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. Information regarding the determination and allocation of the fair value of recently acquired assets and liabilities is further described within Note
4
.
The following summarizes the estimated useful lives by asset classification:
|
|
|
|
|
|
Corporate trade name
|
10-20 years
|
|
Customer relationships
|
10-25 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.
Reserves for claims and performance-based arrangements
Reserves for claims and performance-based arrangements for our Services and True Health segments reflect estimates of payments under performance-based arrangements and 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. Reserves for claims and performance-based arrangements 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 in 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 reserves for claims and performance-based arrangements.
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 monthly 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. Foreign currency translation gains and losses did not have a material impact on our consolidated statements of operations and comprehensive income (loss) for the
three and six
months ended
June 30, 2019
and
2018
.
3
. Recently Issued Accounting Standards
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,
Leases
, in order to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This update introduces a new standard on accounting for leases, including a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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 using an effective date method rather than the earliest comparative period. The requirements of ASU 2018-11 are effective on the same date as the requirements of ASU 2016-02. We adopted ASU 2016-02 as of January 1, 2019, using the modified retrospective approach. Further, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional right-of-use assets and lease liabilities of approximately
$51.4 million
and
$47.4 million
, respectively, on our consolidated balance sheet as of January 1, 2019. The standard had no impact on our results of operations.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal Use Software: Customer’s 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 adopted the requirements of ASU 2018-15 effective January 1, 2019. There was no material impact to our consolidated balance sheets or results of operations as of or for the
three and six
months ended
June 30, 2019
.
Future Adoption of New Accounting Standards
In July 2019, the FASB issued ASU 2019-07,
Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update).
ASU 2019-07 clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the codification easier to apply. We do not expect the disclosure and presentation amendments included in ASU 2019-07, which are to be applied prospectively, to have a material impact on our consolidated financial statements and related disclosures.
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.
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. 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 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
|
|
|
Reserves for claims and performance-based arrangements
|
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.
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 Company paid cash consideration of
$10.3 million
in connection with the acquisition. 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 assets from NMHC 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. 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 information available at the date of the transaction.
True Health is a separate segment, and its results of operations are provided in Note
18
- Segment Reporting.
Pro Forma Financial Information (Unaudited)
The unaudited pro forma consolidated statements of operations presented below gives effect to the New Century Health and True Health transactions as if they took place on January 1, 2017. 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; and
|
|
|
|
|
•
|
Record the issuance of Class B common shares as part of the New Century Health transaction as of January 1, 2017.
|
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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
191,959
|
|
|
$
|
189,572
|
|
|
$
|
389,715
|
|
|
$
|
374,203
|
|
|
Net income (loss)
|
(31,900
|
)
|
|
(10,427
|
)
|
|
(80,549
|
)
|
|
(25,312
|
)
|
|
Net income (loss) attributable to non-controlling interests
|
(415
|
)
|
|
(511
|
)
|
|
(2,075
|
)
|
|
(1,446
|
)
|
|
Net income (loss) attributable to Evolent Health, Inc.
|
(31,485
|
)
|
|
(9,916
|
)
|
|
(78,474
|
)
|
|
(23,866
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per Common Share available to common shareholders
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.38
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(0.31
|
)
|
Securities Offerings and Sales
Under exchange agreements we entered into at the time of our IPO and as part of the New Century Health acquisition, we granted TPG, The Advisory Board Company (“The Advisory Board”) and Ptolemy Capital, LLC (“Ptolemy Capital”) (together, the “Investor Stockholders”) and certain former owners of New Century Health (the “New Century Health Class B Members”) an exchange right that allows receipt of newly-issued shares of the Company’s Class A common stock in exchange (a “Class B Exchange”) for an equal number of shares of the Company’s Class B common stock (which are subsequently canceled) and an equal number of Evolent Health LLC’s Class B common units (“Class B units”). Class B units received by the Company from relevant Investor Stockholders and New Century Health Class B Members are simultaneously exchanged for an equivalent number of Class A units of Evolent Health LLC, and Evolent Health LLC cancels the Class B units it receives in the Class B Exchange. The cancellation of the Class B 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 outstanding shares of the Company’s Class B common stock and Class B units. 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 shares of our Class A common stock, Class B common stock or Class B 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 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 Company’s economic interest in Evolent Health LLC will increase, if further Class B Exchanges occur.
5
. Revenue Recognition
Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services.
Transformation Services Revenue
Transformation services consist of 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 performance-based arrangements) and claims processing services on an ongoing basis, as well as transition or run-out services to customers receiving primarily 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.
Disaggregation of Revenue
The following table represents Evolent’s Services segment revenue disaggregated by revenue type (in thousands), excluding revenues from our True Health segment and from our downside risk sharing arrangements through our insurance subsidiary, which are accounted for under ASC 944,
Financial Services-Insurance
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Services Revenue
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
1,944
|
|
|
$
|
8,215
|
|
|
$
|
5,297
|
|
|
$
|
14,720
|
|
|
Platform and operations services
|
|
143,631
|
|
|
110,836
|
|
|
290,887
|
|
|
219,284
|
|
Transaction Price Allocated to the Remaining Performance Obligations
For contracts with a term that is greater than one year, we have allocated approximately
$100.4 million
of transaction price to performance obligations that are unsatisfied or partially unsatisfied as of
June 30, 2019
. 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 we expect 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
37%
and
79%
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 than this estimate and the timing of recognition may not be as expected.
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.
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
|
|
|
|
June 30,
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Short-term receivables
(1)
|
|
$
|
69,522
|
|
|
|
$
|
78,380
|
|
|
|
Long-term receivables
(1)
|
|
6,550
|
|
|
|
6,550
|
|
|
|
Short-term contract assets
|
|
1,187
|
|
|
|
2,102
|
|
|
|
Long-term contract assets
|
|
1,491
|
|
|
|
961
|
|
|
|
Short-term deferred revenue
|
|
26,923
|
|
|
|
20,584
|
|
|
|
Long-term deferred revenue
|
|
256
|
|
|
|
1,502
|
|
|
(1)
Excludes pharmacy claims receivable and premiums receivable
Changes in contract assets and deferred revenue for the
six
months ended
June 30, 2019
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
|
|
|
Balance as of beginning-of-period
|
|
$
|
3,063
|
|
|
|
Reclass to receivables, as the right
|
|
|
|
|
to consideration becomes unconditional
|
|
(1,482
|
)
|
|
|
Contract assets recognized, net of
|
|
|
|
|
reclass to receivables
|
|
1,097
|
|
|
|
Balance as of end-of-period
|
|
$
|
2,678
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
Balance as of beginning-of-period
|
|
$
|
22,086
|
|
|
|
Reclass to revenue, as a result
|
|
|
|
|
of performance obligations satisfied
|
|
(12,714
|
)
|
|
|
Cash received in advance of satisfaction
|
|
|
|
|
of performance obligations
|
|
17,807
|
|
|
|
Balance as of end-of-period
|
|
$
|
27,179
|
|
|
The amount of revenue recognized during the
three and six
months ended
June 30, 2019
, from performance obligations satisfied (or partially satisfied) in previous periods was immaterial.
