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 II - Item 8. Financial Statements and
Supplementary Data" as well as "Part I - Item 1A. Risk Factors."
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:Evolent Health Services and Clinical Solutions. The Company's EHS segment provides an integrated administrative and clinical platform for health plan administration and population health management. 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 .
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.
43
--------------------------------------------------------------------------------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 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 and 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 ofDecember 31, 2021 , we had cash and cash equivalents of$266.3 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 such as Omicron and the effectiveness of vaccines. 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 uninterrupted 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.
Evolent has instituted a voluntary return to the office. Fully vaccinated
employees and those
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 2021, we saw changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The pandemic initially resulted in a significant increase in unemployment inthe United States throughJuly 2020 but has since steadily decreased to pre-pandemic levels inDecember 2021 . 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 (includingIllinois andMaryland ) 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 ofDecember 31, 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. We cannot predict the magnitude of this potential benefit, or how long it will last. 44 -------------------------------------------------------------------------------- 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 years endedDecember 31, 2020 and 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 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). 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 years endedDecember 31, 2021 , 2020 and 2019: For the Year Ended December 31, 2021 (1) 2020 (1) 2019 (1)Cook County Health and Hospitals Systems (2) 28.0 % 22.3 % 11.6 % New Mexico Health Connections * * 13.4 % Florida Blue Medicare, Inc. (3) 14.1 % N/A N/A Passport (4) * 19.0 % 23.0 % -------- (1)The denominator excludes$44.8 million ,$117.4 million and$171.7 million ofTrue Health premium revenue reclassified to discontinued operations for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2)Cook County Health and Hospital Systems utilizes both our administrative simplification solutions provided byEvolent Health Services , which accounted for 9.0% of our consolidated revenue for the year endedDecember 31, 2021 and our specialty care management solutions provided byNew Century Health which accounted for 19.0% of our consolidated revenue for the year endedDecember 31, 2021 . (3)Customer added during the year endedDecember 31, 2021 .Florida Blue Medicare, Inc. utilizes our specialty care management solutions provided byNew Century Health . (4)Represents revenues from EVH Passport/UHC through the Molina Closing. Subsequent to the Molina Closing onSeptember 1, 2020 , the Company has not received any material revenue from EVH Passport. However, as part of the Molina Closing, we entered into a new contract with Molina on similar terms to our prior services contract with EVH Passport throughDecember 31, 2020 which accounted for approximately 9.7% of our consolidated revenues for the year endedDecember 31, 2020 . * Represents less than 10.0% of the respective balance
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 Decisions
OnAugust 2, 2021 ,Evolent Health LLC andEV Thunder Merger Sub, LLC , each wholly owned subsidiaries of the Company, and the Company entered into a definitive agreement for the Company to acquire Vital Decisions. OnOctober 1, 2021 , we consummated the acquisition of Vital Decisions for$46.5 million in cash and the issuance of 1.8 million shares of Class A common stock. Vital Decisions reports into Evolent's specialty care management offering,New Century Health , and is consolidated into the Company's Clinical Solutions segment. The transaction closed onOctober 1, 2021 . Refer to "Part II - Item 8. Financial Statements - Note 4" for additional discussion regarding the Vital Decisions transactions.
Conversion and Repayment of 2021 Notes
Upon maturity of the 2021 Notes onDecember 1, 2021 , outstanding 2021 Notes with a principal amount of$26.7 million were settled, at the option of the holders, by converting$26.3 million aggregate principal amount of 2021 Notes to common shares and cash repayment of$0.4 million aggregate principal amount of 2021 Notes. Shares issued were valued based on the quoted trading prices on the conversion date for a total fair value of$28.5 million resulting in a loss on debt extinguishment of$2.2 million which was recorded in loss on repayment of debt on our consolidated statements of operations and comprehensive income (loss). Refer to "Part II - Item 8. Financial Statements - Note 10" for additional discussion regarding conversion and repayment of our 2021 Notes.
Sale of True Health New Mexico
45
--------------------------------------------------------------------------------
On January 11, 2021 , Evolent LLC , EH Holdings and True Health , each wholly owned
subsidiaries of the Company, entered into the SPA with Bright HealthCare ,
pursuant to which EH Holdings agreed to sell all of its equity interest in True
Health to Bright 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 one-year anniversary of the True Health
Closing based in part on actual medical claims experience. The True Health
Closing occurred on March 31, 2021 and the Company has had no continuing
involvement with True Health subsequent to the Closing except a pre-existing
services agreement for claims processing and other health plan administrative
functions. As of the first quarter of 2021, the Company determined that True
Health met the discontinued operations criteria under ASC 205, and as such, True
Health assets and liabilities as of December 31, 2020 , and the results of
operations for all periods presented are classified as discontinued operations
and are not included in continuing operations in the consolidated financial
statements. Refer to "Part II - Item 8. Financial Statements - Note 5" for
additional discussion regarding the True Health sale.
