shares issued for the acquisitions of Valence Health and Aldera.
In addition, the Company completed a secondary offering of
8.6 million
shares of its Class A common stock at a price to the underwriters of
$21.54
per share in September 2016. The shares sold in the September 2016 Secondary consisted of
6.4 million
existing shares of the Company’s Class A common stock owned and held by the Selling Stockholders and
2.2 million
newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges. As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the September 2016 Secondary, the Company’s economic interest in Evolent Health LLC increased from
71.0%
to
74.6%
as of September 22, 2016.
During the year ended
December 31, 2017
, the Company completed the 2017 Secondary Offerings discussed in Note 4. The shares sold in the 2017 Secondary Offerings consisted of
20.1 million
shares of the Company’s Class A common stock, consisting of
7.4 million
existing shares of the Company’s Class A common stock owned and held by certain Selling Stockholders,
12.6 million
newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges and
0.1 million
shares issued upon the exercise of options by certain management selling stockholders. As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of its Class B common units during the 2017 Secondary Offerings, the Company’s economic interest in Evolent Health LLC increased from
77.4%
to
96.1%
immediately following the June 2017 Secondary.
In addition, the Company issued
8.8 million
shares of its Class A Common Stock during the August 2017 Primary for net proceeds of
$166.9 million
. For each share of Class A common stock issued by Evolent Health, Inc., the Company received a corresponding Class A common unit from Evolent Health LLC in exchange for contributing the issuance proceeds to Evolent Health LLC. As a result of the Class A common stock and Class A common units issued in conjunction with the August 2017 Primary, the Company’s economic interest in Evolent Health LLC increased from
96.1%
to
96.6%
immediately following the August 2017 Primary.
During the year ended
December 31, 2018
, the Company completed the March 2018 Private Sale. The shares sold in the March 2018 Private Sale consisted of
1.2 million
existing shares of the Company’s Class A common stock owned and held by The Advisory Board and
1.8 million
newly-issued shares of the Company’s Class A common stock received by The Advisory Board pursuant to a Class B Exchange.
As a result of this Class B Exchange and Evolent Health LLC’s cancellation of the Class B common units during the March 2018 Private Sale, the Company’s economic interest in Evolent Health LLC increased from
96.6%
to
98.9%
immediately following the March 2018 Private Sale.
Also during the year ended
December 31, 2018
, the Company issued
3.1 million
shares of Evolent Health LLC’s Class B common units and an equal number of the Company’s Class B common shares as part of the consideration for the New Century Health transaction. The Class B common units, together with a corresponding number of shares of the Company’s Class B common stock, can be exchanged for an equivalent number of shares of the Company’s Class A common stock. As a result of the Class B common units (and corresponding Class B common shares) issued as part of the New Century Health transaction, the Company’s economic interest in Evolent Health LLC decreased from
99.0%
to
95.3%
, immediately following the acquisition.
In addition, the Company completed the November 2018 Private Sales during 2018. The shares sold in the November 2018 Private Sales consisted of
0.1 million
existing shares of the Company’s Class A common stock owned by TPG and
0.7 million
newly-issued shares of the Company’s Class A common stock received by TPG pursuant to Class B Exchanges. As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the Class B common units during the November 2018 Private Sales, the Company’s economic interest in Evolent Health LLC increased from
95.3%
to
96.1%
immediately following the November 2018 Private Sales.
As of
December 31, 2018
and
2017
, we owned
96.1%
and
96.6%
of the economic interests in Evolent Health LLC, respectively. See Note
4
for further discussion of our business combinations and securities offerings.
Changes in non-controlling interests (in thousands) for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
December 31,
|
|
2018
|
|
2017
|
Non-controlling interests balance as of beginning-of-year
|
$
|
35,427
|
|
|
$
|
209,588
|
|
Cumulative-effect adjustment from adoption of new accounting principle
|
594
|
|
|
—
|
|
Decrease in non-controlling interests as a result of Class B Exchanges
|
(34,682
|
)
|
|
(168,883
|
)
|
Issuance of Class B common stock for business combination
|
42,787
|
|
|
—
|
|
Net income (loss) attributable to non-controlling interests
|
(1,533
|
)
|
|
(9,102
|
)
|
Reclassification of non-controlling interests
|
2,939
|
|
|
3,824
|
|
Non-controlling interests balance as of end-of-year
|
$
|
45,532
|
|
|
$
|
35,427
|
|
16
. Fair Value Measurement
GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) assuming an orderly transaction in the most advantageous market at the measurement date. GAAP also establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:
|
|
•
|
Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date;
|
|
|
•
|
Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date and the fair value can be determined through the use of models or other valuation methodologies; and
|
|
|
•
|
Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the particular asset or liability being measured.