Contract Cost Assets
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
June 30, 2019
, and
December 31, 2018
, the Company had
$2.8 million
and
$1.5 million
of contract acquisition cost assets, net of accumulated amortization. The Company recorded
amortiza
tion expense of
$0.1 million
and
$0.2 million
for the
three and six
months ended
June 30, 2019
, respectively, and
less than
$0.1 million
for the
three and six
months ended
June 30, 2018
.
In our platform 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
June 30, 2019
, and
December 31, 2018
, the Company had
$21.7 million
and
$17.6 million
of contract fulfillment cost assets, net of accumulated amortization. The Company recorded amortization expense of
$1.4 million
and
$2.6 million
for the
three and six
months ended
June 30, 2019
, respectively, and
$0.5 million
and
$1.0 million
for the
three and six
months ended
June 30, 2018
, respectively.
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
|
|
|
As of
|
|
|
|
June 30,
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Computer hardware
|
|
$
|
11,131
|
|
|
|
$
|
10,421
|
|
|
|
Furniture and equipment
|
|
3,255
|
|
|
|
3,187
|
|
|
|
Internal-use software development costs
|
|
98,523
|
|
|
|
81,640
|
|
|
|
Leasehold improvements
|
|
9,945
|
|
|
|
10,118
|
|
|
|
Total property and equipment
|
|
122,854
|
|
|
|
105,366
|
|
|
|
Accumulated depreciation and amortization
|
|
(42,637
|
)
|
|
|
(31,738
|
)
|
|
|
Total property and equipment, net
|
|
$
|
80,217
|
|
|
|
$
|
73,628
|
|
|
The Company capitalized
$8.2 million
and
$16.9 million
of internal-use software development costs for the
three and six
months ended
June 30, 2019
, respectively, and
$7.6 million
and
$18.1 million
for the
three and six
months ended
June 30, 2018
, respectively. The net book value of capitalized internal-use software development costs was
$71.1 million
and
$62.8 million
as of
June 30, 2019
, and
December 31, 2018
, respectively.
Depreciation expense related to property and equipment was
$5.7 million
and
$10.9 million
for the
three and six
months ended
June 30, 2019
, of which amortization expense related to capitalized internal-use software development costs was
$4.5 million
and
$8.6 million
, respectively. Depreciation expense related to property and equipment was
$3.9 million
and
$7.5 million
for the
three and six
months ended
June 30, 2018
, of which amortization expense related to capitalized internal-use software development costs was
$2.9 million
and
$5.4 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 management, strategy, partners, or litigation.
During the second quarter of 2019, the price of our Class A common stock declined significantly. The average closing price per share of our Class A common stock for the months of May and June decreased by
25.8%
compared to the average closing price for the period from January to April. We considered whether the stock price decline represented a triggering event for interim goodwill impairment testing and determined that the decline in our stock price does not impact the medium-term and long-term projections of our cash flow generation and, accordingly, our estimates of the fair value of our reporting units. Therefore, we did not perform a quantitative goodwill assessment and no impairment was noted as of June 30, 2019. However, any long-term decline in stock price could result in future goodwill impairment charges.
The following tables summarize the changes in the carrying amount of goodwill, by reportable segment, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2019
|
|
|
|
|
Services
|
|
|
True Health
|
|
Consolidated
|
|
Balance as of beginning-of-period
(1)
|
|
$
|
762,419
|
|
|
|
$
|
5,705
|
|
|
|
$
|
768,124
|
|
|
|
Goodwill Acquired
|
|
3,429
|
|
|
|
—
|
|
|
|
3,429
|
|
|
|
Measurement period adjustments
(2)
|
|
596
|
|
|
|
—
|
|
|
|
596
|
|
|
|
Foreign currency translation
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
Balance as of end-of-period
|
|
$
|
766,459
|
|
|
|
$
|
5,705
|
|
|
|
$
|
772,164
|
|
|
(1)
Net of cumulative inception to date impairment of
$160.6 million
.
(2)
Measurement period adjustments related to transactions completed during the fourth quarter of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
Services
|
|
|
True Health
|
|
Consolidated
|
|
Balance as of beginning-of-period
(1)
|
|
$
|
628,186
|
|
|
|
$
|
—
|
|
|
|
$
|
628,186
|
|
|
|
Goodwill Acquired
(2)
|
|
134,343
|
|
|
|
5,826
|
|
|
|
140,169
|
|
|
|
Measurement period adjustments
(3)
|
|
4
|
|
|
|
(121
|
)
|
|
|
(117
|
)
|
|
|
Foreign currency translation
(4)
|
|
(114
|
)
|
|
|
—
|
|
|
|
(114
|
)
|
|
|
Balance as of end-of-period
|
|
$
|
762,419
|
|
|
|
$
|
5,705
|
|
|
|
$
|
768,124
|
|
|
(1)
Net of cumulative inception to date impairment of
$160.6 million
.
(2)
Goodwill acquired primarily as a result of the New Century Health and True Health transactions, as discussed in Note
4
.
(3)
Measurement period adjustments related to transactions completed during the first quarter of 2018.