In addition, in conjunction with the sale of True 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's Evolent 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 the New Century Health and Evolent Care Partners brands.
Refer to "Part II - Item 8. Financial Statements - Note 22 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 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 consolidation 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. At the time of the transaction, the Company estimated a return of capital from EVH Passport between$130 million to$170 million . The Company now expects, given certain outcomes, an estimated return of capital between$170 million and$190 million , subject to regulatory approval from theKentucky Department of Insurance . Refer to "Part II - Item 8. 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 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. 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 II - Item 8. 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 46 --------------------------------------------------------------------------------
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 that will
provide future benefit to the Company. The Repositioning Plan concluded in the
fourth quarter of 2021.
The following table provides a summary of our total costs associated with the
Repositioning Plan for the years ended December 31, 2021 and 2020, by major type
of cost (in thousands):
For the Year EndedDecember Cumulative Amount
31, Incurred through
2021 2020 December 31, 2021
Severance and termination benefits $ 185 $ - $ 185
Office space consolidation 2,742 - 2,742
Professional services 4,391 1,275 5,666
Total $ 7,318 $ 1,275 $ 8,593
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition. In applying these critical accounting policies in preparing our financial statements, management must use critical assumptions, estimates and judgments concerning future results or other developments, including the likelihood, timing or amount of one or more future events. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our assumptions, estimates and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see "Part II - Item 8. Financial Statements and Supplementary Data - Note 2."Goodwill We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill.Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level. 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. Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit's fair value. 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 use discounted cash flow analyses and market multiple analyses in order to estimate reporting unit fair values. Discounted cash flow analyses rely on significant judgement and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins. These assumptions are based on estimates of future revenue and earnings after considering such factors as general economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The weighted average cost of capital is based on market-based factors/inputs but also considers the specific risk characteristics of the reporting unit's cash flow forecast. A significant change to these estimates and assumptions could cause the estimated fair values of our reporting units and intangible assets to decline and increase the risk of an impairment charge to 47 --------------------------------------------------------------------------------
earnings. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
OnOctober 31, 2021 , the Company performed its annual goodwill impairment review for fiscal year 2021. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest fair value of our single reporting unit was below the carrying value. As a result, a quantitative goodwill impairment analysis was not required.
Revenue Recognition
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 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.
Income Taxes
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We estimate our actual current tax expense, including permanent charges and benefits, and temporary differences resulting from differing treatment of items, such as deferred revenue for tax and book accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not, we establish a valuation allowance. To the extent that we increase a valuation allowance in a period, we include an expense in the consolidated statement of operations in the period in which such determination is made. In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. A significant piece of objective positive evidence evaluated for jurisdictions in a net deferred tax asset position was cumulative pre-tax income over the three years endedDecember 31, 2021 . In addition, we considered that loss and credit carryforwards have not expired unused and the majority of our loss and credit carryforwards will not expire prior to 2032. As ofDecember 31, 2021 , we have determined that it is more likely than not that we will realize the benefit related to our deferred tax assets, except for a valuation allowance related to the realization of existing US deferred tax assets.
Deferred tax liabilities, net of deferred tax assets, as of
We account for uncertainty in income taxes by recognizing a tax position only when it is more likely than not that the tax position, based on its technical merits, will be sustained upon ultimate settlement with the applicable tax authority. The tax benefit to be recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the applicable tax authority that has full knowledge of all relevant information. Our gross unrecognized benefits are$0.6 million as ofDecember 31, 2021 . Our evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and 48 -------------------------------------------------------------------------------- new audit activity. If actual settlements differ from these estimates, or we adjust these estimates in future periods, we may need to recognize additional tax benefits or charges that could materially impact our financial position and results of operations. We are a holding company and our assets consist of our direct ownership inEvolent Health LLC , for which we are the managing member. Taxable income or loss generated byEvolent Health LLC was allocated to holders of its units, including us, on a pro rata basis. Accordingly, we were subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofEvolent Health LLC . As a result of the 2019 Class B units exchanges, we became the sole owner ofEvolent Health LLC and its entity classification changed from a partnership to an entity disregarded as separate from its owner forU.S. federal, state and local income tax purposes. Following the Class B units exchanges, any taxable income or loss generated byEvolent Health LLC is reportable and taxable on the Company's federal, state and local income tax returns.Evolent Health LLC has direct ownership in corporate subsidiaries, which were subject toU.S. and foreign taxes with respect to their own operations during 2019.
