Goodwill and Intangible Assets, Net

Goodwill

Goodwill has an estimated indefinite life and is not amortized; rather it is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

The Company has three reporting units: Legacy Services, New Century Health and True Health. Our annual goodwill impairment review occurs during the fourth quarter of each fiscal year. In interim periods between annual goodwill reviews, we also evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in strategy, partners, or litigation.

A description of our goodwill impairment tests during 2018 and 2017 follows below.

2018 Goodwill Impairment Test

On October 31, 2018, the Company performed its annual goodwill impairment review for fiscal year 2018. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of any of our reporting units was below their respective carrying values. As a result, a quantitative goodwill impairment analysis was not required.

2017 Goodwill Impairment Tests

On October 31, 2017, the Company performed its annual goodwill impairment review for fiscal year 2017. 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.

Following the date of our 2017 annual goodwill review, the price of our Class A common stock declined significantly. The average closing price per share of our Class A common stock for the month of November was approximately $12.01, a 42.4% decrease compared to the average closing price for the period from January to October 2017. A sustained decline in the price of our Class A common stock and the resulting impact on our market capitalization is one of several qualitative factors we consider each quarter when evaluating whether events or changes in circumstances indicate it is more likely than not that a potential goodwill impairment exists. We concluded that the decline in the price of our Class A common stock in November 2017 did represent a sustained decline and therefore was an indicator that our goodwill might be impaired. The Company proceeded to perform a quantitative goodwill impairment test as of December 14, 2017.

Quantitative Assessment Results

To determine the implied fair value for our single reporting unit, we used both a market multiple valuation approach (“market approach”) and a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the market approach, we considered the level of our Class A common stock price and assumptions that we believe market participants would make in valuing our reporting unit, including the application of a control premium. In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, the timing of exchanges of our Class B common units, the impact of updated tax legislation, capital market assumptions and other subjective inputs. If the fair value of the reporting unit derived using one approach is significantly different from the fair value estimate using the other approach, the Company re-evaluates its assumptions used in the two models. The fair values determined by the market approach and income approach, as described above, are weighted to determine the concluded fair value for the reporting unit. For purposes of this analysis, the Company weighted the results 70% towards the market approach and 30% towards the income approach, to give greater prominence to the Level 1 inputs used in the market approach.

In our December 14, 2017, quantitative assessment, our most sensitive assumption for purposes of the market approach was our estimate of the control premium, and the most sensitive assumption related to the income approach, other than the projected cash flows, was the discount rate. A significant decrease in the control premium or a significant increase in the discount rate in isolation would result in a significantly lower fair value. The concluded fair value under the market approach exceeded carrying value by approximately $140.4 million, or 13.4%. Decreasing the selected control premium of 27.5% by 300 basis points (approximately 10%) would result in the concluded fair value exceeding the carrying value by approximately $112.3 million, or 10.7%. The concluded fair value under the income approach exceeded carrying value by approximately $233.2 million, or 22.2%. Increasing the selected discount rate of 13.0% by 50 basis points (approximately 5%) would result in the concluded fair value exceeding the carrying value by approximately $164.5 million, or 15.7%.

As fair value was greater than carrying value under both the market and income approaches, goodwill was not impaired as of December 14, 2017.

As of December 31, 2017, Evolent assessed whether there were events or changes in circumstances that would more likely than not reduce the fair value of its goodwill below its carrying amount and require an additional impairment test. The Company determined there had been no such indicators. Therefore, it was unnecessary to perform an additional goodwill impairment assessment as of December 31, 2017.

The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented (in thousands):



	Services			True Health			Consolidated
Balance as of December 31, 2016	$	626,569		$	—		$	626,569		⁽¹⁾
Measurement period adjustments ⁽²⁾	1,617			—			1,617
Balance as of December 31, 2017	628,186			—			628,186
Goodwill Acquired ⁽³⁾	134,343			5,826			140,169
Measurement period adjustments ⁽²⁾	4			(121		)	(117		)
Foreign currency translation ⁽⁴⁾	(114		)	—			(114		)
Balance as of December 31, 2018	$	762,419		$	5,705		$	768,124

⁽¹⁾ Beginning goodwill balance is net of cumulative inception to date impairment of $160.6 million.

