EVOLENT HEALTH, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand the
Company's financial condition and results of operations. The MD&A is provided as
a supplement to, and should be read in conjunction with our consolidated
financial statements and the accompanying notes to consolidated financial
statements presented in "Part I - Item 1. Financial Statements" of this Form
10-Q; our 2020 Form 10-K, including the sections entitled "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"; and our current reports on Form 8-K filed in 2021.
INTRODUCTIONBackground
Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds inEvolent Health LLC , and its only business is to act as sole managing member ofEvolent Health LLC . Substantially all of our operations are conducted throughEvolent Health LLC and its consolidated subsidiaries. The financial results ofEvolent Health LLC are consolidated in the financial statements ofEvolent Health, Inc.
Business Overview
We are a market leader in the new era of value-based care, in which the delivery of health care is increasingly funded by at-risk payment models. We provide integrated solutions to both health care providers, including independent physicians and health systems, as well as payers, including health plans and other risk-bearing organizations, with a common end: to improve health care quality and outcomes while reducing cost. We consider value-based care to be the necessary convergence of health care payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS health care, a market environment that is incentivizing value-based care models, growth in consumer-focused insurance programs, such as Medicare Advantage and managed Medicaid, and innovation in data and technology. We were an early innovator in Value-Based Care, founded in 2011 by members of our management team,UPMC , an integrated delivery system based inPittsburgh, Pennsylvania , andThe Advisory Board Company . Today we manage our operations and allocate resources across two reportable segments:Clinical Solutions and Evolent Health Services . Our Clinical Solutions segment addresses a broad spectrum of clinical needs, with tailored solutions for Specialty Care Management in Oncology and Cardiology and holistic Total Cost of Care improvement. Our economic opportunity in the Clinical Solutions segment, which we believe to be significant, is largely based on (a) the total amount of medical expenses under management, and (b) the amount of savings we are able to generate relative to a benchmark or target. These partnerships, which we refer to as performance-based arrangements, include both capitation and shared savings arrangements. We also generate Clinical Solutions revenue by providing our technology and services platform on a fee basis. We go to market for our Specialty Care Management under the brand nameNew Century Health , and for our Total Cost of Care solution under the brand nameEvolent Care Partners .
The Company's EHS segment provides an integrated administrative and clinical platform for health plan administration and population health management.
All of our revenue is recognized in
We have incurred operating losses since our inception, in part because we have invested heavily in resources to support our growth. We intend to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities. We also expect to continue to incur operating losses for the foreseeable future and if we are unable to achieve our revenue growth and cost management objectives, we may not be able to achieve profitability.
As of the date the financial statements were available to be issued, we believe we have sufficient liquidity for the next 12 months.
Recent Events
OnMarch 11, 2020 , theWorld Health Organization (the "WHO") declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. While response to the COVID-19 outbreak, including 41 -------------------------------------------------------------------------------- the emergence of variant strains of the virus, continues to rapidly evolve, it has led to aggressive actions to reduce the spread of the disease that seriously disrupted activities in large segments of the economy. We are continuing to monitor the COVID-19 outbreak and its impact on our business. Because of the nature of the services we provide, market dynamics in our end markets and with our significant customers, to date the COVID-19 pandemic has not materially impacted our financial condition or results of operations or our outlook. As ofSeptember 30, 2021 , we had cash and cash equivalents of$252.5 million and as of the date the financial statements were available to be issued we believe our current cash balance is sufficient to meet our liquidity needs for the next twelve months. The COVID-19 crisis has also affected global access to capital and caused significant volatility in financial markets. Significant deterioration of theU.S. and global economies could have a significant adverse impact on our future liquidity needs. Although the impact of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of the pandemic on our partners and the global economy is uncertain and will depend on various factors, including the scope, severity and duration of the pandemic, including resurgence of COVID-19 cases due to more contagious variants. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our partners which could, in turn, adversely impact our business, financial condition and results of operations. Evolent's focus throughout this pandemic has been the health and safety of its employees and their families, as well as ensuring that we continue to furnish high quality service to our partners. Evolent has deployed a multi-faceted response to COVID-19, overseen by its Emergency Preparedness Team, led by the General Counsel, Chief Compliance Officer, andChief Talent Officer , that focuses on maintaining its workforce in a manner that does not disrupt service delivery or operations. Evolent is closely monitoring and overseeing any issues of noncompliance or deficiencies with client operational service level agreements and continuing to review contractual business requirements in light of state and federal mandates, emergency laws and orders, and available financial support opportunities. Evolent is also mindful of the impact COVID-19 has on its vendors and subcontractors, and we will continue to work with them regarding our collective obligations to Evolent's customers. We require a COVID-19 Business Continuity Attestation from subcontractors and vendors, confirming that operational and financial obligations will be met and aiming to ensure that privacy and security risks or incidents can be mitigated and disclosed in a timely manner.
Summary of Impact of COVID-19
In evaluating the impact of COVID-19 on our business, we considered, among other factors, the nature of the services we provide, end market trends and outlook and customer-specific trends. In evaluating our health plan partners, we focused on possible changes in membership and medical utilization trends. Our two most significant service offerings in terms of revenue are specialty care management and administrative simplification services. Because both of these services offerings provide critical services to our clients and their members and have relatively long lead times to implement such services, we currently do not anticipate any material near-term disruption to the relevant contracts as a result of the pandemic.
The three key end-markets we serve are Medicaid, Medicare and Commercial.
