
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37415

_________________________

Evolent Health, Inc.

(Exact name of registrant as specified in its charter)

_________________________

Delaware

32-0454912

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

800 N. Glebe Road

Suite 500

Arlington

Virginia

22203

(Address of principal executive offices)

(Zip Code)

(571) 389-6000

Registrant’s telephone number, including area code

_________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock of Evolent Health, Inc., par value $0.01 per share	EVH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer S Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S

As of ~~November 1, 2021,~~July 29, 2022, there were ~~89,410,507~~91,669,520 shares of the registrant’s Class A common stock outstanding.

Evolent Health, Inc.

Table of Contents


Item	Item		Page	Item		Page
		PART I			PART I
1.	1.	Financial Statements (Unaudited)	1	1.	Financial Statements (Unaudited)	1
2.	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
3.	3.	Quantitative and Qualitative Disclosures About Market Risk	59	3.	Quantitative and Qualitative Disclosures About Market Risk	51
4.	4.	Controls and Procedures	60	4.	Controls and Procedures	52

		PART II			PART II
1	1	Legal Proceedings	61	1	Legal Proceedings	53
1A.	1A.	Risk Factors	61	1A.	Risk Factors	53
2.	2.	Unregistered Sales of Equity Securities and Use of Proceeds	62	2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
3.	3.	Defaults Upon Senior Securities	62	3.	Defaults Upon Senior Securities	54
4.	4.	Mine Safety Disclosures	62	4.	Mine Safety Disclosures	54
5.	5.	Other Information	62	5.	Other Information	54
6.	6.	Exhibits	63	6.	Exhibits	55

		Signatures	64		Signatures	56

Explanatory Note

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, “Evolent,” the “Company,” “we,” “our” and “us” refer to Evolent Health, Inc. and its consolidated subsidiaries. Evolent Health LLC, a subsidiary of Evolent Health, Inc. through which we conduct our operations, has owned all of our operating assets and substantially all of our business since inception. Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units of Evolent Health LLC.

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE

Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe,” “anticipate,” “expect,” “estimate,” “aim,” “predict,” “potential,” “continue,” “plan,” “project,” “will,” “should,” “shall,” “may,” “might” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to our ability to grow our impact significantly throughout this year and beyond, future actions, trends in our businesses, prospective services, new partner additions/expansions, our guidance and business outlook and future performance or financial results, and the closing of pending transactions and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

These statements are only predictions based on our current expectations and projections about future events. Forward-looking statements involve risks and uncertainties that may cause actual results, level of activity, performance or achievements to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others:

•the significant portion of revenue we derive from our largest partners, and the potential loss, non-renewal, termination or renegotiation of our relationship or contract with any significant partner, or multiple partners in the aggregate;

•evolution in the market for value-based care;

•uncertainty in the health care regulatory framework, including the potential impact of policy changes;

•our ability to offer new and innovative products and services;

•risks related to completed and future acquisitions, investments, alliances and joint ventures, including ~~the~~our acquisition of ~~Vital Decisions~~the Implantable Provider Group, Inc., which ~~may be difficult to integrate,~~could divert management resources, or result in unanticipated costs or dilute our stockholders;

•the financial benefits we expect to receive as a result of the sale of certain assets of Passport may not be realized;

•the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control, including governmental funding reductions and other policy changes, enrollment numbers for our partners’ plans, premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce health care costs;

•risks relating to our ability to maintain profitability for our total cost of care and New Century Health’s performance-based contracts and products, including capitation and risk-bearing contracts;

•our ability to effectively manage our growth and maintain an efficient cost structure, and to successfully implement cost cutting measures;

•changes in general economic conditions nationally and regionally in our markets, including inflation and economic and business conditions and the ~~potential negative~~ impact ofthereof on the economy resulting from the COVID-19 pandemic and other public health emergencies;

•our ability to recover the significant upfront costs in our partner relationships;

•our ability to attract new partners and successfully capture new growth opportunities;

•the increasing number of risk-sharing arrangements we enter into with our partners;