⁽²⁾ Measurement period adjustments related to transactions completed during 2017 and the first quarter of 2018.

⁽³⁾ Goodwill acquired primarily as a result of the New Century Health and True Health transactions, as discussed in Note 4.

⁽⁴⁾ Foreign currency translation related to a transaction completed during the first quarter of 2018.

Intangible Assets, Net

Details of our intangible assets (in thousands), including their weighted-average remaining useful lives (in years), are presented below:



	As of December 31, 2018
	Weighted-
	Average	Gross					Net
	Remaining	Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Value
Corporate trade name ⁽¹⁾	15.2	$	23,300		$	3,511	$	19,789
Customer relationships ⁽²⁾	18.1	281,219			29,184		252,035
Technology ⁽³⁾	3.0	82,922			31,764		51,158
Below market lease, net	4.0	4,097			3,003		1,094
Provider network contracts ⁽⁴⁾	4.6	11,900			940		10,960
Total		$	403,438		$	68,402	$	335,036

⁽¹⁾ The increase in the gross carrying amount of the corporate trade name is attributable to a $4.3 million trade name acquired as part of the New Century Health transaction. See Note 4 for further information about the New Century Health transaction.

⁽²⁾The increase in the gross carrying amount of the customer relationships intangible is attributable to $72.5 million acquired customer relationships from the New Century Health transaction, $2.7 million of acquired customer relationships from the NMHC transaction and $2.5 million related the Vestica transaction. The Company acquired certain assets from Vestica in March 2016. The transaction included additional consideration of up to $4.0 million, which was being held in escrow and was recorded within “Prepaid expenses and other noncurrent assets” on our Consolidated Balance Sheets. In February 2018, the Company and Vestica reached an agreement to settle $3.5 million of the $4.0 million in escrow. Based on the terms of the settlement agreement, the Company reclassified the unamortized portion of the additional consideration from “Prepaid expenses and other noncurrent assets” into “Customer relationships” as of the settlement date. See Note 4 for further information about the New Century Health, NMHC and Vestica transactions.

⁽³⁾The increase in the gross carrying amount of the technology is attributable to $27.0 million of technology assets acquired as part of the New Century Health transaction. See Note 4 for further information about the New Century Health transaction.

⁽⁴⁾The increase in the gross carrying amount of the provider network contracts is attributable to a $9.6 million provider network acquired as part of the New Century Health transaction and a $2.3 million provider network acquired as part of the NMHC transaction. See Note 4 for further information about the New Century Health and NMHC transactions.



	As of December 31, 2017
	Weighted-
	Average	Gross					Net
	Remaining	Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Value
Corporate trade name	17.4	$	19,000		$	2,454	$	16,546
Customer relationships	20.5	203,500			18,312		185,188
Technology	3.1	55,802			17,810		37,992
Below market lease, net	4.8	4,197			2,662		1,535
Total		$	282,499		$	41,238	$	241,261

Amortization expense related to intangible assets for the years ended December 31, 2018, 2017 and 2016, was $27.2 million, $22.8 million and $12.5 million, respectively.

Future estimated amortization of intangible assets (in thousands) as of December 31, 2018, is as follows:



2019	$	36,498
2020	32,312
2021	28,143
2022	24,262
2023	21,498
Thereafter	192,323
Total	$	335,036

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. As discussed above, we identified a triggering event and performed a quantitative analysis over the carrying value of our goodwill balance during the fourth quarter of 2017. Identification of the triggering event also triggered an impairment analysis of the carrying value of our intangible asset group. In conjunction with the impairment testing of the carrying value of our goodwill, we performed an analysis to determine whether the carrying amount of our intangible asset group was recoverable. We performed a quantitative analysis, which required management to compare the total pre-tax, undiscounted future cash flows of the intangible asset group to the current carrying amount. The total undiscounted cash flows included only the future cash flows that are directly associated with and that were expected to arise as a result of the use and eventual disposal of the asset group. Based on our quantitative analysis, we determined that the pre-tax, undiscounted cash flows exceeded the carrying value and therefore concluded that our intangible assets were recoverable.