Across 2020 and into the first nine months of 2021, we saw changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The pandemic resulted in a significant increase in unemployment inthe United States . Historically, Medicaid enrollment has increased during periods of rising unemployment as individuals lose access to employer sponsored health care and turn to government sponsored health care. In addition, with respect to Medicaid, many states (includingFlorida ,Kentucky andIllinois ) put in place new rules during the pandemic eliminating the ability of Medicaid health plans to dis-enroll non-paying members, as well as waiving certain eligibility requirements, which together contributed to an increase in membership during the period of the pandemic. In aggregate, as more than 50% of our lives on platform as ofSeptember 30, 2021 , are in Medicaid and we generally earn revenue with respect to those lives based on a per member per month model, we have experienced a modest net benefit in our business from increased membership in that market in the near-term. We cannot predict the magnitude of this potential benefit, or how long it will last. With respect to medical utilization, following the declaration of the pandemic by theWHO , many state-wide mandates deferred non-essential medical procedures to allow hospitals to focus on providing care to COVID-19 patients. Across all markets, our partners experienced declines in non-essential care throughout the year endedDecember 31, 2020 and through the first nine months of 2021, offset in part by increased costs for care of COVID-19 patients. We continue to monitor medical utilization trends closely as the pandemic progresses. Beginning late in the first quarter of 2020 after declaration of the pandemic and continuing through the first nine months of 2021, we have seen a modest benefit in our business from lower utilization trends. However, we cannot predict with any certainty the net impact of lower utilization on our business, as it is possible we will experience a surge in utilization as consumer behavior changes (for example if the novel coronavirus is controlled by the available vaccines or other measures). 42 -------------------------------------------------------------------------------- Overall, we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources. We are actively monitoring the ongoing situation and may take further actions that change our operations if required by law or that we determine are in the best interests of our employees or partners. Customers The following table summarizes those partnerswho represented at least 10.0% of our consolidated revenue for the three and nine months endedSeptember 30, 2021 and 2020: For the Three Months Ended September For the Nine Months Ended September 30, 30, 2021 2020 (1) 2021 2020 (1)Cook County Health and Hospitals Systems 29.0 % 23.1 % 29.0 % 22.0 % Florida Blue Medicare, Inc. 13.8 % * 14.2 % * Passport * 22.9 % * 25.0 % -------- (1)The denominator excludes$29.5 million and$87.1 million ofTrue Health premium revenue reclassified to discontinued operations for the three and nine months endedSeptember 30, 2020 , respectively. * Represents less than 10.0% of the respective balance.Cook County Health and Hospital Systems utilizes both our administrative simplification solutions provided byEvolent Health Services , which accounted for 9.2% of our consolidated revenue for both the three and nine months endedSeptember 30, 2021 and our specialty care management solutions provided byNew Century Health which accounted for 19.8% of our consolidated revenue for both the three and nine months endedSeptember 30, 2021 .Florida Blue Medicare, Inc. utilizes our specialty care management solutions provided byNew Century Health .
Transactions
The Company has undertaken several transactions, some of which may impact year-to-year comparisons. The following is a discussion of certain of those transactions.
Acquisition of Vital Decision
OnAugust 2, 2021 ,Evolent Health LLC andEV Thunder Merger Sub, LLC , each wholly owned subsidiaries of the Company, entered into a definitive agreement for Evolent to acquireWindrose Health Investors III, L.P. portfolio company Vital Decisions for$85 million , with an additional earn out of up to$45 million . Vital Decisions will report into Evolent's specialty care management offering,New Century Health , and will be consolidated into the Company's Clinical Solutions segment. The transaction closed onOctober 1, 2021 .
Sale of True Health New Mexico
OnJanuary 11, 2021 ,Evolent LLC ,EH Holdings and True Health , each wholly owned subsidiaries of the Company, entered into the SPA withBright HealthCare , pursuant to whichEH Holdings agreed to sell all of its equity interest inTrue Health toBright HealthCare for a purchase price of$22.0 million plus excess risk based capital, subject to satisfaction of customary closing conditions, including regulatory approvals. The purchase price is subject to a customary purchase price adjustment following the True Health Closing based in part on actual medical claims experience. The True Health Closing occurred onMarch 31, 2021 and the Company has had no continuing involvement withTrue Health subsequent to the Closing except a pre-existing services agreement for claims processing and other health plan administrative functions. Refer to "Part I - Item 1. Financial Statements - Note 5" for additional discussion regarding theTrue Health sale. In addition, in conjunction with the sale ofTrue Health , the Company made organizational changes, including re-evaluating its reportable segments. Effective during the first quarter of 2021, the Company bifurcated its previous Services segment into two segments. The Company'sEvolent Health Services segment ("EHS") includes our administrative simplification solution and certain supporting population health infrastructure. Our Clinical Solutions segment includes our specialty care management and physician-oriented total cost of care solutions, along with theNew Century Health and Evolent Care Partners brands. Refer to "Part I - Item 1. Financial Statements - Note 21 for a further discussion of our operating results by segment.
Passport
OnDecember 30, 2019 , UHC,Passport Health Solutions, LLC ("PHS I"), the Company and EVH Passport, closed a transaction whereby EVH Passport acquired substantially all of the assets and assumed substantially all of the liabilities of UHC, including the 43 -------------------------------------------------------------------------------- Passport Medicaid Contract. The purchase price paid by EVH Passport consisted of$70.0 million in cash and a 30% equity interest in EVH Passport issued to the Sponsors; however,$16.2 million of the foregoing cash purchase price was held back until such time as PHS I delivers to EVH Passport certain owned real property and improvements. OnSeptember 1, 2020 , EVH Passport and Molina completed the Molina Closing and the Passport Medicaid Contract was novated to Molina. As a result, EVH Passport began to wind down its business. In connection with the Molina Closing, Molina deposited$20.0 million in cash in escrow, which was subsequently released to EVH Passport inJanuary 2021 . Prior to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under the equity method of accounting. As a result of the Molina Closing, the Company concluded that a reconsideration event occurred whereby EVH Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport; accordingly, the Company consolidated EVH Passport as ofSeptember 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the Company's consolidated financials, EVH Passport redeemed the Sponsors' equity interests in EVH Passport in accordance with the terms of EVH Passport's Stockholders' Agreement, and, as a result, EVH Passport became a wholly owned subsidiary of the Company. The Company expects a return of capital from EVH Passport, expected to be between$130 million and$170 million in total, which is subject to regulatory approval from theKentucky Department of Insurance . Refer to "Part I - Item 1. Financial Statements - Note 4" for additional discussion regarding the Passport transactions.