(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) are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
Net
|
|
|
Remaining
|
Carrying
|
Accumulated
|
Carrying
|
|
|
Useful Life
|
Amount
|
Amortization
|
Value
|
|
Corporate trade name
|
|
14.7
|
|
$
|
23,300
|
|
|
$
|
4,201
|
|
|
$
|
19,099
|
|
|
Customer relationships
|
|
17.3
|
|
291,519
|
|
|
36,967
|
|
|
254,552
|
|
|
Technology
|
|
2.5
|
|
82,922
|
|
|
40,761
|
|
|
42,161
|
|
|
Below market lease, net
|
|
3.6
|
|
4,097
|
|
|
3,093
|
|
|
1,004
|
|
|
Provider network contracts
|
|
4.1
|
|
11,900
|
|
|
2,130
|
|
|
9,770
|
|
|
Total
|
|
|
|
$
|
413,738
|
|
|
$
|
87,152
|
|
|
$
|
326,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
Net
|
|
|
Remaining
|
Carrying
|
Accumulated
|
Carrying
|
|
|
Useful Life
|
Amount
|
Amortization
|
Value
|
|
Corporate trade name
|
|
15.2
|
|
$
|
23,300
|
|
|
$
|
3,511
|
|
|
$
|
19,789
|
|
|
Customer relationships
|
|
18.1
|
|
281,219
|
|
|
29,184
|
|
|
252,035
|
|
|
Technology
|
|
3.0
|
|
82,922
|
|
|
31,764
|
|
|
51,158
|
|
|
Below market lease, net
|
|
4.0
|
|
4,097
|
|
|
3,003
|
|
|
1,094
|
|
|
Provider network contracts
|
|
4.6
|
|
11,900
|
|
|
940
|
|
|
10,960
|
|
|
Total
|
|
|
|
$
|
403,438
|
|
|
$
|
68,402
|
|
|
$
|
335,036
|
|
Amortization expense related to intangible assets was
$9.6 million
and
$18.7 million
for the
three and six
months ended
June 30, 2019
, respectively, and
$6.0 million
and
$11.9 million
for the
three and six
months ended
June 30, 2018
, respectively.
Future estimated amortization of intangible assets (in thousands) as of
June 30, 2019
, is as follows:
|
|
|
|
|
|
|
|
2019
|
$
|
18,774
|
|
|
2020
|
33,309
|
|
|
2021
|
29,173
|
|
|
2022
|
25,292
|
|
|
2023
|
22,528
|
|
|
Thereafter
|
197,510
|
|
|
Total
|
$
|
326,586
|
|
Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the assets’ carrying value. We did not identify any circumstances during the
six
months ended
June 30, 2019
, that would require an impairment test for our intangible assets.
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
$0.7 million
and
$1.3 million
related to the 2025 Notes for the
three and six
months ended
June 30, 2019
, respectively. 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
three and six
months ended
June 30, 2019
, the Company recorded
$2.1 million
and
$4.1 million
, respectively, 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
(the “2021 Notes”) 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
100.0%
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
three and six
months ended
June 30, 2019
and
2018
, the Company recorded approximately
$0.6 million
and
$1.2 million
, of interest expense, respectively. For the three and six months ended
June 30, 2019
, the Company recorded
$0.3 million
and
$0.5 million
of non-cash interest expense related to the amortization of deferred financing costs, respectively. For the three and six months ended
June 30, 2018
, the Company recorded
$0.2 million
and
$0.5 million
of 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 indenture between Evolent Health, Inc. and U.S. Bank National Association, as trustee, related to the
2.00%
convertible senior notes due 2021, dated as of December 5, 2016).
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
The 2025 Notes and 2021 Notes are recorded on our accompanying unaudited interim consolidated balance sheets at their net carrying values of
$102.9 million
and
$122.8 million
, respectively, as of
June 30, 2019
. However, 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 as of
June 30, 2019
, were
$114.1 million
and
$106.3 million
, respectively, based on traded prices on
June 28, 2019
, and
June 24, 2019
, respectively, which are
Level 2 inputs. The fair values of the 2025 Notes and 2021 Notes as of
December 31, 2018
, were
$158.8 million
and
$133.6 million
, respectively, based on traded prices on
December 28, 2018
, and
December 26, 2018
, respectively, which are Leve
l 2 inputs. The 2025 Notes and 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
|
|
|
As of
|
|
|
|
June 30,
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2025 Notes
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
102,871
|
|
|
|
$
|
98,730
|
|
|
|
Unamortized debt discount and
|
|
|
|
|
|
|
|
issuance costs allocated to debt
|
|
69,629
|
|
|
|
73,770
|
|
|
|
Principal amount
|
|
$
|
172,500
|
|
|
|
$
|
172,500
|
|
|
|
Remaining amortization period (years)
|
|
6.3
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
2021 Notes
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
122,771
|
|
|
|
$
|
122,311
|
|
|
|
Unamortized issuance costs
|
|
2,229
|
|
|
|
2,689
|
|
|
|
Principal amount
|
|
$
|
125,000
|
|
|
|
$
|
125,000
|
|
|
|
Remaining amortization period (years)
|
|
2.4
|
|
|
|
2.9
|
|
|
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
June 30, 2019
and
December 31, 2018
, in accordance with the Company’s contribution agreements with certain equity-method investees. These obligations are outside of the Company’s control and payment could be requested during 2019.
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 was effective from September 30, 2017, through June 30, 2019, and carried a quarterly facility rental fee of
0.8%
per annum on the amount of the outstanding balance. The letter of credit terminated on June 30, 2019. The letter of credit was presented at the face amount plus accrued facility rental fee, less received payments. T
here were
no
outstanding balances related t
o this letter of credit as of
June 30, 2019
, or
December 31, 2018
.
Lease Commitments
The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business operations. In connection with certain office space lease agreements, the Company is required to maintain
$3.6 million
in letters of credit and, as such, held
$3.6 million
in restricted cash and restricted investments as collateral for the letters of credit as of
June 30, 2019
. Refer to Note
10
for additional discussion regarding leases.
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.
During the second quarter of 2019, the Company and Passport, a current customer (collectively the “Indemnitors”), pursuant to a state requirement of all participating Medicaid Managed Care Organizations, entered into an Indemnity Agreement (the “Indemnity Agreement”), with an insurance company (the “Surety”). The Surety issued a performance bond in the amount of
$25.0 million
to secure the customer’s performance under a contract to provide Medicaid Managed Care Services for the benefit of a third party (the
“Beneficiary”). Pursuant to the Indemnity Agreement, the Indemnitors are jointly and severally liable to the Surety in the maximum amount of the bond, plus certain costs of the Surety, in the event of losses arising under the bond. The bond’s effective date is July 1, 2019, and expiry date is June 30, 2020. To date, the Company has not incurred any material costs as a result of the Indemnity Agreement and has not accrued any liabilities related to it in the accompanying consolidated financial statements.
Pre-IPO Investor Registration Rights Agreement
We entered into a registration rights agreement with The Advisory Board, the University of Pittsburgh Medical Center (“UPMC”), TPG and another investor to register for sale under the Securities Act of 1933, as amended, 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.
