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Fair Value Measurement (Tables)

12 Months Ended

Dec. 31, 2019

Summary of assets at fair value on recurring basis

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):



	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents ⁽¹⁾	$	3,698	—		—		$	3,698
Restricted cash and restricted investments ⁽¹⁾	1,004		—		—		1,004
Total fair value of assets measured on a recurring basis	$	4,702	$	—	$	—	$	4,702

Liabilities
Contingent consideration ⁽²⁾	$	—	$	—	$	9,883	$	9,883
Warrants ⁽³⁾	—		—		7,092		7,092
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	16,975	$	16,975



	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents ⁽¹⁾	$	11,391	$	—	$	—	$	11,391
Restricted cash and restricted investments ⁽¹⁾	31,226		—		—		31,226
Total fair value of assets measured on a recurring basis	$	42,617	$	—	$	—	$	42,617

Liabilities
Contingent consideration ⁽²⁾	$	—	$	—	$	8,800	$	8,800

⁽¹⁾ Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of December 31, 2019 and 2018, as presented in the tables above.

⁽²⁾ Represents the fair value of earn-out consideration related to the Passport, Global Health and other transactions, as described in Note 4. As of December 31, 2019, $3.7 million is attributable to Passport, $5.2 million to Global Health and $1.0 million is attributable to other transactions. As of December 31, 2018, $5.6 million is attributable to Passport and $3.2 million is attributable to New Century Health.

⁽³⁾Represents the fair value of 1,513,786 shares issuable under the warrant agreements discussed in Note 8.

Summary of liabilities at fair value on recurring basis

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):



	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents ⁽¹⁾	$	3,698	—		—		$	3,698
Restricted cash and restricted investments ⁽¹⁾	1,004		—		—		1,004
Total fair value of assets measured on a recurring basis	$	4,702	$	—	$	—	$	4,702

Liabilities
Contingent consideration ⁽²⁾	$	—	$	—	$	9,883	$	9,883
Warrants ⁽³⁾	—		—		7,092		7,092
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	16,975	$	16,975



	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents ⁽¹⁾	$	11,391	$	—	$	—	$	11,391
Restricted cash and restricted investments ⁽¹⁾	31,226		—		—		31,226
Total fair value of assets measured on a recurring basis	$	42,617	$	—	$	—	$	42,617

Liabilities
Contingent consideration ⁽²⁾	$	—	$	—	$	8,800	$	8,800

⁽³⁾Represents the fair value of 1,513,786 shares issuable under the warrant agreements discussed in Note 8.

Changes in contingent consideration measured at fair value

The changes in our contingent consideration, measured at fair value, for which the Company uses Level 3 inputs to determine fair value are as follows (in thousands):



	For the Years Ended December 31,
	2019			2018
Balance as of beginning of year	$	8,800		$	8,700
Additions ⁽¹⁾	12,992			3,200
Settlements	(800		)	—
Realized and unrealized gains, net	(4,017		)	(3,100		)
Balance as of end of year	$	16,975		$	8,800

⁽¹⁾ Addition is related to the GlobalHealth and credit agreement transactions.

Valuation techniques and significant unobservable inputs of Level 3 fair value measurements

The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3 fair value measurements as of the periods presented:



	As of December 31, 2019
	Fair		Valuation	Significant	Assumption or
	Value		Technique	Unobservable Inputs	Input Ranges
Passport contingent consideration	$	3,700	Real options approach	Risk-adjusted recurring revenue CAGR	93.9		%	⁽¹⁾
				Discount rate/time value	4.8% - 5.3%

GlobalHealth contingent consideration	$	5,200	Monte Carlo simulation	Stock price volatility	80.0		%	⁽²⁾

Other contingent considerations	$	983	Management estimate	Adjusted EBITDA	$	19,235

Warrants	$	7,092	Black-Scholes	Stock price volatility	55.0		%
				Annual risk free rate	1.7		%



	As of December 31, 2018
	Fair		Valuation	Significant	Assumption or
	Value		Technique	Unobservable Inputs	Input Ranges
Passport contingent consideration	$	5,600	Real options approach	Risk-adjusted recurring revenue CAGR	103.9	%	⁽¹⁾
				Discount rate	5.5% - 6.5%

New Century Health contingent consideration	$	3,200	Real options approach	Risk-neutral probability exceeds threshold	39.0	%	⁽³⁾
				Risk-neutral probability meets earn-out cap	24.0	%	⁽³⁾


⁽¹⁾	The risk-adjusted recurring revenue CAGR is calculated over the five-year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenue of $1.0 million, resulting in a higher growth rate.


⁽²⁾	Equity volatility based on Evolent’s daily stock price returns for a look-back period corresponding to the time until the Second Test Date. The large one-day stock price drop on November 27, 2019, was excluded from the volatility calculation. The contingent liability expires on June 30, 2020.

⁽³⁾

These amounts represent 1) the probability that New Century Health will achieve at least the minimum level of operating results in 2019 to earn any contingent consideration (39.0%) and 2) the probability that New Century Health will achieve 2019 operating results in excess of the maximum amount of contingent consideration payable (24.0%). The risk-neutral probability rates were determined by projecting theoretical 2019 operating results using a simulation with one-million trials.