Repayment and Termination of Existing Credit Agreement
OnJanuary 8, 2021 , the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation. The total amount paid toAres Corporation under the Credit Agreement in connection with the prepayment was$98.6 million , which included$9.7 million for the make-whole premium as well as$0.2 million in accrued interest. In addition to the payment of the Credit Agreement, the Company settled the outstanding warrants associated with the debt for$13.7 million . Refer to "Part I - Item 1. Financial Statements - Note 10" for additional discussion relating to the repayment of the Credit Agreement. Repositioning Plan We continually assess opportunities to improve operational effectiveness and efficiency to better align our expenses with revenues, while continuing to make investments in our solutions, systems and people that we believe are important to our long-term goals. Across 2020, we divested or agreed to divest a majority of our health plan assets, including the assets of EVH Passport, which represented a significant revenue stream for the Company. In parallel with these divestitures, we contracted with a third-party vendor to review our operating model and organizational design in order to improve our profitability, create value through our solutions and invest in strategic opportunities in future periods. In the fourth quarter of 2020, we committed to certain operational efficiency and profitability actions that we are taking in order to accomplish these objectives ("Repositioning Plan"). These actions included making organizational changes across our business as well as other profitability initiatives expected to result in reductions in force, re-aligning of resources as well as other potential operational efficiency and cost-reduction initiatives. The Repositioning Plan is expected to conclude in the fourth quarter of 2021. The following table provides a summary of our total costs associated with the Repositioning Plan for the three and nine months endedSeptember 30, 2021 , by major type of cost (in thousands): Incurred For Incurred for the Three the Nine Total Amount Months Ended Months Ended Expected to be Cumulative Amount September 30, September 30, Incurred in the Incurred through 2021 2021 Repositioning Plan September 30, 2021 Severance and termination benefits $ -$ 185 $ 185 $ 185 Office space consolidation - 2,071 2,321 2,071 Professional services - 3,787 5,562 5,062 Total $ -$ 6,043 $ 8,068 $ 7,318
Critical Accounting Policies and Estimates
The "Management Discussion and Analysis" included in our 2020 Form 10-K contains
a detailed discussion of our critical accounting policies and estimates. There
have been no material changes to our critical accounting policies and estimates
since our 2020 Form 10-
44
--------------------------------------------------------------------------------
K. See "Item 1. Financial Statements - Note 2" in this Form 10-Q for a summary
of our significant accounting policies and see "Item 1. Financial Statements -
Note 3" in this Form 10-Q for information regarding the Company's adoption of
new accounting standards.
Summary of Significant Accounting Policies
Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 2" in our 2020 Form 10-K for a complete summary of our significant accounting policies.
We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill.Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level. The Company has three reporting units and our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit's fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three and nine months endedSeptember 30, 2021 . We will perform our annual impairment test as ofOctober 31, 2021 .
A description of our 2020 goodwill impairment test follows below.
The Company performed an interim goodwill impairment assessment in one of our three reporting units in the EHS segment as ofMarch 31, 2020 due to the decline in the Company's stock price during the first quarter of 2020 and lack of excess of fair value over the carrying value considering the$199.8 million impairment charge taken in the fourth quarter of 2019. The Company concluded that the fair value of its reporting unit was more than its carrying value as ofMarch 31, 2020 . In addition, the Company performed an interim goodwill impairment assessment as ofMay 31, 2020 and concluded that the fair value of one of our three reporting units in the EHS segment was less than its carrying value by$215.1 million as ofMay 31, 2020 . The decrease in fair value was due to our largest customer, EVH Passport, not obtaining a renewal of itsKentucky managed Medicaid contract, which was its sole business. The non-renewal of EVH Passport's contract caused a reduction in the Company's cash flow projections. As a result of the impairment charges in the fourth quarter of 2019 and second quarter of 2020, the Company elected to forego the qualitative assessment and proceed directly to the quantitative assessment of the goodwill impairment test for the specific reporting unit that incurred those impairment charges. This election does not preclude Management from performing the qualitative assessment in any subsequent period. For the remaining reporting units, after assessing the totality of events and circumstances including the results of our previous valuations, the minimal impacts of the Passport loss and COVID-19, the Company does not believe that an event occurred or circumstances changed during the period under consideration that would, more likely than not, reduce the fair value of any reporting unit below their carrying amount. Therefore, the Company concluded that the quantitative assessment was not required. In performing ourOctober 31, 2020 impairment test for one of the specific reporting unit reference above, we estimated the fair value of our reporting units by considering a discounted cash flow valuation approach ("income approach"). In determining the estimated fair value using the income approach, we projected future cash flows based on management's estimates and long-term plans and applied a discount rate based on the Company's weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates. As ofOctober 31, 2020 , we determined that the specific reporting unit had an estimated fair value greater than its carrying value and as a result, goodwill is not impaired. As ofDecember 31, 2020 , the Company assessed whether there were additional events or changes in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting units was less than the 45 -------------------------------------------------------------------------------- reporting unit's carrying amounts that would require an interim impairment assessment afterOctober 31, 2020 . The Company determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as ofDecember 31, 2020 . As ofDecember 31, 2020 , the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge earlier in the year was$214.3 million .
Adoption of New Accounting Standards
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost, including trade receivables, certain non-trade receivables, customer advances and certain off-balance sheet credit exposures, by replacing the existing "incurred loss" framework with an expected credit loss recognition model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is effective for entities with fiscal years beginning afterDecember 15, 2019 , including interim periods within such fiscal years. We adopted the requirements of this standard effectiveJanuary 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of$3.0 million toJanuary 1, 2020 retained earnings (accumulated deficit). In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based on specific identification. Under the new accounting standard, we utilize several factors to develop historical losses, including aging schedules, customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. Refer to Note 7 for additional disclosures related to current expected credit losses. InDecember 2019 , the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU remove certain exceptions to the intraperiod tax allocation of losses and gains from different financial statement components and to the method of recognizing income taxes on interim period losses and the recognition of deferred tax liabilities for outside basis differences. In addition, the new guidance simplifies aspects of the accounting for franchise taxes and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted this standard starting in the first quarter of 2021, which did not have a material impact on our consolidated financial statements. RESULTS OF OPERATIONSEvolent Health, Inc. is a holding company and its principal asset is all of the Class A common units inEvolent Health LLC , which has owned all of our operating assets and substantially all of our business since inception. The financial results ofEvolent Health LLC are consolidated in the financial statements ofEvolent Health, Inc.