Reserve for Claims and Performance-based Arrangements
Reserves for performance-based arrangements and claims reflect actual 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 composed of accruals for incentives and other amounts payable to health care professionals and facilities. 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.
Business Combinations
Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Our estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Critical estimates used to value certain identifiable assets include, but are not limited to, expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill.Goodwill is assigned to the reporting unit that benefits from the synergies arising from the business combination. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of operations and comprehensive income (loss). For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as a change in fair value of contingent consideration and indemnification asset on the Company's consolidated statements of operations and comprehensive income (loss). Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
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 49 -------------------------------------------------------------------------------- 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. InAugust 2020 , the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature and no longer permits the use of the treasury stock method from calculating earnings per share. As a result, after adopting the ASU's guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity's own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity's own equity. The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2021 . We will adopt the ASU in the first quarter of fiscal 2022 and expect to use modified retrospective approach. The Company is currently assessing the impact, if any, that ASU 2020-06 would have on its financial position, results of operations or cash flows, however, the inability to use the treasury stock method in accounting for the shares issuable upon conversion of the 2024 Notes and the 2025 Notes will adversely affect our diluted earnings per share. 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. 50 -------------------------------------------------------------------------------- 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 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 run out 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. 51 --------------------------------------------------------------------------------
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 are calculated by summing the Clinical Solutions Lives on Platform in our Performance suite andNew Century Health Technology and Services suite Lives on Platform. Clinical Solutions Lives on Platform in our Performance suite are calculated by summing members covered for oncology specialty care services and members covered for cardiology specialty care services for contracts not under ASO arrangements.New Century Health Technology and Services suite Lives on Platform are calculated by summing members covered for oncology specialty care services, members covered for cardiology specialty care services and members covered for advance care planning 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 during the period reported divided by the average of the beginning and endingEvolent Health Services segment membership during the period reported divided by the number of months in the period. Clinical Solutions Performance suite Average PMPM fee is defined as platform and operations services revenue pertaining to our Clinical Solutions Performance suite during the period reported divided by the average of the beginning and ending Clinical Solutions Performance suite membership during the period reported divided by the number of months in the period. New Century Health Technology and Services suite Average PMPM fee is defined as platform and operations revenue pertaining to theNew Century Health Technology and Services suite during the period reported divided by the average of the beginning and ending New Century Heath Technology and Services Suite membership during the period reported 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. 52 --------------------------------------------------------------------------------
(in thousands, For the Year Ended December 31, Change Over Prior Period For the Year Ended December 31, Change Over Prior Period except percentages) 2021 2020 $ % 2020 2019 $ % Revenue Transformation services$ 11,204 $ 11,990 $ (786) (6.6)%$ 11,990 $ 15,203 $ (3,213) (21.1)% Platform and operations services 896,753 912,649 (15,896) (1.7)% 912,649 671,919 240,730 35.8% Total revenue 907,957 924,639 (16,682) (1.8)% 924,639 687,122 237,517 34.6% Expenses Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) 657,551 696,581 (39,030) (5.6)% 696,581 513,033 183,548 35.8% Selling, general and administrative expenses 219,499 210,412 9,087 4.3% 210,412 236,448 (26,036) (11.0)% Depreciation and amortization expenses 60,037 60,835 (798) (1.3)% 60,835 60,323 512 0.8% Loss (gain) on disposal of assets and consolidation - 698 (698) (100.0)% 698 (9,600) 10,298 (107.3)% Loss on extinguishment of debt, net - 4,789 (4,789) (100.0)% 4,789 - 4,789 100.0% Goodwill impairment - 215,100 (215,100) (100.0)% 215,100 199,800 15,300 7.7% Change in fair value of contingent consideration and indemnification asset 13,281 3,860 9,421 244.1% 3,860 (3,997) 7,857