•our ability to estimate the size of our target markets;

•our ability to maintain and enhance our reputation and brand recognition;

•consolidation in the health care industry;

•competition which could limit our ability to maintain or expand market share within our industry;

•risks related to governmental payer audits and actions, including whistleblower claims;

•our ability to partner with providers due to exclusivity provisions in our contracts;

•risks related to our offshore operations;

•our ability to contain health care costs, implement increases in premium rates on a timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider agreements;

•our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;

•the impact of additional goodwill and intangible asset impairments on our results of operations;

•our indebtedness, our ability to service our indebtedness, and our ability to obtain additional financing;

•our ability to achieve profitability in the future;

•the impact of litigation, including the ongoing class action lawsuit;

•material weaknesses in the future may impact our ability to conclude that our internal control over financial reporting is not effective and we may be unable to produce timely and accurate financial statements;

•restrictions and penalties as a result of privacy and data protection laws;

•data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;

•restrictions and penalties as a result of privacy and data protection laws;

•adequate protection of our intellectual property, including trademarks;

•any alleged infringement, misappropriation or violation of third-party proprietary rights;

•our use of “open source” software;

•our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;

•our reliance on third parties and licensed technologies;

•our ability to use, disclose, de-identify or license data and to integrate third-party technologies;

•our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our partners;

•our reliance on third-party vendors to host and maintain our technology platform;

•our obligations to make payments to certain of our pre-IPO investors for certain tax benefits we may claim in the future;

•our ability to utilize benefits under the tax receivables agreement described herein;

•our obligations to make payments under the tax receivables agreement that may be accelerated or may exceed the tax benefits we realize;

•the terms of agreements between us and certain of our pre-IPO investors;

•the conditional conversion features of the 2024 and 2025 convertible notes, which, if triggered, could require us to settle the 2024 or 2025 convertible notes in cash;

•the ~~impact of the accounting method for convertible debt securities that may be settled in cash;~~

•~~the~~ potential volatility of our Class A common stock price;

•~~the potential impact of our securities class action litigation;~~

•the potential decline of our Class A common stock price if a substantial number of shares are sold or become available for sale;

•provisions in our second amended and restated certificate of incorporation and third amended and restated by-laws and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;

•the ability of certain of our investors to compete with us without restrictions;

•provisions in our second amended and restated certificate of incorporation which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees; and

•our intention not to pay cash dividends on our Class A common stock.