Key Components of our Results of Operations
Revenue
We derive revenue primarily from transformation services and 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 programs. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clientswho 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 are typically multi-year arrangements with customers to provide various clinical and administrative solutions. In our Clinical Solutions segment, our solutions are designed to lower the medical expenses of our partners and include our total cost of care and specialty care management services. In ourEvolent Health Services segment, our solutions are designed to provide comprehensive health plan operations and claims processing services, and also include 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 46 -------------------------------------------------------------------------------- performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically includes 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. In our Clinical Solutions segment, we enter into capitation arrangements that may include performance-based arrangements and/or gainshare features. We recognize capitation revenue on a gross basis when we have established control over the services within our scope and recognize capitation revenue on a net basis when we do not have control over the services within our scope. 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 from 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. 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.
Cost of Revenue (exclusive of depreciation and amortization)
Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments to providers and payments for pharmaceutical treatments and other health care expenditures through performance-based arrangements. Subsequent to the consolidation of EVH Passport onSeptember 1, 2020 , our cost of revenue includes the consolidated impact of the runout of EVH Passport's operations, consisting principally of updates to EVH Passport's claims reserve based on actual claims payments.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of employee-related expenses (including compensation, benefits and stock-based compensation) for selling and marketing, corporate development, finance, legal, human resources, corporate information technology, professional fees and other corporate expenses associated with these functional areas. Selling, general and administrative expenses also include costs associated with our centralized infrastructure and research and development activities to support our network development capabilities, claims processing services, including PBM administration, technology infrastructure, clinical program development and data analytics.
Depreciation and amortization expense
Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value ofEvolent Health LLC's assets and liabilities for the Offering Reorganization, amortization of intangible assets recorded as part of our various business combinations and asset acquisitions and depreciation of property and equipment, including the amortization of capitalized software.
Lives on Platform and PMPM Fees
Evolent Health Services lives on platform are calculated by summing members on our value-based care and comprehensive health plan administrative platform. Clinical Solutions lives on platform in our Performance suite are calculated by summing members 47 -------------------------------------------------------------------------------- covered for oncology specialty care services and members covered for cardiology specialty care services for contracts not under ASO arrangements. New Century Technology and Services suite lives on platform are calculated by summing members covered for oncology specialty care services and members covered for cardiology specialty care services for contracts under ASO arrangements. Members covered for more than one category are counted in each category. Evolent Health Services Average per member per month ("PMPM") fee is defined as platform and operations revenue pertaining to theEvolent Health Services segment in the period divided by the average of the beginning and endingEvolent Health Services segment membership during the quarter divided by the number of months in the period. Clinical Solutions Performance suite PMPM fee is defined as platform and operations services revenue pertaining to our Performance suite in the period divided by the average of the beginning and ending Performance suite membership for the relevant divided by the number of months in the period. New Century Technology and Services suite PMPM fee is defined as platform and operations revenue pertaining to the New Century Technology and Services suite in the period divided by the average of the beginning and ending New Century Technology and Services suite membership for the relevant period divided by the number of months in the period. Management uses lives on platform and PMPM fees because we believe that they provide insight into the unit economics of our services. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance. 48 --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
(in thousands, September 30, Change Over Prior Period September 30, Change Over Prior Period
except
percentages) 2021 2020 $ % 2021 2020 $ %
Revenue
Transformation
services $ 2,075 $ 4,807 $ (2,732) (56.8)% $ 4,984 $ 10,800 $ (5,816) (53.9)%
Platform and
operations
services 220,396 234,765 (14,369) (6.1)% 654,615 667,303 (12,688) (1.9)%
Total revenue 222,471 239,572 (17,101) (7.1)% 659,599 678,103 (18,504) (2.7)%
Expenses
Cost of revenue
(exclusive of
depreciation and
amortization
expenses
presented
separately below) 163,126 181,761 (18,635) (10.3)% 493,071 521,748 (28,677) (5.5)%
Selling, general
and
administrative
expenses 51,292 52,366 (1,074) (2.1)% 152,582 151,749 833 0.5%
Depreciation and
amortization
expenses 14,859 14,534 325 2.2% 44,962 46,130 (1,168) (2.5)%
Loss on
extinguishment of
debt, net - 4,789 (4,789) (100.0)% - 4,789 (4,789) (100.0)%
Loss on disposal
of assets and
consolidation - - - -% - 6,447 (6,447) (100.0)%
Goodwill
impairment - - - -% - 215,100 (215,100) (100.0)%
Change in fair
value of
contingent
consideration and
indemnification
asset (225) 2,570 (2,795) (108.8)% (819) (492) (327) (66.5)%
Total operating
expenses 229,052 256,020 (26,968) (10.5)% 689,796 945,471 (255,675) (27.0)%
Operating loss
Transformation services revenue as a % of total revenue 0.9 % 2.0 % 0.8 % 1.6 % Platform and operations services revenue as a % of total revenue 99.1 % 98.0 % 99.2 % 98.4 % Cost of revenue as a % of revenue 73.3 % 75.9 % 74.8 % 76.9 % Selling, general and administrative expenses as a % of total revenue 23.1 % 21.9 % 23.1 % 22.4 %
Comparison of the Results for the Three Months Ended
Revenue
Total revenue decreased by
Transformation services revenue decreased by$2.7 million , or 56.8%, to$2.1 million for the three months endedSeptember 30, 2021 , as compared to 2020, due primarily to the timing and volume of implementation activities. Transformation services revenue accounted for 0.9% and 2.0% of our total revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Platform and operations services revenue decreased by$14.4 million , or 6.1%, to$220.4 million for the three months endedSeptember 30, 2021 , as compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact of new customer additions, offset, in part by the wind-down of EVH Passport's operations compared to 2020. Platform and operations services revenue accounted for 99.1% and 98.0% of our total revenue for the three months endedSeptember 30, 2021 and 2020, respectively. 49 -------------------------------------------------------------------------------- The following table represents Evolent's revenue disaggregated by segment and end-market for the three months endedSeptember 30, 2021 and 2020 (in thousands): For the Three Months Ended September 30, 2021 2020 2021 2020 Evolent Health Services Clinical Solutions Medicaid$ 41,857 $ 51,637 $ 51,829 $ 73,480 Medicare 4,816 28,483 91,249 63,663 Commercial and other 30,154 19,830 2,566 2,479 Total$ 76,827 $ 99,950 $ 145,644 $ 139,622 Revenue from ourEvolent Health Services segment decreased by$23.1 million for the three months endedSeptember 30, 2021 as compared to 2020 due to the runout of services for EVH Passport, partially offset by new partner additions. Revenue from our Clinical Solutions segment increased by$6.0 million for the three months endedSeptember 30, 2021 as compared to 2020 due to new partner additions as well as expansion into new markets within current New Century Technology and Services Suite partners.