(196.6)%
Total operating expenses 950,368 1,192,275 (241,907) (20.3)% 1,192,275 996,007 196,268
19.7%
Operating loss$ (42,411) $ (267,636) $ 225,225 84.2%$ (267,636) $ (308,885) $ 41,249 (13.4)% Transformation services revenue as a % of total revenue 1.2 % 1.3 % 1.3 % 2.2 % Platform and operations services revenue as a % of total revenue 98.8 % 98.7 % 98.7 % 97.8 % Cost of revenue as a % of revenue 72.4 % 75.3 % 75.3 % 74.7 % Selling, general and administrative expenses as a % of total revenue 24.2 % 22.8 % 22.8 % 34.4 %
Comparison of the Results for the Year Ended
Revenue
Total revenue decreased by
Transformation services revenue decreased by$0.8 million , or 6.6%, to$11.2 million for the year endedDecember 31, 2021 , as compared to 2020, due primarily to the timing and volume of implementation activities. Transformation services revenue accounted for 1.2% and 1.3% of our total revenue for the years endedDecember 31, 2021 and 2020, respectively. Platform and operations services revenue decreased by$15.9 million , or 1.7%, to$896.8 million for the year endedDecember 31, 2021 , as compared to 2020. This decrease is primarily due to the runout of EVH Passport's operations compared to 2020 mostly offset by the addition of new partners and expansion with other existing partners. Platform and operations services revenue accounted for 98.8% and 98.7% of our total revenue for the years endedDecember 31, 2021 and 2020, respectively. 53 --------------------------------------------------------------------------------
The following table represents Evolent's revenue disaggregated by segment and
end-market for the years ended
For the Year Ended December 31,
2021 2020 2021 2020
Evolent Health Services Clinical Solutions
Medicaid $ 215,236 $ 236,634 $ 205,833 $ 274,028
Medicare 26,358 68,505 363,053 257,092
Commercial and other 68,219 77,221 29,258 11,159
Total $ 309,813 $ 382,360 $ 598,144 $ 542,279
Revenue from our Evolent Health Services segment decreased by $72.5 million for
the year ended December 31, 2021 , as compared to 2020 due to the consolidation
and runout of services for EVH Passport, partially offset by new partner
additions. Revenue from our Clinical Solutions segment increased by $55.9
million for the year ended December 31, 2021 as compared to 2020 due to new
partner additions including Florida Blue Medicare, Inc. , as well as expansion
into new markets within current New Century Health 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 Year Ended December
December 31, 31,
2021 2020 2021 2020
Evolent Health Services 1,586 1,898 $ 17.25 $ 17.63
Clinical Solutions
Performance suite 1,502 1,602 32.33 28.55
New Century Health Technology and Services suite 16,894 6,286 0.39 0.43
We had 44 and 37 operating partners as of
Cost of Revenue
The following table provides a summary of our total cost of revenue by segment
for the year ended
For the Year Ended December 31,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 198,190 $ 216,004 $ 456,912 $ 474,803 $ 2,449 $ 5,774 $ 657,551 $ 696,581
Cost of revenue decreased by $39.0 million , or 5.6%, to $657.6 million for the
year ended December 31, 2021 , as compared to 2020. Cost of revenue decreased by
approximately $23.2 million due to lower personnel costs, $8.4 million due to
lower claims activity in our Clinical Solutions segment, $4.0 million in lower
professional fees and $4.1 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 year ended
December 31, 2021 includes approximately $(0.5) million associated with the
wind-down of EVH Passport, inclusive of a reduction in Passport's claims
reserve. Approximately $2.3 million and $1.8 million of total personnel costs
was attributable to stock-based compensation expense for the years ended
December 31, 2021 and 2020, respectively. Cost of revenue represented 72.4% and
75.3% of total services revenue for the years ended December 31, 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 decrease as a
percentage of total services revenue over the longer-term subject to the
composition of our growth.
54
--------------------------------------------------------------------------------Selling, General and Administrative Expenses
The following table provides a summary of our total selling, general and
administrative by segment for the year ended
For the Year Ended December 31,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 86,480 $ 81,778 $ 34,696 $ 24,033 $ 98,323 $ 104,601 $ 219,499 $ 210,412
Selling, general, and administrative expenses increased by $9.1 million , or
4.3%, to $219.5 million for the year ended December 31, 2021 , as compared to
2020. Professional fees increased by $14.8 million for the year ended December
31, 2021 , as compared to 2020, respectively, primarily due to the Repositioning
Plan and shareholder advisory services. During the year ended December 31, 2021 ,
personnel costs decreased by $1.3 million period over period due to a reduction
in employee headcount, other expenses decreased by $2.8 million due to the
termination of leases at EVH Passport during the third quarter of 2020 and legal
fees decreased $2.1 million due to the timing and volume of transactions.