The risks included here are not exhaustive. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~"2020~~"2021 Form 10-K")~~, subsequent Quarterly Reports on Form 10-Q~~ and other documents filed with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	252,496	$	319,002	Cash and cash equivalents	$	193,070	$	266,280
Restricted cash and restricted investments	Restricted cash and restricted investments	16,509		14,374		Restricted cash and restricted investments	74,377		75,685
Accounts receivable, net (1)	Accounts receivable, net (1)	175,226		124,064		Accounts receivable, net (1)	118,525		130,604
Prepaid expenses and other current assets (1)	Prepaid expenses and other current assets (1)	33,965		56,295		Prepaid expenses and other current assets (1)	37,173		51,391
Current assets of discontinued operations		—		33,914
Total current assets	Total current assets	478,196		547,649		Total current assets	423,145		523,960
Restricted cash and restricted investments	Restricted cash and restricted investments	12,750		6,654		Restricted cash and restricted investments	12,986		12,977
Investments in and advances to equity method investees		5,004		6,498
Investments in equity method investees						Investments in equity method investees	3,831		5,458
Property and equipment, net	Property and equipment, net	81,574		86,240		Property and equipment, net	92,627		81,365
Right-of-use assets - operating	Right-of-use assets - operating	50,118		57,799		Right-of-use assets - operating	50,873		50,203
Prepaid expenses and other noncurrent assets (1)	Prepaid expenses and other noncurrent assets (1)	6,606		5,773		Prepaid expenses and other noncurrent assets (1)	6,655		6,790
Contract cost assets	Contract cost assets	25,198		26,687		Contract cost assets	22,721		32,624
Intangible assets, net	Intangible assets, net	245,069		264,992		Intangible assets, net	264,846		279,784
Goodwill	Goodwill	349,010		349,029		Goodwill	426,228		426,297
Non-current assets of discontinued operations		—		20,379
Total assets	Total assets	$	1,253,525	$	1,371,700	Total assets	$	1,303,912	$	1,419,458
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities	Liabilities					Liabilities
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable (1)	Accounts payable (1)	$	37,785	$	31,975	Accounts payable (1)	$	96,565	$	96,084
Accrued liabilities (1)	Accrued liabilities (1)	55,774		73,242		Accrued liabilities (1)	75,846		107,241
Short-term debt, net of discount		26,704		26,557
Operating lease liability - current	Operating lease liability - current	6,730		7,357		Operating lease liability - current	6,389		7,069
Accrued compensation and employee benefits	Accrued compensation and employee benefits	34,542		47,163		Accrued compensation and employee benefits	29,371		51,861
Deferred revenue	Deferred revenue	13,785		10,187		Deferred revenue	8,711		11,944
Reserve for claims and performance - based arrangements (1)	Reserve for claims and performance - based arrangements (1)	191,878		178,827		Reserve for claims and performance - based arrangements (1)	125,960		171,294
Current liabilities of discontinued operations		—		27,986
Total current liabilities	Total current liabilities	367,198		403,294		Total current liabilities	342,842		445,493
Long-term debt, net of discount		211,063		263,343
Long-term debt, net						Long-term debt, net	283,138		215,676
Other long-term liabilities	Other long-term liabilities	9,474		22,081		Other long-term liabilities	4,619		5,531
Operating lease liabilities - noncurrent	Operating lease liabilities - noncurrent	57,283		62,526		Operating lease liabilities - noncurrent	58,581		57,722
Deferred tax liabilities, net	Deferred tax liabilities, net	1,023		679		Deferred tax liabilities, net	1,644		1,403
Non-current liabilities from discontinued operations		—		177
Total liabilities	Total liabilities	646,041		752,100		Total liabilities	690,824		725,825
Commitments and Contingencies (See Note 11)	Commitments and Contingencies (See Note 11)	0		0		Commitments and Contingencies (See Note 11)	0		0
Shareholders' Equity	Shareholders' Equity					Shareholders' Equity
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 87,456,228 and 85,894,450 shares issued, respectively		874		859
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 91,657,480 and 90,758,318 shares issued, respectively						Class A common stock - $0.01 par value; 750,000,000 shares authorized; 91,657,480 and 90,758,318 shares issued, respectively	916		908
Additional paid-in-capital	Additional paid-in-capital	1,249,228		1,229,320		Additional paid-in-capital	1,231,005		1,340,989
Accumulated other comprehensive income (loss)		(363)		(278)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(782)		(362)
Retained earnings (accumulated deficit)	Retained earnings (accumulated deficit)	(621,132)		(589,178)		Retained earnings (accumulated deficit)	(596,928)		(626,779)
Treasury stock, at cost; 1,537,582 shares issued, respectively	Treasury stock, at cost; 1,537,582 shares issued, respectively	(21,123)		(21,123)		Treasury stock, at cost; 1,537,582 shares issued, respectively	(21,123)		(21,123)
Total shareholders' equity	Total shareholders' equity	607,484		619,600		Total shareholders' equity	613,088		693,633
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,253,525	$	1,371,700	Total liabilities and shareholders' equity	$	1,303,912	$	1,419,458

(1) See Note 1918 for amounts attributable to ~~unconsolidated~~ related parties included in these line items.

See accompanying Notes to Consolidated Financial Statements.