Recurring Fair Value Measurements
In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
11,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,391
|
|
Restricted cash and restricted investments
(1)
|
31,226
|
|
|
—
|
|
|
—
|
|
|
31,226
|
|
Total
|
$
|
42,617
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,617
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
(2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,800
|
|
|
$
|
8,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
60,535
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,535
|
|
Restricted cash and restricted investments
(1)
|
16,575
|
|
|
—
|
|
|
—
|
|
|
16,575
|
|
Total
|
$
|
77,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77,110
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,700
|
|
|
$
|
8,700
|
|
(1)
Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of
December 31, 2018
and
2017
, as presented in the tables above.
(2)
Represents the fair value of earn-out consideration related to the Passport and New Century Health transactions, as described in Note
4
. Out of the total
$8.8 million
,
$5.6 million
is attributable to Passport and
$3.2 million
is attributable to New Century Health.
(3)
Represents the fair value of earn-out consideration related to the Passport transaction, as described in Note
4
.
The Company recognizes any transfers between levels within the hierarchy as of the beginning of the reporting period. There were no transfers between fair value levels for the years ended
December 31, 2018
and
2017
, respectively.
In the absence of observable market prices, the fair value is based on the best information available and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks.
As discussed in Note
4
, the strategic alliance with Passport includes a provision for additional equity consideration contingent upon the Company obtaining new third-party Medicaid business in future periods. The fair value of the contingent equity consideration was estimated based on the real options approach, a form of the income approach, which estimated the probability of the Company achieving future revenues under the agreement. The significant unobservable inputs used in the fair value measurement of the Passport contingent consideration are the
five
-year risk-adjusted recurring revenue compound annual growth rate (“CAGR”) and the applicable discount rate. A significant increase in the assumed
five
-year risk-adjusted recurring revenue CAGR projection or decrease in discount rate in isolation would result in a significantly higher fair value of the contingent consideration.
Also as discussed in Note
4
, the acquisition of New Century Health includes an earn-out of up to
$11.4 million
, contingent upon New Century Health achieving certain levels of operating results during 2019. The fair value of the earn-out was estimated based on the real options approach, a form of the income approach, which estimated the probability of New Century Health achieving certain levels of operating results during 2019. The significant unobservable inputs used in the fair value measurement of the New Century Health earn-out are the risk neutral probabilities that the 2019 operating results for New Century Health meet the defined operating results target or exceed the operating results target cap. A significant increase in either one of these metrics, in isolation, would result in a significantly higher fair value of the contingent consideration.
The changes in our contingent consideration, measured at fair value, for which the Company uses Level 3 inputs to determine fair value are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
December 31,
|
|
2018
|
|
2017
|
Balance as of beginning of year
|
$
|
8,700
|
|
|
$
|
8,300
|
|
Additions
(1)
|
3,200
|
|
|
—
|
|
Realized and unrealized (gains) losses, net
(2)
|
(3,100
|
)
|
|
400
|
|
Balance as of end of year
|
$
|
8,800
|
|
|
$
|
8,700
|
|
(1)
Additions during 2018 are attributable to the earn-out related to the New Century Health transaction.
(2)
Realized and unrealized gains and losses during 2018 and 2017 are attributable to the earn-out related to the Passport transaction.