Approximately $14.4 million and $12.8 million of total personnel costs were
attributable to stock-based compensation expense for the year ended December 31,
2021 and 2020, respectively. Acquisition and severance costs accounted for
approximately $4.4 million and $9.2 million of total selling, general and
administrative expenses for the year ended December 31, 2021 and 2020,
respectively. Selling, general and administrative expenses represented 24.2% and
22.8% of total revenue for the year ended December 31, 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$0.8 million , or 1.3%, to$60.0 million for the year endedDecember 31, 2021 , as compared to 2020. The decrease was due primarily to lower amortization on existing technology intangibles of$3.9 million , offset, in part by, an increase in amortization expense for internal-use software of$2.6 million and customer relationships of$0.6 million . 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.
Loss (Gain) 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 year endedDecember 31, 2020 , the Company sold its interest in the subsidiary and recorded a$6.4 million loss in loss (gain) 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. OnSeptember 1, 2020 , EVH Passport and Molina consummated the Molina Closing, and the Passport Medicaid Contract was novated to Molina. As a result, 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 and recorded a$5.7 million bargain purchase gain in gain (loss) on disposal of assets and consolidation in its consolidated financial statements. Goodwill Impairment During the year endedDecember 31, 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 II - Item 8. Financial Statements - Note 9" for further details of the impairment charge to goodwill. 55 --------------------------------------------------------------------------------
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$13.3 million and$3.9 million for the year endedDecember 31, 2021 and 2020, respectively. This variance is the result of changes in the fair values of contingent liabilities incurred from entering into the warrant agreements compared to the liabilities acquired as a result of the acquisition of Vital Decisions in 2021.
Comparison of the Results for the Year Ended
Revenue
Total revenue increased by
Transformation services revenue decreased by$3.2 million , or 21.1%, to$12.0 million for year endedDecember 31, 2020 , as compared to 2019, due primarily to the timing of implementation activities. Transformation services revenue accounted for 1.3% and 2.2% of our total revenue for the years endedDecember 31, 2020 and 2019, respectively. Platform and operations services revenue increased by$241.6 million , or 36.0%, to$912.6 million for the year endedDecember 31, 2020 , as compared to 2019 primarily as a result of membership growth with existing partners, cross-sell of new services to existing partners and new partner additions. Platform and operations services revenue accounted for 98.7% and 97.8% of our total revenue for years endedDecember 31, 2020 and 2019, respectively.
The following table represents Evolent's revenue disaggregated by segment and
end-market for the years ended
For the Year Ended December 31,
2020 2019 2020 2019
Evolent Health Services Clinical Solutions
Medicaid $ 236,634 267,222 $ 274,028 75,675
Medicare 68,505 73,671 257,092 199,817
Commercial and other 77,221 68,012 11,159 2,725
Total $ 382,360 408,905 $ 542,279 278,217
Revenue from our Evolent Health Services segment decreased by $26.5 million for
the year ended December 31, 2020 as compared to 2019 due to the disposal of
non-strategic assets offset by higher revenue from Passport. Revenue from our
Clinical Solutions segment increased by $264.1 million for the year ended
December 31, 2020 as compared to 2019 due to new partner additions including
Florida Blue Medicare, Inc. , as well as expansion into new markets within
current New Century Health Technology and Services Suite partners.
We had 37 and 39 operating partners as of
Cost of Revenue
The following table provides a summary of our total cost of revenue by segment
for the year ended
For the Year Ended December 31,
2020 2019 2020 2019 2020 2019 2020 2019
Evolent Health Services Clinical Solutions Corporate Total
Total 216,004 257,409 $ 474,803 $ 246,843 $ 5,774 $ 8,781 $ 696,581 $ 513,033
Cost of revenue increased by $183.5 , or 35.8%, to $696.6 million for the year
ended December 31, 2020 , as compared to the year ended December 31, 2019 . Cost
of revenue increased by approximately $187.1 million period over period as a
result of growth of our revenue generating services and additional payments
related to performance-based arrangements, an increase of $5.4 million in
professional fees due to the nature and timing of our projects, offset, in part
by a decrease of $8.1 million if personnel costs period
56
--------------------------------------------------------------------------------
over period. Cost of revenue for the year ended December 31, 2020 includes
approximately $(11.9) million associated with the wind-down of EVH Passport,
inclusive of a reduction in Passport's claims reserve. Approximately $1.8
million and $2.7 million of total personnel costs was attributable to
stock-based compensation expense for the years ended December 31, 2020 and 2019,
respectively. Cost of revenue represented 75.3% and 74.7% of total services
revenue for the years ended December 31, 2020 and 2019, respectively. Our cost
of revenue increased as a percentage of our total services revenue due to a
change in the mix of our service offerings towards lower gross margin services,
principally New Century Health , during 2020.