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands, except per share data)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Revenue
Transformation services (1)
$ 2,075 $ 4,807 $ 4,984 $ 10,800
Platform and operations services (1)
220,396 234,765 654,615 667,303
Total revenue 222,471 239,572 659,599 678,103
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)
163,126 181,761 493,071 521,748
Selling, general and administrative expenses (1)
51,292 52,366 152,582 151,749
Depreciation and amortization expenses 14,859 14,534 44,962 46,130
Loss on disposal of assets — — — 6,447
Loss on extinguishment of debt, net — 4,789 — 4,789
Goodwill impairment — — — 215,100
Change in fair value of contingent consideration and indemnification asset (225) 2,570 (819) (492)
Total operating expenses 229,052 256,020 689,796 945,471
Operating loss (6,581) (16,448) (30,197) (267,368)
Interest income 120 1,159 311 2,634
Interest expense (6,367) (7,416) (18,978) (19,987)
Impairment of equity method investments — — — (47,133)
Gain from equity method investees 63 (13,717) 12,725 11,014
Gain on transfer of membership — — 22,969 —
Loss on repayment of debt — — (19,158) —
Other income (expense), net (41) (110) (73) 174
Loss from continuing operations before income taxes (12,806) (36,532) (32,401) (320,666)
Provision (benefit) for income taxes 234 503 936 (3,131)
Loss from continuing operations (13,040) (37,035) (33,337) (317,535)
Income (loss) from discontinued operations, net of tax (2)
— (1,135) 1,383 (2,908)
Net loss (13,040) (38,170) (31,954) (320,443)
Net loss attributable to non-controlling interests — (822) — (822)
Net loss attributable to common shareholders of Evolent Health, Inc. $ (13,040) $ (37,348) $ (31,954) $ (319,621)
Loss per common share
Basic and diluted
Continuing operations $ (0.15) $ (0.43) $ (0.39) $ (3.84)
Discontinued operations — (0.01) 0.02 (0.03)
Basic and diluted loss per share attributable to common shareholders of Evolent Health, Inc. $ (0.15) $ (0.44) $ (0.37) $ (3.87)
Weighted-average common shares outstanding
Basic and diluted 85,800 85,172 85,306 82,615
Comprehensive loss
Net loss $ (13,040) $ (38,170) $ (31,954) $ (320,443)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment 4 71 (85) (86)
Total comprehensive loss (13,036) (38,099) (32,039) (320,529)
Total comprehensive loss attributable to non-controlling interests — (822) — (822)
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc. $ (13,036) $ (37,277) $ (32,039) $ (319,707)

~~See accompanying Notes to Consolidated Financial Statements~~


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Revenue(1)	$	319,939	$	222,057	$	616,996	$	437,128

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	249,705		172,113		469,444		329,945
Selling, general and administrative expenses (1)	58,955		42,699		117,887		101,290
Depreciation and amortization expenses	15,112		14,916		30,218		30,103
Change in fair value of contingent consideration	800		—		6,878		(594)
Total operating expenses	324,572		229,728		624,427		460,744
Operating loss	(4,633)		(7,671)		(7,431)		(23,616)
Interest income	223		68		340		191
Interest expense	(2,148)		(6,274)		(4,389)		(12,611)
Gain from equity method investees	1,952		4,879		2,548		12,662
Gain on transfer of membership	—		—		—		22,969
Loss on repayment of debt	—		—		—		(19,158)
Other income (expense), net	297		(18)		475		(32)
Loss from continuing operations before income taxes	(4,309)		(9,016)		(8,457)		(19,595)
Provision for (benefit from) income taxes	(184)		91		1,018		702
Loss from continuing operations	(4,125)		(9,107)		(9,475)		(20,297)
Income (loss) from discontinued operations, net of tax (2)	(463)		—		(463)		1,383
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(4,588)	$	(9,107)	$	(9,938)	$	(18,914)

Loss per common share
Basic and diluted
Continuing operations	$	(0.05)	$	(0.11)	$	(0.11)	$	(0.24)
Discontinued operations	—		—		—		0.02
Basic and diluted loss per share attributable to common shareholders of Evolent Health, Inc.	$	(0.05)	$	(0.11)	$	(0.11)	$	(0.22)

Weighted-average common shares outstanding
Basic and diluted	90,071		85,448		89,792		85,056

Comprehensive income (loss)
Net loss	$	(4,588)	$	(9,107)	$	(9,938)	$	(18,914)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment	(288)		(58)		(420)		(89)
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc.	$	(4,876)	$	(9,165)	$	(10,358)	$	(19,003)

————————

(1)See Note 1918 for amounts attributable to unconsolidated related parties included in these line items.