We will 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 of 1933, as amended, state law or otherwise. We did not incur any expenses related to secondary offerings or other sales of shares by our Investor Stockholders for the
three and six
months ended
June 30, 2019
and 2018.
Momentum
Registration Rights Agreement
On May 24, 2019, in connection with the GlobalHealth transaction, the Company entered into a registration rights agreement with Momentum Health Holdings, LLC (“MHG”), which granted certain registration rights to MHG as a holder of shares of the Company’s Class A common stock. Pursuant to our contractual obligations under this agreement, we filed a resale prospectus supplement in respect of the registrable shares on May 28, 2019.
The Company will pay certain costs and expenses, other than any underwriting discounts and commissions, in connection with the relevant resale registration statement. The amount of expenses recognized during the
three and six
months ended
June 30, 2019
, related to the resale registration statement was immaterial.
Guarantees
As part of our strategy to support certain of our partners in the Next Generation Accountable Care Program, we entered into upside and downside risk sharing arrangements. Our downside risk-sharing arrangements are limited to our fees and are executed through our wholly-owned captive insurance company. To satisfy the capital requirements of our captive insurance entity as well as state insurance regulators, Evolent entered into letters of credit of
$35.0 million
as of
June 30, 2019
, to secure potential losses related to insurance services. This amount is 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 agreement 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 agreement 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
within “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 will record the full amount of the gross reinsurance premiums and claims assumed by the Company within “Premiums” and “Claims Expenses,” respectively, and record 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 “Reserves for claims and performance-based arrangements” on our consolidated balance sheets. Amounts owed by NMHC under the reinsurance agreement are recorded within “Accounts receivable, net” on our consolidated balance sheets.
The following table summarizes premiums and claims assumed under the reinsurance agreement for the
six
months ended
June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
Reinsurance premiums assumed
|
$
|
48,828
|
|
|
Claims assumed
|
41,424
|
|
|
Claims-related administrative expenses
|
8,219
|
|
|
Increase (decrease) in reserves for claims and performance-based arrangements
|
|
|
attributable to the Reinsurance Agreement
|
815
|
|
|
Reserves for claims and performance-based arrangements attributable to the
|
|
|
Reinsurance Agreement at the beginning of the period
|
1,243
|
|
|
Reinsurance payments
|
1,235
|
|
|
(Receivables) Payables for claims and performance-based arrangements
|
|
|
attributable to the Reinsurance Agreement at the end of the period
|
$
|
823
|
|
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 at the time of our initial public offering, the Company entered into the Tax Receivables Agreement (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 Evolent Health, Inc. 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
June 30, 2019
, 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
June 30, 2019
, approximately
69.0%
of our
$137.2 million
of cash and cash equivalents (including restricted cash) were held in bank deposits with FDIC participating banks, approximately
29.7%
were held in money market funds and
1.3%
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 trade accounts receivable for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Customer C
|
|
20.3
|
%
|
|
|
23.3
|
%
|
|
|
Customer D
|
|
15.3
|
%
|
|
|
*
|
|
|
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 revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Customer A
|
|
13.2
|
%
|
|
*
|
|
|
13.6
|
%
|
|
*
|
|
|
Customer B
|
|
13.2
|
%
|
|
18.0
|
%
|
|
13.1
|
%
|
|
19.0
|
%
|
|
Customer C
|
|
*
|
|
|
10.0
|
%
|
|
*
|
|
|
10.3
|
%
|
* Represents less than 10.0% of the respective balance
10
. Leases
The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease. If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most leases include one or more options to renew or may have a termination option. The Company determines whether these options are reasonably certain to be exercised or not at the inception of the lease. The rent expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the term of the lease. Leases with an initial term or 12 months or less are not recorded on our consolidated balance sheets.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Further, the Company treats all lease and non-lease components as a single combined lease component for all classes of underlying assets.
The Company also enters into sublease agreements for some of its leased office space. Rental income attributable to subleases is offset against rent expense over the terms of the respective leases.
The following table summarizes the components of our lease expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
For the Six
|
|
|
Months Ended
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
Operating lease cost
|
|
$
|
3,838
|
|
|
|
$
|
7,119
|
|
|
|
Variable lease cost
|
|
1,121
|
|
|
|
2,576
|
|
|
|
Total lease cost
|
|
$
|
4,959
|
|
|
|
$
|
9,695
|
|
|
As discussed in Note
3
, the Company adopted ASU 2016-02 effective January 1, 2019, which resulted in accounting for leases under ASC 842. Prior to the adoption, we accounted for leases under ASC 840. In accordance with ASC 840, rent expense, net of sublease income, on operating leases was
$3.5 million
and
$6.8 million
for the
three and six
months ended
June 30, 2018
, respectively.
Maturity of lease liabilities (in thousands) as of
June 30, 2019
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating lease
|
|
|
expense
(1)
|
|
2019
|
|
$
|
4,289
|
|
|
|
2020
|
|
10,404
|
|
|
|
2021
|
|
10,503
|
|
|
|
2022
|
|
9,389
|
|
|
|
2023
|
|
9,283
|
|
|
|
2024 and thereafter
|
|
61,156
|
|
|
|
Total lease payments
|
|
105,024
|
|
|
|
Less:
|
|
|
|
|
Interest
|
|
29,579
|
|
|
|
Present value of lease liabilities
|
|
75,445
|
|
|
(1)
We have additional operating lease agreements for office space that have not yet commenced as of
June 30, 2019
. The minimum lease payments for those leases are
$8.59 million
and the leases will commence throughout the remainder of 2019.