The following table represents the Company's lives on platform as of
Lives on Platform Average PMPM Fees
For the Three Months Ended
September 30, September 30,
2021 2020 2021 2020
Evolent Health Services 1,564 1,841 $ 13.19 $ 17.64
Clinical Solutions
Performance suite 1,471 1,611 $ 34.16 $ 29.92
New Century Technology and Services suite 11,670 4,946 $ 0.36 $ 0.41 We had 41 and 34 operating partners as of
Cost of Revenue
The following table provides a summary of our total cost of revenue by segment for the three months endedSeptember 30, 2021 , as compared to 2020 (amounts in thousands):
For the Three Months Ended
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 42,651 $ 44,007 $ 119,894 $ 130,558 $ 581 $ 7,196 $ 163,126 $ 181,761
Cost of revenue decreased by $18.6 million , or (10.3)%, to $163.1 million for
the three months ended September 30, 2021 , as compared to 2020. Cost of revenue
decreased by approximately $13.1 million period over period as a result of lower
capitation expenses and $3.1 million in our personnel costs due to a lower
headcount. The principal driver of these decreases was the wind-down of EVH
Passport relative to 2020. Cost of revenue for three months ended September 30,
2021 includes approximately $2.7 million associated with the wind-down of EVH
Passport, inclusive of a reduction in Passport's claims reserve. Approximately
$0.1 million and $0.4 million of total personnel costs was attributable to
stock-based compensation expense for the three months ended September 30, 2021
and 2020, respectively. Cost of revenue represented 73.3% and 75.9% of total
services revenue for the three months ended September 30, 2021 and 2020,
respectively. Our cost of revenue decreased as a percentage of our total
services revenue due to a change in the mix of our service offerings towards
higher gross margin services with divestiture of our health plans combined with
our Repositioning Plan. We expect our cost of revenue to continue to decrease as
a percentage of total services revenue over the longer-term subject to the
composition of our growth.
50
--------------------------------------------------------------------------------Selling, General and Administrative Expenses
The following table provides a summary of our selling, general and
administrative expenses by segment for the three months ended
For the Three Months Ended
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 26,826 $ 18,589 $ 4,314 $ 4,630 $ 20,152 $ 29,147 $ 51,292 $ 52,366
Selling, general, and administrative expenses decreased by $1.1 million , or
2.1%, to $51.3 million for the three months ended September 30, 2021 , as
compared to 2020. Selling, general, and administrative expenses decreased
approximately $4.1 million period over period due to termination of leases at
Passport, legal expense decreased $1.0 million due to the timing and volume of
transactions. These were offset, in part by, stock compensation increases of
$1.5 million due primarily to restricted stock awards to employees and
professional fees of $1.4 million primarily due to the Repositioning Plan and
shareholder advisory services. Approximately $4.3 million and $2.7 million of
total personnel costs were attributable to stock-based compensation expense for
the three months ended September 30, 2021 and 2020, respectively. Acquisition
and severance costs accounted for approximately $1.2 million and $2.6 million of
total selling, general and administrative expenses for the three months ended
September 30, 2021 and 2020, respectively. Selling, general and administrative
expenses represented 23.1% and 21.9% of total revenue for the three months ended
September 30, 2021 , as compared to 2020, respectively. While our selling,
general and administrative expenses are expected to grow as our business grows,
we expect them to decrease as a percentage of our total revenue over the long
term due to cost saving initiatives introduced in the fourth quarter of 2020.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased$0.3 million , or 2.2%, to$14.9 million for the three months endedSeptember 30, 2021 , as compared to 2020. The increase was due primarily to higher amortization of internal-use software, offset, in part by, a decrease in amortization expense for existing technology intangibles. We expect depreciation and amortization expenses to continue to increase in future periods as we continue to capitalize internal-use software and amortize intangible assets resulting from asset acquisitions and business combinations.
Loss on extinguishment of debt, net
InAugust 2020 , as part of the issuance of the 2024 Notes, the Company issued$84.2 million aggregate principal amount of the 2024 Notes in exchange for$84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of$4.8 million , including an aggregate cash payment to noteholders of$2.5 million , which is included in loss on extinguishment of debt, net on the consolidated statement of operations.
Change in Fair Value of Contingent Consideration and Indemnification Asset
We recorded a gain (loss) on change in fair value of contingent consideration and indemnification asset of$(0.2) million and$2.6 million for the three months endedSeptember 30, 2021 and 2020, respectively. This variance is the result of changes in the fair values of contingent liabilities incurred from entering in the warrant agreements compared to the liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018, 2019 and 2020.
Comparison of the Results for the Nine Months Ended
Revenue
Total revenue decreased by
Transformation services revenue decreased by$5.8 million , or 53.9%, to$5.0 million for the nine months endedSeptember 30, 2021 , as compared to 2020, due primarily to the timing and volume of implementation activities. Transformation services revenue accounted for 0.8% and 1.6% of our total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Platform and operations services revenue decreased by$12.7 million , or 1.9%, to$654.6 million for the nine months endedSeptember 30, 2021 , as compared to 2020. This decrease is primarily due to the consolidation and wind-down of EVH Passport's operations 51 -------------------------------------------------------------------------------- compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact of new customer additions, includingFlorida Blue Medicare, Inc. Platform and operations services revenue accounted for 99.2% and 98.4% of our total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. The following table represents Evolent's revenue disaggregated by segment and end-market for the nine months endedSeptember 30, 2021 and 2020 (in thousands): For the Nine Months Ended September 30, 2021 2020 2021 2020 Evolent Health Services Clinical Solutions Medicaid$ 154,850 $ 165,584 $ 148,816 $ 197,992 Medicare 19,500 57,729 267,793 190,223 Commercial and other 62,177 59,535 6,463 7,040 Total$ 236,527 $ 282,848 $ 423,072 $ 395,255 Revenue from ourEvolent Health Services segment decreased by$46.3 million for the nine months endedSeptember 30, 2021 as compared to 2020 due to the runout of services for EVH Passport, partially offset by new partner additions. Revenue from our Clinical Solutions segment increased by$27.8 million for the nine months endedSeptember 30, 2021 as compared to 2020 due to new partner additions includingFlorida Blue Medicare, Inc. , as well as expansion into new markets within current New Century Technology and Services Suite partners.