The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3 fair value measurements as of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Fair
|
|
Valuation
|
|
Significant
|
|
Assumption or
|
|
|
Value
|
|
Technique
|
|
Unobservable Inputs
|
|
Input Ranges
|
|
Passport contingent
|
|
|
|
|
|
|
|
|
consideration
|
$
|
5,600
|
|
|
Real options approach
|
|
Risk-adjusted recurring revenue CAGR
|
|
103.9
|
%
|
(1)
|
|
|
|
|
|
Discount rate/time value
|
|
5.5% - 6.5%
|
|
|
|
|
|
|
|
|
|
|
|
New Century Health
|
|
|
|
|
|
|
|
|
contingent consideration
|
$
|
3,200
|
|
|
Real options approach
|
|
Risk-neutral probability exceeds threshold
|
|
39.0
|
%
|
(2)
|
|
|
|
|
|
Risk-neutral probability meets earn-out cap
|
|
24.0
|
%
|
(2)
|
(1)
The risk-adjusted recurring revenue CAGR is calculated over the
five
year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenue of
$1.0 million
, resulting in a higher growth rate. The risk-adjusted recurring revenue CAGR from 2019-2021 is
61.8%
.
|
|
(2)
|
These amounts represent 1) the probability that New Century Health will achieve at least the minimum level of operating results in 2019 to earn any contingent consideration (
39.0%
) and 2) the probability that New Century Health will achieve 2019 operating results in excess of the maximum amount of contingent consideration payable (
24.0%
). The risk-neutral probability rates were determined by projecting theoretical 2019 operating results using a simulation with one million trials.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Fair
|
|
Valuation
|
|
Significant
|
|
Assumption or
|
|
|
Value
|
|
Technique
|
|
Unobservable Inputs
|
|
Input Ranges
|
|
Passport contingent
|
|
|
|
|
|
|
|
|
consideration
|
$
|
8,700
|
|
|
Real options approach
|
|
Risk-adjusted recurring revenue CAGR
|
|
92.5
|
%
|
(1)
|
|
|
|
|
|
Discount rate/time value
|
|
2.7% - 4.0%
|
|
|
(1)
The risk-adjusted recurring revenue CAGR is calculated over the
five
year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenues of
$1.0 million
, resulting in a higher growth rate. The risk-adjusted recurring revenue CAGR over the period 2019-2021 is
19.2%
.
Nonrecurring Fair Value Measurements
In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. This includes assets and liabilities recorded in business combinations or asset acquisitions, goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value. See Notes
4
,
5
,
6
,
7
,
14
and
20
for further discussion of assets measured at fair value on a nonrecurring basis.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents (those not held in a money market fund), restricted cash, receivables, prepaid expenses, accounts payable, accrued liabilities and accrued compensation approximate their fair values because of the relatively short-term maturities of these items and financial instruments.
See Note
8
for information regarding the fair value of the 2025 Notes and the 2021 Notes.
17
. Related Parties
The entities described below are considered related parties and the balances and/or transactions with them are reported in our consolidated financial statements.
As discussed in Note
14
, the Company has economic interests in several entities that are accounted for under the equity method of accounting. The Company is allocated its proportional share of the investees’ earnings and losses each reporting period. In addition, Evolent has entered into services agreements with certain of the entities to provide certain management, operational and support services to help the entities manage elements of their service offerings. Revenues related to the services agreements were approximately
$10.7 million
,
$0.4 million
and
$0.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The Company also works closely with UPMC, one of its founding investors. The Company’s relationship with UPMC is a subcontractor relationship where UPMC has agreed to execute certain tasks (primarily TPA services) relating to certain customer commitments. We also conduct business with a company in which UPMC holds a significant equity interest.
The following table presents revenues and expenses attributable to our related parties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
Transformation services
|
$
|
10,540
|
|
|
$
|
597
|
|
|
$
|
482
|
|
Platform and operations services
|
37,490
|
|
|
32,335
|
|
|
34,267
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization expenses)
|
9,451
|
|
|
22,389
|
|
|
22,207
|
|
Selling, general and administrative expenses
|
917
|
|
|
1,153
|
|
|
2,027
|
|
18
. Segment Reporting
We define our reportable segments based on the way the chief operating decision maker (“CODM”), currently the chief executive officer, manages the operations for purposes of allocating resources and assessing performance. We classify our operations into
two
reportable segments as follows:
|
|
•
|
Services, which consists of our technology-enabled value-based care services, specialty care management services and comprehensive health plan administration services; and
|
|
|
•
|
True Health, which consists of a commercial health plan we operate in New Mexico that focuses on small and large businesses.
|
In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.