Selling, General and Administrative Expenses
The following table provides a summary of our total selling, general and
administrative by segment for the year ended
For the Year Ended December 31,
2020 2019 2020 2019 2020 2019 2020 2019
Evolent Health Services Clinical Solutions Corporate Total
Total $ 81,778 $ 127,608 $ 24,033 $ 17,178 $ 104,601 $ 91,662 $ 210,412 $ 236,448
Selling, general, and administrative expenses decreased by $26.0 million , or
11.0%, to $210.4 million for the year ended December 31, 2020 , as compared to
the year ended December 31, 2019 . During the year ended December 31, 2020 ,
personnel costs decreased by $33.7 million period over period due to a reduction
in employee headcount, offset, in part by an increase of $6.1 million in legal
and professional fees due to the timing of our projects and an increase of $3.0
million in leasing costs due primarily to our consolidation of Passport.
Approximately $12.8 million and $12.9 million of total personnel costs were
attributable to stock-based compensation expense for the years ended December
31, 2020 and 2019, respectively. Ceded expenses under the reinsurance agreement
were $14.0 million for the year ended December 31, 2019 . Acquisition and
severance costs accounted for approximately $9.2 million and $27.9 million of
total selling, general and administrative expenses for the years ended December
31, 2020 and 2019, respectively. Selling, general and administrative expenses
represented 22.8% and 34.4% of total revenue for the year ended December 31,
2020 , as compared to 2019, respectively.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased$0.5 million , or 0.8%, to$60.8 million for the year endedDecember 31, 2020 , as compared to 2019. The increase was due primarily to higher amortization expense for internal-use software of$5.6 million , offset in part by lower amortization on existing technology intangibles of$4.3 million as a result of the change in assets acquired through business combinations and asset acquisitions during 2019.
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.
In
Loss (Gain) 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 year endedDecember 31, 2020 , the Company sold its interest in the subsidiary and recorded a$6.4 million loss in loss (gain) 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. OnSeptember 1, 2020 , EVH Passport and Molina consummated the Molina Closing, and the Passport Medicaid Contract was novated to Molina. As a result, 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 and recorded a$5.7 million bargain purchase gain in gain (loss) on disposal of assets and consolidation in its consolidated financial statements. 57 -------------------------------------------------------------------------------- OnMay 24, 2019 , the Company entered into a joint venture arrangement in respect of GlobalHealth. The Company determined that it had significant influence over the entity, but that it did not have control over the entity. Accordingly, the investment was accounted for under the equity method of accounting and the Company was allocated its proportional share of the entity's earnings and losses for each reporting period. During the year endedDecember 31, 2019 , we recorded a non-cash gain on disposal of assets of$9.6 million upon the consummation of the GlobalHealth transaction.
Goodwill Impairment
During the year endedDecember 31, 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 three reporting units in the Services segment was less than the carrying amount. During the year endedDecember 31, 2019 , we recorded a non-cash impairment charge of$199.8 million in the same reporting unit. Both of these charges related to the value of our investment in EVH Passport. See "Part II - Item 8. Financial Statements - Note 9" for further details of the impairment charge to goodwill.
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$3.9 million and$(4.0) million for the yearsDecember 31, 2020 as compared to 2019, 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 and 2019. See "Part II - Item 8. Financial Statements - Note 19" in this Form 10-K for the information related to the fair value of our warrant agreements.
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$0.4 million ,$2.6 million and$3.4 million for the years endedDecember 31, 2021 , 2020 and 2019, 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$25.4 million ,$28.3 million and$14.6 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The decrease in interest expense during the year endedDecember 31, 2021 compared to 2020 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 . The increase in interest expense during the year endedDecember 31, 2020 compared to 2019 is driven primarily by the commencement of the Ares Credit Agreement inDecember 2019 . See "Part II - Item 8. Financial Statements - Note 10" in this Form 10-K for the information related to interest expense.
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 year endedDecember 31, 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 (loss) from its equity method investments was approximately$13.2 million ,$10.0 million and$(9.5) million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The change in gain from equity method investees for the year endedDecember 31, 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. The change in gain (loss) from equity method investees for the 58 --------------------------------------------------------------------------------
year ended
Gain from Transfer of Membership
During the year endedDecember 31, 2021 , EVH Passport earned a cash payment from Molina in the amount of$46.0 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. 50% of the payment was received during the year endedDecember 31, 2021 , and the remaining 50% was received in the first quarter of 2022. 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. As a result of this transaction, the Company recorded loss on the repayment of debt of$19.2 million , representing the remaining unamortized debt issuance costs of$9.5 million , the make-whole premium and legal expenses. Upon maturity of the 2021 Notes onDecember 1, 2021 , outstanding 2021 Notes with a principal amount of$26.7 million were settled, at the option of the holders, by converting$26.3 million aggregate principal amount of 2021 Notes to common shares and cash repayment of$0.4 million aggregate principal amount of 2021 Notes. Shares issued were valued based on the quoted trading prices on the conversion date for a total fair value of$28.5 million resulting in a loss on debt extinguishment of$2.2 million which was recorded in loss on repayment of debt on our consolidated statements of operations and comprehensive income (loss).