Our weighted-average discount rate and our weighted-remaining lease terms (in years) are as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
|
2019
|
|
Weighted average discount rate
|
|
6.25
|
%
|
|
Weighted average remaining lease term
|
|
10.0
|
|
11
. 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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income (loss)
|
$
|
(31,900
|
)
|
|
$
|
(10,031
|
)
|
|
$
|
(80,549
|
)
|
|
$
|
(24,096
|
)
|
|
Less:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to non-controlling interests
|
(285
|
)
|
|
(115
|
)
|
|
(2,195
|
)
|
|
(554
|
)
|
|
Net income (loss) available for common shareholders
(1) (2)
|
$
|
(31,615
|
)
|
|
$
|
(9,916
|
)
|
|
$
|
(78,354
|
)
|
|
$
|
(23,542
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
(2) (3)
|
82,289
|
|
|
77,209
|
|
|
80,820
|
|
|
76,297
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.38
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(0.31
|
)
|
|
Diluted
|
(0.38
|
)
|
|
(0.13
|
)
|
|
(0.97
|
)
|
|
(0.31
|
)
|
|
|
|
|
(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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Exchangeable Class B common stock
|
1,080
|
|
|
862
|
|
|
2,129
|
|
|
1,498
|
|
|
Restricted stock units ("RSUs"), performance-based RSUs
|
|
|
|
|
|
|
|
|
and leveraged stock units ("LSUs")
|
985
|
|
|
938
|
|
|
1,014
|
|
|
784
|
|
|
Stock options and performance-based stock options
|
1,495
|
|
|
2,591
|
|
|
1,729
|
|
|
2,378
|
|
|
Convertible senior notes
|
10,361
|
|
|
5,201
|
|
|
10,361
|
|
|
5,201
|
|
|
Total
|
13,921
|
|
|
9,592
|
|
|
15,233
|
|
|
9,861
|
|
12
. Stock-based Compensation
Total compensation expense by award type and line item in our consolidated financial statements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Award Type
|
|
|
|
|
|
|
|
|
Stock options
|
$
|
903
|
|
|
$
|
2,639
|
|
|
$
|
2,263
|
|
|
$
|
4,870
|
|
|
Performance-based stock options
|
112
|
|
|
111
|
|
|
222
|
|
|
221
|
|
|
RSUs
|
2,630
|
|
|
1,968
|
|
|
5,060
|
|
|
3,422
|
|
|
Performance-based RSUs
|
388
|
|
|
—
|
|
|
772
|
|
|
—
|
|
|
LSUs
|
717
|
|
|
—
|
|
|
970
|
|
|
—
|
|
|
Total
|
$
|
4,750
|
|
|
$
|
4,718
|
|
|
$
|
9,287
|
|
|
$
|
8,513
|
|
|
|
|
|
|
|
|
|
|
|
Line Item
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
891
|
|
|
$
|
438
|
|
|
$
|
1,682
|
|
|
$
|
754
|
|
|
Selling, general and
|
|
|
|
|
|
|
|
|
administrative expenses
|
3,859
|
|
|
4,280
|
|
|
7,605
|
|
|
7,759
|
|
|
Total
|
$
|
4,750
|
|
|
$
|
4,718
|
|
|
$
|
9,287
|
|
|
$
|
8,513
|
|
No
stock-based compensation in the totals above was capitalized as software development costs for the
three and six
months ended
June 30, 2019
and
2018
, respectively.
Stock-based awards were granted as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Stock options
|
18
|
|
|
89
|
|
|
399
|
|
|
1,050
|
|
|
RSUs
|
17
|
|
|
85
|
|
|
518
|
|
|
838
|
|
|
LSUs
|
—
|
|
|
—
|
|
|
720
|
|
|
—
|
|
13
. Income Taxes
For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the full year. Provision (benefit) for income tax (in thousands) and effective tax rates for the
three and six
months ended
June 30, 2019
, and
June 30, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Provision (benefit) for income taxes
|
|
$
|
1,398
|
|
|
$
|
(109
|
)
|
|
$
|
902
|
|
|
$
|
(106
|
)
|
|
Effective tax rate
|
|
(4.6
|
)%
|
|
1.1
|
%
|
|
(1.1
|
)%
|
|
0.4
|
%
|
The Company recorded a provision for income taxes of approximately
$0.9 million
on a pre-tax loss from continuing operations of approximately
$79.6 million
for the
six
months ended
June 30, 2019
, which resulted in a tax rate of approximately
(1.1)%
. This tax rate is based on an estimated annual effective tax rate of
1.2%
. The Company recorded a discrete tax provision expense of
$2.0 million
primarily due to the
$9.6 million
non-cash gain on disposal of assets recognized for financial reporting purposes upon contribution of True Health Indiana, Inc. to GlobalHealth (as defined below), treated as a tax-deferred transaction. Comparatively, the Company recorded a tax benefit for income taxes of approximately
$(0.1) million
on a pre-tax loss from continuing operations of approximately
$24.2 million
for the six months ended June 30, 2018, which resulted in a tax rate of approximately
0.4%
.
The difference between our effective tax rate and our statutory rate is primarily due to the
$2.0 million
income tax expense recorded as a discrete item in connection with the non-cash gain on disposal of assets related to True Health Indiana, as well as certain permanent items which include, but are not limited to, income attributable to the non-controlling interest, the impact of certain tax deduction limits related to meals and entertainment, employee compensation and other permanent nondeductible expenses. Furthermore, as of
June 30, 2019
, with the exception of our corporate subsidiaries, the Company maintained a full valuation allowance recorded against its net deferred tax assets, except for certain indefinite-lived components as part of the outside basis difference in our partnership interest in Evolent Health LLC.
As of
December 31, 2018
, the Company had unrecognized tax benefits of
$0.9 million
that, if recognized, would not affect the effective tax rate. As of
June 30, 2019
, there are no changes to the unrecognized tax benefits. The Company is not currently subject to income tax audits in any U.S., state, or foreign jurisdictions for any tax year, with the exception of New Century Health’s examination by the State of California for 2015-2017.
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. See Note
9
above for discussion of our TRA.
14
. Investments in and Advances to Equity Method Investees
The Company has entered into joint venture agreements with various entities. On May 24, 2019, we completed the acquisition of an approximately
43%
ownership interest in Momentum Health Group, LLC (“MHG”), the sole owner of Momentum Health Acquisition, Inc. (“MHA”), which is the sole owner of GlobalHealth Holdings, LLC (“GHH”), which is the sole owner of GlobalHealth, Inc., a health maintenance organization based in the State of Oklahoma that offers, among other things, Medicare Advantage products in the State of Oklahoma. At closing, we contributed approximately
$15.0 million
in cash and
1,577,841
shares of our Class A common stock to MHG, together with certain of our other assets in the form of True Health Indiana, Inc., the Company’s Medicare Advantage line of business, including the provider contracts, to GlobalHealth. The Company recognized
$9.6 million
non-cash gain on disposal of assets upon the contribution. We also recognized a short-term contingent consideration liability of
$5.9 million
related to the transaction. At the time of the transaction, our economic interest in GlobalHealth was approximately
43%
and our voting interest was approximately
29%
. As of
June 30, 2019
, the Company’s economic and voting interests remained unchanged from these amounts.