The CODM uses Adjusted Revenue and Adjusted EBITDA as the relevant segment performance measures to evaluate the performance of the segments and allocate resources.
Adjusted Revenue and Adjusted EBITDA are segment performance financial measures that offer a useful view of the overall operation of our businesses and may be different than similarly-titled segment performance financial measures used by other companies. Adjusted Revenue is defined as the sum of Adjusted Services Revenue and True Health premiums revenue less intersegment eliminations. Adjusted Services Revenue is defined as Services revenue adjusted to exclude the impact of purchase accounting adjustments. Adjusted Services Revenue consists of Adjusted Transformation Services Revenue and Adjusted Platform and Operations Services Revenue, which are defined as transformation services revenue and platform and operations services revenue, respectively, before the effect of intersegment eliminations and adjusted to exclude the impact of purchase accounting adjustments. The company’s Adjusted Services Revenue for the year ended
December 31, 2018
, includes a
$4.5 million
adjustment related to revenue that was contracted for prior to 2018 and that was properly excluded from revenue in our 2017 results under the revenue recognition rules then in effect under ASC 605. On January 1, 2018, we adopted the new revenue recognition rules under ASC 606 using the modified retrospective method, which required us to include this
$4.5 million
as part of the cumulative transition adjustment to beginning retained earnings as of January 1, 2018. Under ASC 605, and based on proportionate performance revenue recognition, we would have recognized an additional
$4.5 million
in revenue during 2018, primarily within our Adjusted Transformation Services Revenue. The Company has therefore included this revenue, and related profit, in its adjusted results for the year ended
December 31, 2018
, as they had not been previously reported prior to 2018 and the contracts are expected to be completed within 2018. This is a one-time adjustment and it will not reoccur in future periods.
Adjusted EBITDA is the sum of Services Adjusted EBITDA and True Health Adjusted EBITDA and is defined as EBITDA (net income (loss) attributable to Evolent Health, Inc. before interest income, interest expense, (provision) benefit for income taxes, depreciation and amortization expenses), adjusted to exclude changes in fair value of contingent consideration and indemnification assets, income (loss) from equity method investees, other income (expense), net, net (income) loss attributable to non-controlling interests, purchase accounting adjustments, stock-based compensation expenses, severance costs, amortization of contract cost assets recorded as a result of a one-time ASC 606 transition adjustment, transaction costs related to acquisitions and business combinations, goodwill impairment and other one-time adjustments (which for the year ended
December 31, 2018
, includes the ASC 606 transition adjustment described above). When Adjusted EBITDA is discussed in this report, the most directly comparable GAAP financial measure is net income (loss) attributable to Evolent Health, Inc.
Management considers Adjusted Revenue and Adjusted EBITDA to be the appropriate metrics to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as they eliminate the effect of items which are not indicative of each segment's core operating performance.