The following table represents the Company's lives on platform as of
Lives on Platform Average PMPM Fees
For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Evolent Health Services 1,564 1,841 $ 12.23 $ 14.56
Clinical Solutions
Performance suite 1,471 1,611 28.78 29.83
New Century Technology and Services suite 11,670 4,946 0.38 0.41
We had 41 and 34 operating partners as of
Cost of Revenue
The following table provides a summary of our total cost of revenue by segment for the nine months endedSeptember 30, 2021 , as compared to 2020 (amounts in thousands):
For the Nine Months Ended
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 145,354 $ 163,386 $ 345,874 $ 347,980 $ 1,843 $ 10,382 $ 493,071 $ 521,748
Cost of revenue decreased by $28.7 million , or 5.5%, to $493.1 million for the
nine months ended September 30, 2021 , as compared to 2020. Cost of revenue
decreased by approximately $21.0 million due to lower personnel costs, $4.4
million in lower professional fees and $3.3 million in our technology services,
TPA fees, brokerage fees and other costs. The principal driver of these
decreases was the wind-down of EVH Passport relative to 2020. Cost of revenue
for the nine months ended September 30, 2021 includes approximately $8.5 million
associated with the wind-down of EVH Passport, inclusive of a reduction in
Passport's claims reserve. Approximately $1.6 million and $1.4 million of total
personnel costs was attributable to stock-based compensation expense for the
nine months ended September 30, 2021 and 2020, respectively. Cost of revenue
represented 74.8% and 76.9% of total services revenue for the nine months ended
September 30, 2021 and 2020, respectively. Our cost of revenue decreased as a
percentage of our total services revenue due to a change in the mix of our
service offerings towards higher gross margin services with divestiture of our
health plans combined
52
--------------------------------------------------------------------------------with our Repositioning Plan. We expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the composition of our growth.
Selling, General and Administrative Expenses
The following table provides a summary of our total selling, general and
administrative by segment for the nine months ended
For the Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 69,555 $ 68,736 $ 21,086 $ 16,272 $ 61,941 $ 66,741 $ 152,582 $ 151,749
Selling, general, and administrative expenses increased by $0.8 million , or
0.5%, to $152.6 million for the nine months ended September 30, 2021 , as
compared to 2020. Professional fees increased by $11.2 million for the nine
months ended September 30, 2021 , as compared to 2020, respectively, primarily
due to the Repositioning Plan and shareholder advisory services. During the nine
months ended September 30, 2021 , personnel costs decreased by $3.2 million
period over period due to a reduction in employee headcount, other expenses
decreased by $3.5 million due to the termination of leases at Passport during
the third quarter of 2020 and legal fees decreased $3.2 million due to the
timing and volume of transactions. Approximately $10.1 million and $9.0 million
of total personnel costs were attributable to stock-based compensation expense
for the nine months ended September 30, 2021 and 2020, respectively. Acquisition
and severance costs accounted for approximately $3.3 million and $9.4 million of
total selling, general and administrative expenses for the nine months ended
September 30, 2021 and 2020, respectively. Selling, general and administrative
expenses represented 23.1% and 22.4% of total revenue for the nine months ended
September 30, 2021 , as compared to 2020, respectively. While our selling,
general and administrative expenses are expected to grow as our business grows,
we expect them to decrease as a percentage of our total revenue over the long
term due to cost saving initiatives introduced in the fourth quarter of 2020.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased$1.2 million , or 2.5%, to$45.0 million for the nine months endedSeptember 30, 2021 , as compared to 2020. The decrease was due primarily to lower amortization on existing technology intangibles, offset, in part by, an increase in amortization expense for internal-use software. We expect depreciation and amortization expenses to increase in future periods as we continue to capitalize internal-use software and amortize intangible assets resulting from asset acquisitions and business combinations.
Loss on extinguishment of debt, net
InAugust 2020 , as part of the issuance of the 2024 Notes, the Company issued$84.2 million aggregate principal amount of the 2024 Notes in exchange for$84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of$4.8 million , including an aggregate cash payment to noteholders of$2.5 million , which is included in loss on extinguishment of debt, net on the consolidated statement of operations.
Gain (Loss) on Disposal of Assets and Consolidation
During 2019, the Company, through a non-wholly owned consolidated subsidiary, entered into an agreement with an unrelated party to provide services and support to providers, independent physician associations, and other provider groups. During the nine months endedSeptember 30, 2020 , the Company sold its interest in the subsidiary and recorded a$6.4 million loss on disposal of assets and consolidation on the consolidated statements of operations. The Company did not have any continuing involvement with the entity after the consummation of this transaction.
Goodwill Impairment
During the nine months endedSeptember 30, 2020 we recorded a non-cash impairment charge of$215.1 million on our consolidated statements of operations as we determined that the implied fair value of goodwill of one of the two reporting units in the EHS segment was less than the carrying amount. See "Part I - Item 1. Financial Statements - Note 9" for further details of the impairment charge to goodwill. 53 --------------------------------------------------------------------------------
Change in Fair Value of Contingent Consideration and Indemnification Asset
We recorded a gain on change in fair value of contingent consideration and indemnification asset of$0.8 million and$0.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. This variance is the result of changes in the fair values of contingent liabilities incurred from entering in the warrant agreements compared to the liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018, 2019 and 2020.
Discussion of Non-Operating Results
Interest Income
Interest income consists of interest from investing cash in money market funds and interest from both our short-term and long-term investments. We recorded interest income of$0.1 million and$0.3 million and for the three and nine months endedSeptember 30, 2021 , respectively, and$1.2 million and$2.6 million for the three and nine months endedSeptember 30, 2020 , respectively. Interest income decreased during 2021 as a result of the repayment of the$40.0 million Passport Note onNovember 24, 2020 .