As of
June 30, 2019
, the Company’s economic and voting interests in its joint venture arrangements ranged between
4%
and
43%
. As of
December 31, 2018
, the Company’s economic and voting interests in these entities ranged between
4%
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, including GlobalHealth. 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
$1.9 million
and
$2.3 million
for the
three and six
months ended
June 30, 2019
, respectively, and
$1.3 million
and
$1.4 million
for the
three and six
months ended
June 30, 2018
, 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. Revenues related to these services agreements was
$11.0 million
and
$18.1 million
for the
three and six
months ended
June 30, 2019
, respectively, and
$0.8 million
for the
three and six
months ended
June 30, 2018
.
15
. Non-controlling Interests
As discussed in Note
1
, Evolent Health, Inc. does not own
100%
of the economic interests of Evolent Health LLC. The Company’s ownership percentage changes with the issuance of Class A common stock and Class B Exchanges. Following is a description of events that resulted in changes to the Company’s ownership percentage during the
six
months ended
June 30, 2019
and the year ended
December 31, 2018
.
2019
During the second quarter of 2019, certain holders of Class B units executed Class B Exchanges. These Class B Exchanges resulted in the issuance of
2.5 million
shares of the Company’s Class A common stock. As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the related Class B units, the Company’s economic interest in Evolent Health LLC increased from
96.1%
to
99.1%
immediately following the final Class B Exchange during the quarter, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.
In May 2019, the Company issued
1.6 million
Class A common shares as part of the consideration for the GlobalHealth transaction. 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. As a result of the Class A common units (and corresponding Class A common shares) issued as part of the GlobalHealth transaction, the Company’s economic interest in Evolent Health LLC increased from
99.1%
to
99.2%
, immediately following the transaction.
2018
The Company completed the March 2018 Private Sale during March 2018. 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 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.
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
June 30, 2019
, and
December 31, 2018
, we owned
99.2%
and
96.1%
, respectively, of the economic interests in Evolent Health LLC. 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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Non-controlling interests as of beginning-of-period
|
$
|
50,100
|
|
|
$
|
11,772
|
|
|
$
|
45,532
|
|
|
$
|
35,427
|
|
|
Cumulative-effect adjustment from adoption of new accounting principle
|
—
|
|
|
—
|
|
|
—
|
|
|
594
|
|
|
Decrease in non-controlling interests as a result of Class B Exchanges
|
(33,946
|
)
|
|
(1,529
|
)
|
|
(33,946
|
)
|
|
(25,334
|
)
|
|
Amount attributable to NCI from 2019 business combination
|
—
|
|
|
—
|
|
|
6,500
|
|
|
—
|
|
|
Net income (loss) attributable to non-controlling interests
|
(285
|
)
|
|
(115
|
)
|
|
(2,195
|
)
|
|
(554
|
)
|
|
Reclassification of non-controlling interests
|
209
|
|
|
20
|
|
|
187
|
|
|
15
|
|
|
Non-controlling interests as of end-of-period
|
$
|
16,078
|
|
|
$
|
10,148
|
|
|
$
|
16,078
|
|
|
$
|
10,148
|
|
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 June 30, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
5,756
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,756
|
|
|
Restricted cash and restricted investments
(1)
|
34,957
|
|
|
—
|
|
|
—
|
|
|
34,957
|
|
|
Total
|
$
|
40,713
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,713
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Contingent consideration
(2)
|
—
|
|
|
—
|
|
|
14,100
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(1)
Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of
June 30, 2019
, and
December 31, 2018
, as presented in the tables above.
(2)
Represents the contingent earn-out consideration related to the University Health Care, Inc. d/b/a Passport Health Plan (“Passport”) and the New Century Health acquisitions, as well as contingent consideration for the GlobalHealth transaction, as described below. As of
June 30, 2019
,
$5.0 million
was attributable to Passport,
$3.2 million
was attributable to New Century Health, and
$5.9 million
was attributable to GlobalHealth. As of
December 31, 2018
,
$5.6 million
was attributable to Passport and
$3.2 million
was attributable to New Century Health.
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
three and six
month periods ended
June 30, 2019
and
2018
, 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.
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.
T
he 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.
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 are sufficient to either exceed the minimum earn-out threshold or meet the earn-out 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. Refer to Note
4
for additional discussion of the New Century Health transaction.
The GlobalHealth transaction includes a provision for additional consideration contingent upon the Company’s future share price. The fair value of the contingent consideration was estimated based on the average closing market price of the common stock following the announcement of the transaction. The significant unobservable input used in the fair value measurement of GlobalHealth contingent consideration is the share price period. A significant change in the share price period, 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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Balance as of beginning-of-period
|
$
|
8,100
|
|
|
$
|
8,800
|
|
|
$
|
8,800
|
|
|
$
|
8,700
|
|
|
Additions
(1)
|
5,900
|
|
|
—
|
|
|
5,900
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
(800
|
)
|
|
—
|
|
|
Realized and unrealized (gains) losses, net
|
100
|
|
|
(600
|
)
|
|
200
|
|
|
(500
|
)
|
|
Balance as of end-of-period
|
$
|
14,100
|
|
|
$
|
8,200
|
|
|
$
|
14,100
|
|
|
$
|
8,200
|
|
(1)
Addition is related to the GlobalHealth 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 June 30, 2019
|
|
|
|
Fair
|
|
Valuation
|
|
Significant
|
|
Assumption or
|
|
|
|
Value
|
|
Technique
|
|
Unobservable Inputs
|
|
Input Ranges
|
|
|
Passport contingent
|
|
|
|
|
|
|
|
|
|
consideration
|
$
|
5,000
|
|
|
Real options approach
|
|
Risk-adjusted recurring revenue CAGR
|
|
103.9
|
%
|
(1)
|
|
|
|
|
|
|
Discount rate
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
GlobalHealth
|
|
|
|
|
|
|
|
|
|
contingent consideration
|
$
|
5,900
|
|
|
Management estimate
|
|
Stock price period
|
|
May - June 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
68.3%
.
|
|
|
|
(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.
|
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 has 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 these services agreements was
$11.0 million
and
$18.1 million
for the
three and six
months ended
June 30, 2019
, respectively, and
$0.8 million
for the
three and six
months ended
June 30, 2018
.