The following tables present our segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
Services
|
|
True Health
(1)
|
Eliminations
|
Consolidated
|
Adjusted Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Transformation Services
|
|
$
|
36,571
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
36,571
|
|
|
Adjusted Platform and Operations Services
|
|
516,219
|
|
|
|
—
|
|
|
|
(14,325
|
)
|
|
|
501,894
|
|
|
Adjusted Services Revenue
|
|
552,790
|
|
|
|
—
|
|
|
|
(14,325
|
)
|
|
|
538,465
|
|
|
True Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
—
|
|
|
|
94,763
|
|
|
|
(806
|
)
|
|
|
93,957
|
|
|
Adjusted Revenue
|
|
552,790
|
|
|
|
94,763
|
|
|
|
(15,131
|
)
|
|
|
632,422
|
|
|
ASC 606 transition adjustment
(2)
|
|
(4,498
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,498
|
)
|
|
Purchase accounting adjustments
(3)
|
|
(861
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(861
|
)
|
|
Total revenue
|
|
$
|
547,431
|
|
|
|
$
|
94,763
|
|
|
|
$
|
(15,131
|
)
|
|
|
$
|
627,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Transformation Services
|
|
$
|
29,466
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
29,466
|
|
|
Adjusted Platform and Operations Services
|
|
406,951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
406,951
|
|
|
Adjusted Services Revenue
|
|
436,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
436,417
|
|
|
Adjusted Revenue
|
|
436,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
436,417
|
|
|
Purchase accounting adjustments
(3)
|
|
(1,467
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,467
|
)
|
|
Total revenue
|
|
$
|
434,950
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
434,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Transformation Services
|
|
$
|
38,434
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
38,434
|
|
|
Adjusted Platform and Operations Services
|
|
217,844
|
|
|
|
—
|
|
|
|
—
|
|
|
|
217,844
|
|
|
Adjusted Services Revenue
|
|
256,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
256,278
|
|
|
Adjusted Revenue
|
|
256,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
256,278
|
|
|
Purchase accounting adjustments
(4)
|
|
(2,090
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,090
|
)
|
|
Total revenue
|
|
$
|
254,188
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
254,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
|
|
|
|
|
Services
|
|
True Health
(1)
|
Total
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
21,310
|
|
|
|
$
|
1,915
|
|
|
|
$
|
23,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(2,204
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(2,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(21,407
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(21,407
|
)
|
|
|
|
|
|
|
(1)
|
The True Health segment was created in January 2018.
|
|
|
(2)
|
Adjustment to Adjusted Transformation Services Revenue was approximately
$3.7 million
and the adjustment to Adjusted Platform and Operations Services Revenue was approximately
$0.8 million
.
|
|
|
(3)
|
Purchase accounting adjustments pertain to Adjusted Platform and Operations Services Revenue. There were
no
purchase accounting adjustments in relation to Adjusted Transformation Services Revenue or True Health premiums revenue.
|
|
|
(4)
|
Purchase accounting adjustments of
$2.1 million
include an adjustment of
$0.1 million
to Adjusted Transformation Services Revenue and an adjustment of
$2.0 million
to Adjusted Platform and Operations Services Revenue.
|
The following table presents our reconciliation of segments total Adjusted EBITDA to net income (loss) attributable to Evolent Health, Inc. (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net Income (Loss) Attributable to
|
|
|
|
|
|
|
Evolent Health, Inc.
|
|
$
|
(52,658
|
)
|
|
$
|
(60,665
|
)
|
|
$
|
(159,742
|
)
|
Less:
|
|
|
|
|
|
|
Interest income
|
|
3,440
|
|
|
1,656
|
|
|
970
|
|
Interest expense
|
|
(5,484
|
)
|
|
(3,636
|
)
|
|
(247
|
)
|
(Provision) benefit for income taxes
|
|
(40
|
)
|
|
6,637
|
|
|
10,755
|
|
Depreciation and amortization expenses
|
|
(44,515
|
)
|
|
(32,368
|
)
|
|
(17,224
|
)
|
Goodwill impairment
|
|
—
|
|
|
—
|
|
|
(160,600
|
)
|
Impact of lease abandonment
|
|
—
|
|
|
—
|
|
|
(6,456
|
)
|
Income (loss) from equity method investees
|
|
(4,736
|
)
|
|
(1,755
|
)
|
|
(841
|
)
|
Change in fair value of contingent
|
|
|
|
|
|
|
consideration and indemnification asset
|
|
4,104
|
|
|
(400
|
)
|
|
2,086
|
|
Other income (expense), net
|
|
109
|
|
|
171
|
|
|
4
|
|
Net (income) loss attributable to
|
|
|
|
|
|
|
non-controlling interests
|
|
1,533
|
|
|
9,102
|
|
|
67,036
|
|
ASC 606 transition adjustments
|
|
(4,498
|
)
|
|
—
|
|
|
—
|
|
Purchase accounting adjustments
|
|
(861
|
)
|
|
(1,467
|
)
|
|
(2,090
|
)
|
Stock-based compensation expense
|
|
(17,609
|
)
|
|
(20,437
|
)
|
|
(22,501
|
)
|
Severance costs
|
|
(2,205
|
)
|
|
—
|
|
|
—
|
|
Amortization of contract cost assets
|
|
(2,456
|
)
|
|
—
|
|
|
—
|
|
Transaction costs
|
|
(2,665
|
)
|
|
(15,964
|
)
|
|
(9,227
|
)
|
Adjusted EBITDA
|
|
$
|
23,225
|
|
|
$
|
(2,204
|
)
|
|
$
|
(21,407
|
)
|
Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment.