Provision (Benefit) for Income Taxes
The Company recorded$0.5 million ,$(2.4) million and$(22.8) million in income tax expense (benefit) the years endedDecember 31, 2021 , 2020 and 2019, respectively, which resulted in effective tax rates of (1.6)%, 0.7% and 6.9%, 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 ofDecember 31, 2021 , the Company determined thatTrue Health met the held for sale criteria under ASC 205, and as such,True Health assets and liabilities as ofDecember 31, 2020 , and the results of operations for all periods presented are classified as discontinued operations and are not included in continuing operations in the consolidated financial statements. The True Health Closing occurred onMarch 31, 2021 . During the year endedDecember 31, 2021 , the Company recorded purchase prices adjustments of$8.7 million which are included in loss from discontinued operations on the consolidated statements of operations and comprehensive income (loss). 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 years endedDecember 31, 2021 , 2020 and 2019.
For the Year Ended
2021 2020 2019
Revenue
Platform and operations $ 38 $ 356 $ 145
Premiums 44,795 117,377 171,742
Total revenue 44,833 117,733 171,887
ExpensesCost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)
5,885 18,343 6,633
Claims expenses 33,954 87,951 135,774
Selling, general and administrative expenses (2) 5,764 18,576 26,617
59
--------------------------------------------------------------------------------
Depreciation and amortization expenses 160 640 590
Total operating expenses 45,763 125,510 169,614
Operating income (loss) (930) (7,777) 2,273
Interest income 112 531 581
Interest expense (4) (12) 21
Other loss (25) (1) (3)Income (loss) before income taxes and non-controlling interests (847)
(7,259) 2,872
Benefit (provision) for income taxes (326) (1,185) 1,259
Net income (loss) $ (521) $ (6,074) $ 1,613
--------
(1)Cost of revenue includes intercompany expenses between the Company and True
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
$2.8 million , $13.6 million and $6.6 million for the years ended December 31,
2021 , 2020 and 2019, respectively.
(2)Selling, general and administrative expenses include intercompany expenses
between the Company and True 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 $1.1 million , $6.4 million and $6.0 million for the years ended
December 31 2021, 2020 and 2019, respectively.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Liquidity and Capital Resources
Since its inception, the Company has incurred operating losses and net cash
outflows from operations. The Company incurred operating losses of
As of
We believe our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies.
Cash Flows
The following summary of cash flows for the years endedDecember 31, 2021 , 2020 and 2019 (in thousands) has been derived from our financial statements included in "Part II - Item 8. Financial Statements - Consolidated Statements of Cash Flows:" For the Year Ended December 31, 2021 2020 2019 Net cash and restricted cash provided by (used in) operating activities$ 38,747 $ (16,225) $ (42,645) Net cash and restricted cash (used in) provided by investing activities (15,786) 261,072 (181,634) Net cash and restricted cash used in financing activities (29,548) (11,862) (35,545) Operating Activities Cash flows from operating activities of$38.7 million for the year endedDecember 31, 2021 were primarily due to our net loss of$37.6 million , a loss on the repayment and termination of our Credit Agreement and 2021 Notes of$21.3 million , a gain on the disposal of assets of$6.8 million , gain on the transfer of memberships of$45.9 million , and non-cash items including depreciation and amortization expenses of$60.0 million , stock-based compensation expense of$16.7 million and change in fair value of contingent consideration and indemnification asset of$13.3 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 reserves for claims and performance-based arrangements contributed and accrued liabilities approximately$28.9 million to our cash outflows. Those cash outflows were offset, in part by higher accounts payable and accrued compensation and employee benefits of approximately$10.8 million . 60 -------------------------------------------------------------------------------- Cash flows used in operating activities of$16.2 million in the year endedDecember 31, 2020 were due primarily to our net loss of$334.2 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$61.5 million , stock-based compensation expense of$14.6 million and a loss on the disposal of assets and consolidation of$0.7 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 decreases in claims reserves contributed approximately$94.5 million to our cash outflows. Those cash outflows were partially offset by an increase in accounts payable, accrued expenses and accrued compensation and employee benefits contributed approximately$23.5 million . Cash flows used in operating activities of$42.6 million in the year endedDecember 31, 2019 were due primarily to our net loss of$305.6 million , partially offset by non-cash items, including goodwill impairment of$199.8 million , depreciation and amortization expenses of$60.9 million , stock-based compensation expense of$15.6 million and a decrease in deferred tax liability of$23.1 million . Our operating cash outflows were affected by the timing of our customer and vendor payments. An increase in contract cost assets combined with accounts payable and accrued liabilities contributed approximately$50.4 million to our cash outflows. Those cash outflows were partially offset by decreases in accounts receivable combined with increases in accrued compensation and employee benefits and claims reserves of approximately$49.1 million .