(2)Includes $(0.5) million loss on disposal for the three and six months ended June 30, 2022 and $1.9 million gain on disposal of discontinued operations for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2021, respectively.

See accompanying Notes to Consolidated Financial ~~Statements~~Statements.

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited, in thousands)

For the Three Months Ended September 30, 2021
Class A Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Treasury Stock Total Shareholders' Equity
Attributable to
Evolent Health, Inc. Non-Controlling Interests Total Equity
Shares Amount
Balance as of June 30, 2021 87,195 $ 872 $ 1,242,900 $ (367) $ (608,092) $ (21,123) $ 614,190 $ — $ 614,190
Stock-based compensation expense — — 4,395 — — — 4,395 — 4,395
Exercise of stock options 242 2 2,188 — — — 2,190 — 2,190
Restricted stock units vested, net of shares withheld for taxes 19 — (255) — — — (255) — (255)
Foreign currency translation adjustment — — — 4 — — 4 — 4
Net loss — — — — (13,040) — (13,040) — (13,040)
Balance as of September 30, 2021 87,456 $ 874 $ 1,249,228 $ (363) $ (621,132) $ (21,123) $ 607,484 $ — $ 607,484
For the Three Months Ended September 30, 2020
Class A Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Treasury Stock Total Shareholders' Equity
Attributable to
Evolent Health, Inc. Non-Controlling Interests Total Equity
Shares Amount
Balance as of June 30, 2020 85,457 $ 855 $ 1,183,605 $ (391) $ (537,205) $ — $ 646,864 $ — $ 646,864
Stock-based compensation expense — — 3,164 — — — 3,164 — 3,164
Exercise of stock options 265 3 1,445 — — — 1,448 — 1,448
Restricted stock units vested, net of shares withheld for taxes 35 — (51) — — — (51) — (51)
Consolidation of equity method investment — — — — — (21,123) (21,123) 25,749 4,626
Foreign currency translation adjustment — — — 71 — — 71 — 71
Equity component of 2024 notes, net of issuance costs — — 36,793 — — — 36,793 — 36,793
Net loss — — — — (37,348) — (37,348) (822) (38,170)
Balance as of September 30, 2020 85,757 $ 858 $ 1,224,956 $ (320) $ (574,553) $ (21,123) $ 629,818 $ 24,927 $ 654,745


	For the Three Months Ended June 30, 2022
	Class A Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance as of March 31, 2022	91,588	$	916	$	1,224,250	$	(494)	$	(592,340)	$	(21,123)	$	611,209

Stock-based compensation expense	—	—		7,011		—		—		—		7,011
Restricted stock units vested, net of shares withheld for taxes	69	—		(256)		—		—		—		(256)
Foreign currency translation adjustment	—	—		—		(288)		—		—		(288)
Net loss	—	—		—		—		(4,588)		—		(4,588)

Balance as of June 30, 2022	91,657	$	916	$	1,231,005	$	(782)	$	(596,928)	$	(21,123)	$	613,088


	For the Three Months Ended June 30, 2021
	Class A Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance as of March 31, 2021	86,779	$	868	$	1,236,847	$	(309)	$	(598,985)	$	(21,123)	$	617,298

Stock-based compensation expense	—	—		3,653		—		—		—		3,653
Exercise of stock options	306	3		2,855		—		—		—		2,858
Restricted stock units vested, net of shares withheld for taxes	110	1		(455)		—		—		—		(454)
Foreign currency translation adjustment	—	—		—		(58)		—		—		(58)
Net loss	—	—		—		—		(9,107)		—		(9,107)

