Evolent Health(EVH) - 2019 Q2 - Quarterly Report

Part I - Financial Information Financial Statements (Unaudited) Evolent Health's H1 2019 unaudited financials detail revenue, net loss, balance sheet, cash flows, and new lease accounting Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $92,821 | $228,320 | | Goodwill | $772,164 | $768,124 | | Total Assets | $1,652,256 | $1,722,281 | | Long-term debt, net | $225,642 | $221,041 | | Total Liabilities | $505,500 | $532,925 | | Total Shareholders' Equity | $1,146,756 | $1,189,356 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $191,959 | $144,298 | $389,715 | $284,012 | | Operating Loss | $(25,233) | $(8,966) | $(71,879) | $(23,098) | | Net Loss Attributable to Evolent | $(31,615) | $(9,916) | $(78,354) | $(23,542) | | Diluted Loss Per Share | $(0.38) | $(0.13) | $(0.97) | $(0.31) | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(39,242) | $(18,004) | | Net cash used in investing activities | $(90,816) | $(19,376) | | Net cash used in financing activities | $(121,071) | $(3,665) | - The company operates through two segments: Services (population health platform, claims processing, specialty care management) and True Health (a commercial health plan in New Mexico)[25] - Effective January 1, 2019, the company adopted the new lease accounting standard ASU 2016-02, resulting in the recording of right-of-use assets and lease liabilities of approximately $51.4 million and $47.4 million, respectively[46] - On May 24, 2019, the company acquired an approximately 43% ownership interest in Momentum Health Group (owner of GlobalHealth) by contributing $15.0 million in cash, 1.6 million shares of Class A common stock, and its Medicare Advantage business (True Health Indiana, Inc.), resulting in a $9.6 million non-cash gain on disposal of assets[115] - A shareholder class action lawsuit was filed against the company and two of its officers on August 8, 2019. The company believes the case is without merit and intends to defend against the claims[142] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Evolent Health's H1 2019 financial performance, explaining revenue growth, widening losses, and key transactions Revenue and Expense Comparison (in thousands) | Metric | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $389,715 | $284,012 | $105,703 | 37.2% | | Transformation services | $5,297 | $14,720 | $(9,423) | (64.0)% | | Platform and operations services | $291,814 | $223,164 | $68,650 | 30.8% | | Premiums | $92,604 | $46,128 | $46,476 | 100.8% | | Total Operating Expenses | $461,594 | $307,110 | $154,484 | 50.3% | | Cost of revenue | $225,824 | $140,978 | $84,846 | 60.2% | | Claims expenses | $73,842 | $35,177 | $38,665 | 109.9% | | SG&A expenses | $141,770 | $112,929 | $28,841 | 25.5% | | Operating Loss | $(71,879) | $(23,098) | $(48,781) | (211.2)% | - The company entered into an Asset Purchase Agreement to acquire substantially all assets and liabilities of Passport Health Plan for $70.0 million in cash and a 30% equity interest in the buyer entity. The deal is expected to close in Q4 2019, contingent on regulatory approvals and the outcome of Kentucky's Medicaid RFP[147] - Platform and operations services revenue increased by 30.8% for the six months ended June 30, 2019, primarily due to the acquisition of New Century Health, an increase in average PMPM fees, and a 14.4% growth in lives on the platform[175] - Cost of revenue as a percentage of Services revenue increased from 59.3% to 76.0% year-over-year for the six-month period, mainly due to the New Century Health acquisition[176][177] - Net cash used in operating activities increased to $39.2 million for the first six months of 2019 from $18.0 million in the prior year, driven by a larger net loss, though partially offset by non-cash expenses[193] Quantitative and Qualitative Disclosures About Market Risk Evolent Health discloses market risks, including interest rate, foreign currency, and equity market exposures from share exchanges - The company has fixed-rate convertible notes totaling $225.6 million (net), so its debt service costs are not subject to interest rate fluctuations[204] - Foreign currency risk is related to the Indian Rupee for its subsidiary in India, but the impact on results has been immaterial to date[205] - Equity market risk stems from the potential exchange of Class B common stock for Class A common stock, which would increase the outstanding share count and could trigger payments under the Tax Receivables Agreement[207] Controls and Procedures Management concluded Evolent Health's disclosure controls were effective as of June 30, 2019, with no material internal control changes - The principal executive officer and principal financial officer concluded that as of June 30, 2019, the company's disclosure controls and procedures were effective[210] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal controls[210] Part II - Other Information Legal Proceedings Evolent Health is involved in legal disputes, including a shareholder class action filed August 8, 2019, believed to be without merit - Information regarding legal proceedings is contained in Note 9 of the financial statements[212] - A putative shareholder class action complaint was filed against the Company, its CEO, and another officer on August 8, 2019. The company believes the case is without merit and intends to defend against the claims vigorously[142] Risk Factors Evolent Health highlights material risks including revenue concentration, Kentucky Medicaid RFP outcome, acquisition integration, and goodwill impairment - The company has significant revenue concentration with its largest partners. Passport accounted for 13.1% of revenue for the six months ended June 30, 2019. The loss of this partner would negatively impact results[213] - A material risk exists related to Passport's bid in the ongoing Kentucky Medicaid RFP. If Passport is not awarded a contract, Evolent expects to receive no material revenue from Passport after June 30, 2020, and the value of its pending investment will be negatively impacted[214][215] - Acquisitions, including the completed New Century Health deal and the pending Passport transaction, pose numerous risks such as integration difficulties, unanticipated costs, and potential dilution of stockholders[215][217] - The company's stock price declined significantly in Q2 2019, which was considered as a potential triggering event for goodwill impairment. While management concluded a quantitative test was not necessary as of June 30, 2019, a sustained decline could lead to future impairment charges[221] Unregistered Sales of Equity Securities and Use of Proceeds Evolent Health issued 154,026 Class A common shares on June 18, 2019, for an acquisition, exempt from registration - On June 18, 2019, the company issued 154,026 shares of Class A common stock for the acquisition of The Accountable Care Organization Ltd. The sale was unregistered, relying on exemptions for private offerings[221] Exhibits This section lists exhibits filed with the Form 10-Q, including agreements and CEO/CFO certifications