Investing Activities
Cash flows used in investing activities of$15.8 million in the year endedDecember 31, 2021 were primarily attributable to cash flows of$46.5 million for the acquisition of Vital Decisions and$25.0 million of investments in internal-use software and purchases of property and equipment offset, in part by,$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 . Cash flows from investing activities of$261.1 million in the year endedDecember 31, 2020 were primarily attributable to cash flows from the impact of the initial consolidation of EVH Passport of$159.8 million , maturities and sales of investments primarily held by EVH Passport of$143.4 million , offset, in part by investments in internal-use software and purchases of property and equipment of$29.5 million , disposal of non-strategic assets of$2.3 million and purchases of investments of$11.2 million .
Cash flows used in investing activities of
Financing Activities
Cash flows used in financing activities of$29.5 million in the year endedDecember 31, 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$61.2 million increase in net working capital balances held on behalf of our partners for claims processing services and a$13.3 million increase from cash proceeds from stock option exercises. Cash flows used in financing activities of$11.9 million in the year endedDecember 31, 2020 were primarily related to a$20.0 million redemption of the Sponsors equity in EVH Passport in accordance with the terms of EVH Passport's Stockholders' Agreement as part of the EVH Passport wind-down and repurchase of our 2021 Notes of$16.6 million ,$1.9 million of taxes withheld and paid for vests of restricted stock units and a$6.0 million decrease in working capital balances held on behalf of our partners for claims processing services offset, in part by$30.1 million from proceeds of convertible debt. The change in working capital balances held on behalf of partners for claims processing are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed. Cash flows used in financing activities of$35.5 million in the year endedDecember 31, 2019 were primarily related to a$104.3 million increase in working capital balances held on behalf of our partners for claims processing as well as$2.6 million of taxes withheld and paid for vests of restricted stock units, offset, in part by net proceeds of$62.6 million from borrowings under the credit agreement.
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 during the year endedDecember 31, 2021 , 2020 and 2019 were as follows: 61 -------------------------------------------------------------------------------- For
the Year Ended
2021 2020 2019
Cash flows provided by (used in) operating activities
$ 6,852 $ (6,642) Cash flows (used in) provided by investing activities (2,494) 2,636 (7,172) Cash flows used in financing activities - - (2,500) Contractual Obligations We believe that the amount of cash and cash equivalents on hand and cash flows from operations will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures working capital and debt service for 2022. Our estimated contractual obligations (in thousands) as ofDecember 31, 2021 , were as follows: 2022 2023-2024 2025-2026 2027+ Total Operating leases for facilities (1)$ 10,950 $ 18,221 $ 17,493 $ 40,225 $ 86,889 Purchase obligations related to vendor contracts 6,466 3,554 - - 10,020
Debt interest and termination payments 6,684 13,376 2,588
- 22,648
Debt principal repayment - 117,051 172,500 - 289,551
Total contractual obligations
--------
(1)Operating leases for facilities includes
During the year endedDecember 31, 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 and the conversion and repayment of our 2021 Notes. Refer to the discussion in "Part II - Item 8. 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 year endedDecember 31, 2021 , accounts receivable, net, increased due to the impact of new customers of$71.3 million , offset, in part, by the timing of cash receipts from existing customers.
Restricted Cash and Restricted Investments
Restricted cash and restricted investments of$88.7 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of$73.2 million , collateral for letters of credit required as security deposits for facility leases of$3.8 million , amounts held with financial institutions for risk-sharing arrangements of$11.7 million as ofDecember 31, 2021 . See "Part II - Item 8. Financial Statements - Note 2" for further details of the Company's restricted cash balances.
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. Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. The gross carrying value increases of$77.3 million in goodwill and$44.3 million in intangibles is driven primarily by theOctober 2021 acquisition of Vital Decisions. See "Part II - Item 8. Financial Statements - Note 9" for further details of the Company's restricted cash balances.
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.
62--------------------------------------------------------------------------------
© Edgar Online, source