Balance as of June 30, 2021	87,195	$	872	$	1,242,900	$	(367)	$	(608,092)	$	(21,123)	$	614,190

See accompanying Notes to Consolidated Financial Statements


																															For the Six Months Ended June 30, 2022
																															Class A Common Stock								Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Treasury Stock			Total Shareholders’ Equity
																															Shares			Amount
Balance as of December 31, 2021																														Balance as of December 31, 2021	90,759			$	908							$	1,340,989					$	(362)		$	(626,779)		$	(21,123)		$	693,633

Cumulative-effect adjustment from adoption of ASC 2020-06																														Cumulative-effect adjustment from adoption of ASC 2020-06	—			—					(106,172)						—			39,789			—			(66,383)
Stock-based compensation expense																														Stock-based compensation expense	—			—					12,358						—			—			—			12,358
Exercise of stock options																														Exercise of stock options	37			—					309						—			—			—			309
Restricted stock units vested, net of shares withheld for taxes																														Restricted stock units vested, net of shares withheld for taxes	403			4					(5,243)						—			—			—			(5,239)
Leveraged stock units vested, net of shares withheld for taxes																														Leveraged stock units vested, net of shares withheld for taxes	458			4					(11,236)						—			—			—			(11,232)
Foreign currency translation adjustment																														Foreign currency translation adjustment	—			—					—						(420)			—			—			(420)
Net loss																														Net loss	—			—					—						—			(9,938)			—			(9,938)

Balance as of June 30, 2022																														Balance as of June 30, 2022	91,657			$	916				$	1,231,005					$	(782)		$	(596,928)		$	(21,123)		$	613,088

		For the Nine Months Ended September 30, 2021																													For the Six Months Ended June 30, 2021
		Class A Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)				Treasury Stock					Total Shareholders' Equity Attributable to Evolent Health, Inc.			Non-Controlling Interests					Total Equity			Class A Common Stock								Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Treasury Stock			Total Shareholders’ Equity
		Shares	Amount																Shares						Amount
Balance as of December 31, 2020	Balance as of December 31, 2020	85,895	$	859			$	1,229,320					$	(278)			$	(589,178)				$	(21,123)				$	619,600			$	—		$	619,600		Balance as of December 31, 2020	85,895						$	859		$	1,229,320		$	(278)		$	(589,178)		$	(21,123)		$	619,600

Stock-based compensation expense	Stock-based compensation expense	—	—		11,754				—		—				—					11,754			—					11,754		Stock-based compensation expense	—			—					7,359						—			—			—			7,359
Exercise of stock options	Exercise of stock options	1,142	11		11,555				—		—				—					11,566			—					11,566		Exercise of stock options	900			9					9,367						—			—			—			9,376
Restricted stock units vested, net of shares withheld for taxes	Restricted stock units vested, net of shares withheld for taxes	419	4		(3,401)				—		—				—					(3,397)			—					(3,397)		Restricted stock units vested, net of shares withheld for taxes	400			4					(3,146)						—			—			—			(3,142)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				(85)		—				—					(85)			—					(85)		Foreign currency translation adjustment	—			—					—						(89)			—			—			(89)
Net loss	Net loss	—	—		—				—		(31,954)				—					(31,954)			—					(31,954)		Net loss	—			—					—						—			(18,914)			—			(18,914)

Balance as of September 30, 2021		87,456	$	874	$	1,249,228			$	(363)	$	(621,132)			$	(21,123)				$	607,484		$	—				$	607,484

		For the Nine Months Ended September 30, 2020
		Class A Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)				Treasury Stock					Total Shareholders' Equity Attributable to Evolent Health, Inc.			Non-Controlling Interests					Total Equity
		Shares	Amount
Balance as of December 31, 2019		84,589	$	846			$	1,173,708					$	(234)			$	(251,962)							$	—						$	922,358		$	6,689				$	929,047