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 Three
|
|
For the Six
|
|
|
Months Ended
|
|
Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
|
|
Transformation services
|
$
|
41
|
|
|
$
|
748
|
|
|
$
|
1,200
|
|
|
$
|
780
|
|
|
Platform and operations services
|
16,874
|
|
|
7,601
|
|
|
29,818
|
|
|
14,892
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation and amortization expenses)
|
6,657
|
|
|
1,262
|
|
|
14,487
|
|
|
4,452
|
|
|
Selling, general and administrative expenses
|
386
|
|
|
280
|
|
|
542
|
|
|
379
|
|
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 EBITDA as the relevant segment performance measure to evaluate the performance of the segments and allocate resources.
Adjusted EBITDA is a segment performance financial measure that offers 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 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 income (loss) from equity method investees, gain (loss) on disposal of assets, changes in fair value of contingent consideration and indemnification asset, other income (expense), net, net (income) loss attributable to non-controlling interests, ASC 606 transition adjustments, 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, and other one-time adjustments. 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 EBITDA to be the appropriate metric to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as it eliminates 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
|
Eliminations
|
Consolidated
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
1,944
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
1,944
|
|
|
|
|
Platform and operations
|
|
147,599
|
|
|
|
—
|
|
|
|
(3,077
|
)
|
|
|
144,522
|
|
|
|
|
Services revenue
|
|
149,543
|
|
|
|
—
|
|
|
|
(3,077
|
)
|
|
|
146,466
|
|
|
|
|
True Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
—
|
|
|
|
45,764
|
|
|
|
(271
|
)
|
|
|
45,493
|
|
|
|
|
Total revenue
|
|
$
|
149,543
|
|
|
|
$
|
45,764
|
|
|
|
$
|
(3,348
|
)
|
|
|
$
|
191,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
8,215
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
8,215
|
|
|
|
|
Platform and operations
|
|
116,961
|
|
|
|
—
|
|
|
|
(3,615
|
)
|
|
|
113,346
|
|
|
|
|
Services revenue
|
|
125,176
|
|
|
|
—
|
|
|
|
(3,615
|
)
|
|
|
121,561
|
|
|
|
|
True Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
—
|
|
|
|
22,939
|
|
|
|
(202
|
)
|
|
|
22,737
|
|
|
|
|
Total revenue
|
|
$
|
125,176
|
|
|
|
$
|
22,939
|
|
|
|
$
|
(3,817
|
)
|
|
|
$
|
144,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
|
|
|
|
Services
|
|
True Health
|
Total
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(8,797
|
)
|
|
|
$
|
1,123
|
|
|
|
$
|
(7,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
5,643
|
|
|
|
$
|
(758
|
)
|
|
|
$
|
4,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
|
Services
|
|
True Health
|
Eliminations
|
Consolidated
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
5,297
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
5,297
|
|
|
|
|
Platform and operations
|
|
297,949
|
|
|
|
—
|
|
|
|
(6,135
|
)
|
|
|
291,814
|
|
|
|
|
Services revenue
|
|
303,246
|
|
|
|
—
|
|
|
|
(6,135
|
)
|
|
|
297,111
|
|
|
|
|
True Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
—
|
|
|
|
93,140
|
|
|
|
(536
|
)
|
|
|
92,604
|
|
|
|
|
Total revenue
|
|
$
|
303,246
|
|
|
|
$
|
93,140
|
|
|
|
$
|
(6,671
|
)
|
|
|
$
|
389,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation services
|
|
$
|
14,720
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
14,720
|
|
|
|
|
Platform and operations
|
|
230,576
|
|
|
|
—
|
|
|
|
(7,412
|
)
|
|
|
223,164
|
|
|
|
|
Services revenue
|
|
245,296
|
|
|
|
—
|
|
|
|
(7,412
|
)
|
|
|
237,884
|
|
|
|
|
True Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
—
|
|
|
|
46,524
|
|
|
|
(396
|
)
|
|
|
46,128
|
|
|
|
|
Total revenue
|
|
$
|
245,296
|
|
|
|
$
|
46,524
|
|
|
|
$
|
(7,808
|
)
|
|
|
$
|
284,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
|
|
|
|
Services
|
|
True Health
|
Total
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(24,296
|
)
|
|
|
$
|
1,844
|
|
|
|
$
|
(22,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
12,609
|
|
|
|
$
|
189
|
|
|
|
$
|
12,798
|
|
|
|
The following table presents our reconciliation of segments total Adjusted EBITDA to net income (loss) attributable to Evolent Health, Inc. (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Six
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net Income (Loss) Attributable to
|
|
|
|
|
|
|
|
|
|
Evolent Health, Inc.
|
|
$
|
(31,615
|
)
|
|
$
|
(9,916
|
)
|
|
$
|
(78,354
|
)
|
|
$
|
(23,542
|
)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
842
|
|
|
878
|
|
|
1,902
|
|
|
1,950
|
|
|
Interest expense
|
|
(3,620
|
)
|
|
(855
|
)
|
|
(7,182
|
)
|
|
(1,708
|
)
|
|
(Provision) benefit for income taxes
|
|
(1,398
|
)
|
|
109
|
|
|
(902
|
)
|
|
106
|
|
|
Depreciation and amortization expenses
|
|
(15,292
|
)
|
|
(10,034
|
)
|
|
(29,558
|
)
|
|
(19,530
|
)
|
|
Income (loss) from equity method investees
|
|
(1,904
|
)
|
|
(1,275
|
)
|
|
(2,328
|
)
|
|
(1,406
|
)
|
|
Gain (loss) on disposal of assets
|
|
9,600
|
|
|
—
|
|
|
9,600
|
|
|
—
|
|
|
Change in fair value of contingent consideration
|
|
|
|
|
|
|
|
|
|
and indemnification asset
|
|
(100
|
)
|
|
1,604
|
|
|
(200
|
)
|
|
1,504
|
|
|
Other income (expense), net
|
|
(587
|
)
|
|
78
|
|
|
(160
|
)
|
|
60
|
|
|
Net (income) loss attributable to
|
|
|
|
|
|
|
|
|
|
non-controlling interests
|
|
285
|
|
|
115
|
|
|
2,195
|
|
|
554
|
|
|
ASC 606 transition adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,498
|
)
|
|
Purchase accounting adjustments
|
|
(165
|
)
|
|
(216
|
)
|
|
(761
|
)
|
|
(433
|
)
|
|
Stock-based compensation expense
|
|
(4,750
|
)
|
|
(4,718
|
)
|
|
(9,287
|
)
|
|
(8,513
|
)
|
|
Severance costs
|
|
(3,881
|
)
|
|
105
|
|
|
(14,483
|
)
|
|
(1,489
|
)
|
|
Amortization of contract cost assets
|
|
(776
|
)
|
|
(578
|
)
|
|
(1,552
|
)
|
|
(1,139
|
)
|
|
Transaction costs
|
|
(2,195
|
)
|
|
(14
|
)
|
|
(3,186
|
)
|
|
(1,798
|
)
|
|
Adjusted EBITDA
|
|
$
|
(7,674
|
)
|
|
$
|
4,885
|
|
|
$
|
(22,452
|
)
|
|
$
|
12,798
|
|
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
. Reserves for Claims and Performance-Based Arrangements
The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based arrangements related to its specialty care management services. The Company also maintains reserves for claims incurred but not paid related to its capitation arrangement and for its health plan, True Health, in New Mexico.