Interest Expense
Our interest expense is primarily attributable to our 2021 Notes, 2024 Notes, 2025 Notes and Credit Agreement with Ares Capital Corporation. We recorded interest expense (including amortization of deferred financing costs) of approximately$6.4 million and$19.0 million for the three and nine months endedSeptember 30, 2021 , respectively, and$7.4 million and$20.0 million for the three and nine months endedSeptember 30, 2020 , respectively. The decrease in interest expense is driven primarily by the termination of the Ares Credit Agreement inJanuary 2021 , offset, in part by the issuance of the 2024 Notes inAugust 2020 . See "Part I - Item 1. Financial Statements - Note 10" in this Form 10-Q for further details.
Impairment of Equity Method Investments
As ofJune 30, 2020 , the Oklahoma Insurance Division ("OID") informedGlobalHealth, Inc. that in response to the COVID-19 pandemic, the OID requiredGlobalHealth, Inc. to increase its regulatory capital surplus byMay 15, 2020 . It would otherwise be placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to increase statutory capital reserves to no lower than 300%. In connection with the investment,GlobalHealth, Inc. transferred 100% of the equity interests inGlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred onMay 13, 2020 . As a result of this transaction, we have recorded a non-cash impairment charge of approximately$47.1 million , representing the total value of our investment, in impairment of equity method investments on the consolidated statements of operations for the nine months endedSeptember 30, 2020 .
Gain (Loss) from Equity Method Investees
The Company allocated its proportional share of the investees' earnings and losses each reporting period. The Company's proportional share of the gains from its equity method investments was approximately$0.1 million and$12.7 million for the three and nine months endedSeptember 30, 2021 , respectively and$(13.7) million and$11.0 million for the three and nine months endedSeptember 30, 2020 , respectively. The change in gain from equity method investees for the three months endedSeptember 30, 2021 compared to 2020 is driven primarily by the Company's investment in Passport. The change in gain from equity method investees for the nine months endedSeptember 30, 2021 compared to 2020 is driven primarily by the Company's investment in Passport during 2020 combined with gains on the sale of ourFlorida equity investee's membership during 2021.
Gain from Transfer of Membership
During the nine months endedSeptember 30, 2021 , EVH Passport received a cash payment from Molina in the amount of$23.0 million based on the number of enrollees above a certain threshold in the D-SNP Business and Molina's Medicaid plan following the open enrollment period for plan year 2021. The foregoing amount represents 50% of the payment that EVH Passport is eligible to receive based on the number of such enrollees. The remaining 50% will be receivable in the first quarter of 2022 subject to the satisfaction of certain contingencies.
Loss On Repayment of Debt
OnJanuary 8, 2021 , the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the Credit Agreement in connection with the prepayment was$98.6 million , which included$9.7 million for the make-whole premium as well as$0.2 million in accrued interest. 54 --------------------------------------------------------------------------------
As a result of this transaction, the Company recorded loss on the repayment of
debt of
Provision for Income Taxes
The Company recorded$0.2 million and$0.9 million in income tax expense (benefit) for the three and nine months endedSeptember 30, 2021 , respectively, which resulted in effective tax rates of (1.8)% and (2.9)%, respectively, and$0.5 million and$(3.1) million for the three and nine months endedSeptember 30, 2020 , respectively, which resulted in effective tax rates of (1.3)% and 1.0%, respectively. The difference between our effective tax rate and our statutory rate is due primarily to the fact that the Company maintains a full valuation allowance recorded against its net deferred tax assets, with the exception of certain indefinite-lived components.
Loss from Discontinued Operations, Net of Tax
As ofSeptember 30, 2021 , the Company determined thatTrue Health met the held for sale criteria under ASC 360, and as such,True Health assets and liabilities as ofDecember 31, 2020 , and the results of operations for all periods presented are classified as held for sale and are not included in continuing operations in the consolidated financial statements. The True Health Closing occurred onMarch 31, 2021 . The following table summarizes the results of operations of the Company'sTrue Health business, which are included in the loss from discontinued operations in the consolidated statements of operations for the three and nine months endedSeptember 30, 2021 and 2020. For the Three Months Ended For the Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenue Platform and operations - 71 38 350 Premiums - 29,487 44,795 87,136 Total revenue - 29,558 44,833 87,486 Expenses Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1) - 4,926 5,885 12,861 Claims expenses - 21,325 33,954 63,136 Selling, general and administrative expenses (2) - 4,407 5,764 14,318 Depreciation and amortization expenses - 160 160 480 Total operating expenses - 30,818 45,763 90,795 Operating loss - (1,260) (930) (3,309) Interest income - 129 112 415 Interest expense - (3) (4) (10) Other loss - (1) (25) (4) Loss before income taxes and non-controlling interests - (1,135) (847) (2,908) Benefit for income taxes - - (326) - Net loss $ -$ (1,135) $ (521) $ (2,908) -------- (1)Cost of revenue includes intercompany expenses between the Company andTrue Health that are recorded in income from continuing operations on the consolidated statements of operations related to an existing services agreement for claims processing and other health plan administrative functions of$3.7 million for the three months endedSeptember 30, 2020 and$2.8 million and$10.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. (2)Selling, general and administrative expenses includes intercompany expenses between the Company andTrue Health that are recorded in income from continuing operations on the consolidated statements of operations related to an existing services agreement for claims processing and other health plan administrative functions of$1.0 million of for the three months endedSeptember 30, 2020 and$1.1 million and$5.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. REVIEW OF CONSOLIDATED FINANCIAL CONDITION 55 -------------------------------------------------------------------------------- Liquidity and Capital Resources Since its inception, the Company has incurred operating losses and net cash outflows from operations. The Company incurred operating losses of$30.2 million and$267.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash and restricted cash used in operating activities was$27.9 million and$3.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively.
As of
We believe our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies.