19
. Claims Reserves
The Company maintains reserves for claims incurred but not paid related its specialty care management services and its health plan, True Health, in New Mexico.
Claims reserves reflect estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities. Claims reserves also reflect estimated amounts owed to NMHC under the Reinsurance Agreement, as discussed further in Note 9.
The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.
This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The liability is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.
The Company’s policy is to use historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.
For more recent months, the Company expects to rely more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including
inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.
For each reporting period, the Company compares key assumptions used to establish the claims reserves to actual experience. When actual experience differs from these assumptions, claims reserves are adjusted through current period shareholders' net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.
Activity in claims reserves for the year ended December 31, 2018, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
(1)
|
True Health
|
|
Total
|
Incurred costs related to current year
|
|
$
|
38,674
|
|
|
|
$
|
70,889
|
|
|
|
$
|
109,563
|
|
Paid costs related to current year
|
|
38,124
|
|
|
|
58,318
|
|
|
|
96,442
|
|
Change during the year
|
|
550
|
|
|
|
12,571
|
|
|
|
13,121
|
|
Other adjustments
(2)
|
|
(1,466
|
)
|
|
|
(2,691
|
)
|
|
|
(4,157
|
)
|
Beginning balance
|
|
18,631
|
|
|
|
—
|
|
|
|
18,631
|
|
Ending balance
|
|
$
|
17,715
|
|
|
|
$
|
9,880
|
|
|
|
$
|
27,595
|
|
(1)
Costs incurred to provide specialty care management services are recorded within cost of revenue in our statement of operations.
(2)
Other adjustments to claims reserves for Services reflect changes in accrual for amounts payable to facilities and amounts owed to our payer partners for claims paid on our behalf. Other adjustments for True Health include reinsurance premiums assumed of
$2.7 million
, net of claims-related administrative expenses of
$0.6 million
. In connection with the Reinsurance Agreement, we assumed
$3.9 million
of claims expenses for the year ended December 31, 2018, which is recorded within “Claims expenses” on our Consolidated Statements of Operations and Comprehensive Income (Loss), and recorded a liability of
$1.2 million
as of December 31, 2018, which is recoded within “Claims reserves” on our Consolidated Balance Sheets.
20
. Investments
Our investments are classified as held-to-maturity as we have both the intent and ability to hold the investments until their individual maturities. The amortized cost, gross unrealized gains and losses, and fair value of our investments as measured using Level 2 inputs as of
December 31, 2018
(in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
U.S. Treasury bills
|
$
|
7,982
|
|
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
8,102
|
|
Corporate bonds
|
887
|
|
|
17
|
|
|
—
|
|
|
904
|
|
Other CMOs
|
545
|
|
|
6
|
|
|
—
|
|
|
551
|
|
Yankees
|
596
|
|
|
11
|
|
|
—
|
|
|
607
|
|
Total investments
|
$
|
10,010
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
10,164
|
|
We did
no
t hold any material investments as of December 31, 2017.
The amortized cost and fair value of our investments by contractual maturities as of
December 31, 2018
(in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Fair
|
|
Cost
|
|
Value
|
Due after one year through five years
|
$
|
9,666
|
|
|
$
|
9,813
|
|
Due after five years through ten years
|
344
|
|
|
351
|
|
Total
|
$
|
10,010
|
|
|
$
|
10,164
|
|
When a held-to-maturity investment is in an unrealized loss position, we assess whether or not we expect to recover the entire cost basis of security, based on our best estimate of the present value of cash flows expected to be collected from the debt security. Factors considered in our analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position,
credit worthiness and forecasted performance of the investee. In cases where the estimated present value of future cash flows is less than our cost basis, we recognize an other than temporary impairment and write the investment down to its fair value. The new cost basis would not be changed for subsequent recoveries in fair value.
We did not hold any securities that were in an unrealized loss position as of
December 31, 2018
or
2017
.