Reserves for claims and performance-based arrangements 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. Reserves for claims and performance-based arrangements 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, for reserves related to its specialty care management services and True Health, 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, for reserves related to its specialty care management services and True Health, 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 reserves for claims and performance-based arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based arrangements are adjusted through current period 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.
For reserves related to the Company’s capitation arrangement, the liability is calculated based on the budgeted medical loss ratio as historical data and completion patterns are not credible.
Activity in reserves for claims and performance-based arrangements was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Services
(1)
|
True Health
|
Consolidated
|
|
Services
(1)
|
True Health
|
Consolidated
|
|
Beginning balance
|
|
$
|
17,715
|
|
|
|
$
|
9,880
|
|
|
|
$
|
27,595
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
Incurred costs related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
88,261
|
|
|
|
73,359
|
|
|
|
161,620
|
|
|
|
—
|
|
|
|
35,177
|
|
|
|
35,177
|
|
|
|
Prior years
|
|
244
|
|
|
|
483
|
|
|
|
727
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Total incurred
|
|
88,505
|
|
|
|
73,842
|
|
|
|
162,347
|
|
|
|
—
|
|
|
|
35,177
|
|
|
|
35,177
|
|
|
|
Paid costs related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
73,781
|
|
|
|
26,473
|
|
|
|
100,254
|
|
|
|
—
|
|
|
|
25,711
|
|
|
|
25,711
|
|
|
|
Prior years
|
|
7,837
|
|
|
|
8,003
|
|
|
|
15,840
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Total paid
|
|
81,618
|
|
|
|
34,476
|
|
|
|
116,094
|
|
|
|
—
|
|
|
|
25,711
|
|
|
|
25,711
|
|
|
|
Other adjustments
(2)
|
|
(187
|
)
|
|
|
(40,609
|
)
|
|
|
(40,796
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Change during the year
|
|
6,700
|
|
|
|
(1,243
|
)
|
|
|
5,457
|
|
|
|
—
|
|
|
|
9,466
|
|
|
|
9,466
|
|
|
|
Ending balance
|
|
$
|
24,415
|
|
|
|
$
|
8,637
|
|
|
|
$
|
33,052
|
|
|
|
$
|
—
|
|
|
|
$
|
9,466
|
|
|
|
$
|
9,466
|
|
|
(1)
Costs related the Company’s capitation arrangement as well as costs incurred to provide specialty care management services are recorded within cost of revenue in our consolidated statements of operations and comprehensive income (loss).
(2)
Other adjustments to reserves for claims and performance-based arrangements 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 related to the True Health segment represent premiums received less administrative expenses related to the reinsurance agreement. Refer to Note
9
for additional information about the reinsurance agreement.
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 the periods indicated below (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
U.S. Treasury bills
|
$
|
12,248
|
|
|
$
|
329
|
|
|
$
|
—
|
|
|
$
|
12,577
|
|
|
Corporate bonds
|
1,704
|
|
|
70
|
|
|
—
|
|
|
1,774
|
|
|
Other CMOs
|
2,584
|
|
|
45
|
|
|
—
|
|
|
2,629
|
|
|
Yankees
|
596
|
|
|
34
|
|
|
—
|
|
|
630
|
|
|
Total investments
|
$
|
17,132
|
|
|
$
|
478
|
|
|
$
|
—
|
|
|
$
|
17,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
|
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
|
|
The amortized cost and fair value of our investments by contractual maturities as of the periods indicated below (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
As of December 31, 2018
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Due in one year or less
|
$
|
4,048
|
|
|
$
|
4,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Due after one year through five years
|
13,084
|
|
|
13,553
|
|
|
9,666
|
|
|
9,813
|
|
|
Due after five years through ten years
|
—
|
|
|
—
|
|
|
344
|
|
|
351
|
|
|
Total
|
$
|
17,132
|
|
|
$
|
17,610
|
|
|
$
|
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
June 30, 2019
or
December 31, 2018
.
21
. Supplemental Cash Flow Information
The following represents supplemental disclosure of cash flow information and non-cash investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
Months Ended
|
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
6,542
|
|
|
$
|
—
|
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
30,181
|
|
|
—
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
Accrued property and equipment purchases
|
$
|
166
|
|
|
$
|
875
|
|
|
Class A common stock issued for payment of Passport earn-out
|
800
|
|
|
—
|
|
|
Increase to goodwill from measurement period adjustments
|
|
|
|
|
related to business combinations
|
596
|
|
|
128
|
|
|
Consideration for asset acquisitions or business combinations
|
16,000
|
|
|
500
|
|
|
Settlement of escrow related to asset acquisition
|
—
|
|
|
2,519
|
|
|
Settlement of indemnification asset
|
—
|
|
|
1,004
|
|
|
Effects of Class B Exchanges
|
|
|
|
|
Decrease in non-controlling interests as a result of Class B Exchanges
|
33,946
|
|
|
25,334
|
|
|
Decrease in deferred tax liability as a result of securities offerings
|
—
|
|
|
908
|
|
22
. Subsequent Events
On August 8, 2019, a purported shareholder of the Company filed a putative class action complaint against the Company, Frank Williams and Nicholas McGrane. The case, captioned Plymouth County Retirement System v. Evolent Health, Inc., Frank Williams, and Nicholas McGrane, was filed in the United States District Court, Eastern District of Virginia, Alexandria Division. The complaint seeks unspecified remedies under the Securities Exchange Act of 1934. As of the date of this filing, the complaint has not been formally served on the Company, Mr. Williams or Mr. McGrane. Based on our brief preliminary review, the Company believes the case is without merit and intends to vigorously defend against these claims. The outcome of any litigation is uncertain, and at this early stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.