Cash Flows
The following summary of cash flows for the nine months endedSeptember 30, 2021 and 2020 (in thousands) has been derived from our financial statements included in "Part I - Item 1. Financial Statements - Consolidated Statements of Cash Flows:" For the Nine Months Ended September 30, 2021 2020 Net cash and restricted cash used in operating activities $ (27,909)$ (3,374) Net cash and restricted cash provided by investing activities 38,582
263,297
Net cash and restricted cash provided by (used in) financing activities (90,446) 12,054 Operating Activities Cash flows used in operating activities of$27.9 million for the nine months endedSeptember 30, 2021 were primarily due to our net loss of$32.0 million , a loss on the repayment and termination of our Credit Agreement of$19.2 million , a gain on the disposal of assets of$1.9 million , gain on the transfer of memberships of$23.0 million and non cash items including depreciation and amortization expenses of$45.1 million and stock-based compensation expense of$11.8 million . Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts receivables and contract cost assets and reductions in accrued liabilities and accrued compensation and employee benefits contributed approximately$88.0 million to our cash outflows. Those cash outflows were offset, in part by increased reserves for claims and performance-based arrangements of approximately$16.8 million . Cash flows used in operating activities of$3.4 million in the nine months endedSeptember 30, 2020 were due primarily to our net loss of$320.4 million , partially offset by non-cash items, including an impairment of goodwill of$215.1 million , an impairment of an equity method investment of$47.1 million , depreciation and amortization expenses of$46.6 million , stock-based compensation expense of$10.4 million and a loss on the disposal of assets of$6.4 million . Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts payable, accrued liabilities and claims reserves contributed approximately$10.6 million to our cash outflows. Those cash inflows were partially offset by an increase in accounts receivable and contract assets and contract costs assets and a decrease in accrued compensation and employee benefits contributed of approximately$28.3 million .
Investing Activities
Cash flows provided by investing activities of$38.6 million in the nine months endedSeptember 30, 2021 were primarily attributable to cash flows of$43.0 million from the transfer of membership and release of Passport escrow and returns of investment on equity method investments of$14.2 million offset, in part by$17.7 million from investments in internal-use software and purchases of property and equipment and$3.0 million of purchases of investments. Cash flows from investing activities of$263.3 million in the nine months endedSeptember 30, 2020 were primarily attributable to cash flows from the impact of the initial consolidation of Passport of$159.8 million , maturities and sales of investments of$140.9 million , offset, in part by investments in internal-use software and purchases of property and equipment of$23.6 million , disposal of non-strategic assets of$2.3 million and purchases of investments of$11.2 million . 56 --------------------------------------------------------------------------------
Financing Activities
Cash flows used in financing activities of$90.4 million in the nine months endedSeptember 30, 2021 were primarily related to the repayment and termination of our Credit Agreement and settlement of our outstanding warrant agreements with Ares Capital Corporation of$98.4 million , offset, in part by a$1.1 million decrease in net working capital balances held on behalf of our partners for claims processing services. Cash flows from financing activities of$12.1 million in the nine months endedSeptember 30, 2020 were primarily related to$30.1 million from proceeds of convertible debt, offset, in part by repurchase of our 2021 Notes of$16.4 million ,$1.4 million of taxes withheld and paid for vests of restricted stock units and a$2.2 million decrease in working capital balances held on behalf of our partners for claims processing services. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.
Cash flows from Discontinued Operations
The consolidated statements of cash flows for all periods have not been adjusted to separately disclose cash flows related to discontinued operations. Cash flows related to theTrue Health business, which was sold onMarch 31, 2021 , during the nine months endedSeptember 30, 2021 and 2020 were as follows: For the Nine Months Ended September 30, 2021 2020 Cash flows provided by (used in) operating activities$ 5,002 $ 7,920 Cash flows provided by (used in) investing activities (2,494) 936 Contractual Obligations
Our estimated contractual obligations (in thousands) as of
2021 2022-2023 2024-2025 2026+ Total
Operating leases for facilities $ 2,961 $ 18,626 $ 16,594 $ 47,760 $ 85,941
Purchase obligations related to vendor
contracts 3,814 8,380 123 - 12,317
Debt interest and termination payments 3,613 13,369 9,279
- 26,261
Debt principal repayment (1) 26,737 - 289,551 - 316,288
Total contractual obligations
--------
(1)Debt principal repayments in 2021 includes the remaining
During the nine months endedSeptember 30, 2021 , the only material change fromDecember 31, 2020 outside the ordinary course of business in the contractual obligations set forth above was the repayment and termination of our Credit Agreement and settlement of our warrant agreements with Ares Capital Corporation. Refer to the discussion in "Part I - Item 1. Financial Statements - Note 10" for additional information on our long-term debt.
Accounts Receivable, net
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the nine months endedSeptember 30, 2021 , accounts receivable, net increased due to the impact of new customers of$60.0 million and the timing of cash receipts from existing customers.
Restricted Cash and Restricted Investments
Restricted cash and restricted investments of$29.3 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of$13.2 million , collateral for letters of credit required as security deposits for facility leases of$3.4 million , amounts held with financial institutions for risk-sharing arrangements of$12.0 million and other restricted balances of$0.7 million as ofSeptember 30, 2021 . See "Part I - Item 1. Financial Statements - Note 2" for further details of the Company's restricted cash balances. 57 --------------------------------------------------------------------------------
Uses of Capital
Our principal uses of cash are in the operation and expansion of our business.
The Company does not anticipate paying a cash dividend on our Class A common
stock in the foreseeable future.
OTHER MATTERSOff-balance Sheet Arrangements
ThroughSeptember 30, 2021 , the Company had not entered into any off-balance sheet arrangements, other than the operating leases and notes receivable noted above, and did not have any holdings in variable interest entities, other than the unconsolidated variable interest entities discussed in "Part I - Item 1. Financial Statements - Note 16" within this Form 10-Q.
Related Party Transactions
In the ordinary course of business, we enter into transactions with related parties. Information regarding transactions and amounts with related parties is discussed in "Part I - Item 1. Financial Statements - Note 19" within this Form 10-Q.
Other Factors Affecting Our Business
In general, our business is subject to a changing social, economic, legal,
legislative and regulatory environment. Although the eventual impact on us of
the changing environment in which we operate remains uncertain, these factors
and others could have a material effect on our results of operations, liquidity
and capital resources. Factors that could cause actual results to differ
materially from those set forth in this section are described in "Part I - Item
1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language."
58--------------------------------------------------------------------------------
© Edgar Online, source