21
. Quarterly Results of Operations (unaudited)
The unaudited consolidated quarterly results of operations (in thousands, except per share data) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
2018
|
|
|
|
|
|
|
|
Total revenue
|
$
|
139,714
|
|
|
$
|
144,298
|
|
|
$
|
149,947
|
|
|
$
|
193,104
|
|
Total operating expenses
|
153,846
|
|
|
153,264
|
|
|
160,977
|
|
|
206,456
|
|
Net income (loss)
|
(14,065
|
)
|
|
(10,031
|
)
|
|
(12,555
|
)
|
|
(17,540
|
)
|
Net income (loss) attributable to non-controlling interests
|
(439
|
)
|
|
(115
|
)
|
|
(126
|
)
|
|
(853
|
)
|
Net income (loss) attributable to Evolent Health, Inc.
|
(13,626
|
)
|
|
(9,916
|
)
|
|
(12,429
|
)
|
|
(16,687
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.18
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
Total revenue
|
$
|
106,238
|
|
|
$
|
107,071
|
|
|
$
|
107,912
|
|
|
$
|
113,729
|
|
Total operating expenses
|
127,693
|
|
|
126,188
|
|
|
121,932
|
|
|
131,977
|
|
Net income (loss)
|
(23,149
|
)
|
|
(19,698
|
)
|
|
(13,129
|
)
|
|
(13,791
|
)
|
Net income (loss) attributable to non-controlling interests
|
(5,137
|
)
|
|
(2,793
|
)
|
|
(541
|
)
|
|
(631
|
)
|
Net income (loss) attributable to Evolent Health, Inc.
|
(18,012
|
)
|
|
(16,905
|
)
|
|
(12,588
|
)
|
|
(13,160
|
)
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.34
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
The unaudited consolidated quarterly results of operations include certain unusual or infrequently occurring items that were material to the results of certain quarters as described below.
On January 2, 2018, the Company launched a health plan in New Mexico, True Health, by acquiring assets related to NMHC’s commercial business. On October 1, 2018, the Company completed the acquisition of New Century Health. Accordingly, the 2018 quarterly results include the consolidated results of True Health and the quarterly results for the fourth quarter of 2018 include the consolidated results of New Century Health. In addition, as described further in Note
8
, the Company issued its 2025 Notes during the fourth quarter of 2018, which increased interest expense by approximately
$2.0 million
during the fourth quarter of 2018.
22
. Supplemental Cash Flow Information
The following represents supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Supplemental Disclosure of Non-cash Investing and Financing Activities
|
|
|
|
|
|
Class A and Class B common stock issued in connection with business combinations
|
$
|
83,173
|
|
|
$
|
—
|
|
|
$
|
177,795
|
|
Change in goodwill due to measurement period adjustments related to business combinations
|
(117
|
)
|
|
1,611
|
|
|
—
|
|
Decrease in accrued financing costs related to 2021 Notes
|
—
|
|
|
196
|
|
|
—
|
|
Consideration for asset acquisitions or business combinations
|
500
|
|
|
—
|
|
|
—
|
|
Settlement of escrow related to asset acquisition
|
2,519
|
|
|
—
|
|
|
—
|
|
Settlement of indemnification asset
|
1,004
|
|
|
—
|
|
|
—
|
|
Tax benefit related to Accordion intangible technology
|
—
|
|
|
2,042
|
|
|
—
|
|
Acquisition consideration payable
|
—
|
|
|
—
|
|
|
1,148
|
|
Accrued property and equipment purchases
|
368
|
|
|
229
|
|
|
446
|
|
Accrued deferred financing costs
|
607
|
|
|
—
|
|
|
1,036
|
|
Effects of Class B Exchanges
|
|
|
|
|
|
Decrease in non-controlling interests as a result of Class B Exchanges
|
34,682
|
|
|
168,883
|
|
|
28,220
|
|
Decrease in deferred tax liability as a result of securities offerings and exchanges
|
652
|
|
|
12,857
|
|
|
1,606
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
Cash paid during the period for interest
|
2,500
|
|
|
2,472
|
|
|
—
|
|
Cash paid during the year for taxes, net
|
343
|
|
|
674
|
|
|
—
|
|