Cumulative-effect adjustment from adoption of ASU 2016-13		—	—		—				—		(2,970)				—					(2,970)			—					(2,970)
Stock-based compensation expense		—	—		10,375				—		—				—					10,375			—					10,375
Exercise of stock options		355	4		1,970				—		—				—					1,974			—					1,974
Restricted stock units vested, net of shares withheld for taxes		385	4		(1,386)				—		—				—					(1,382)			—					(1,382)
Consolidation of equity method investment		—	—		—				—		—				(21,123)					(21,123)			25,749					4,626
Share retirement		(188)	(2)		(683)				—		—				—					(685)			—					(685)
Class A common stock issued for payment of earn-outs		616	6		4,179				—		—				—					4,185			—					4,185
Disposal of assets		—	—		—				—		—				—					—			(6,689)					(6,689)
Foreign currency translation adjustment		—	—		—				(86)		—				—					(86)			—					(86)
Equity component of 2024 notes, net of issuance costs		—	—		36,793				—		—				—					36,793			—					36,793
Net loss		—	—		—				—		(319,621)				—					(319,621)			(822)					(320,443)

Balance as of September 30, 2020		85,757	$	858	$	1,224,956			$	(320)	$	(574,553)			$	(21,123)				$	629,818		$	24,927				$	654,745
Balance as of June 30, 2021																														Balance as of June 30, 2021	87,195			$	872				$	1,242,900					$	(367)		$	(608,092)		$	(21,123)		$	614,190

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


		For the Nine Months Ended September 30,					For the Six Months Ended June 30,
		2021		2020			2022		2021
Cash Flows Used In Operating Activities	Cash Flows Used In Operating Activities					Cash Flows Used In Operating Activities
Net loss	Net loss	$	(31,954)	$	(320,443)	Net loss	$	(9,938)	$	(18,914)
Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:	Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:					Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:
Change in fair value of contingent consideration and indemnification asset		(819)		(492)
(Gain) loss on disposal of assets		(1,904)		6,447
(Gain) loss from equity method investees		(12,725)		(11,014)
Change in fair value of contingent consideration						Change in fair value of contingent consideration	6,878		(594)
Loss (gain) on discontinued operations						Loss (gain) on discontinued operations	463		(1,904)
Gain from equity method investees						Gain from equity method investees	(2,548)		(12,662)
Depreciation and amortization expenses	Depreciation and amortization expenses	45,122		46,610		Depreciation and amortization expenses	30,218		30,263
Impairment of equity method investments		—		47,133
Stock-based compensation expense	Stock-based compensation expense	11,754		10,375		Stock-based compensation expense	12,358		7,359
Deferred tax (benefit) provision		(288)		(773)
Deferred tax provision (benefit)						Deferred tax provision (benefit)	472		(268)
Amortization of contract cost assets	Amortization of contract cost assets	9,928		15,937		Amortization of contract cost assets	13,186		8,311
Amortization of deferred financing costs	Amortization of deferred financing costs	13,399		10,093		Amortization of deferred financing costs	1,079		8,837
Interest from customer advance for regulatory capital requirements		(242)		(1,788)
Gain on transfer of membership	Gain on transfer of membership	(22,969)		—		Gain on transfer of membership	—		(22,969)
Goodwill impairment		—		215,100
Loss on repayment of debt	Loss on repayment of debt	19,158		4,789		Loss on repayment of debt	—		19,158
Other current operating cash outflows, net		714		1,809
Other current operating cash inflows (outflows), net						Other current operating cash inflows (outflows), net	692		(729)
Changes in assets and liabilities, net of acquisitions:	Changes in assets and liabilities, net of acquisitions:					Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets	Accounts receivable, net and contract assets	(52,878)		(15,665)		Accounts receivable, net and contract assets	13,042		(120,066)
Prepaid expenses and other current and non-current assets	Prepaid expenses and other current and non-current assets	(140)		9,113		Prepaid expenses and other current and non-current assets	(8,453)		(3,439)
Contract cost assets	Contract cost assets	(8,439)		(7,946)		Contract cost assets	(3,284)		(3,991)
Accounts payable	Accounts payable	8,164		(394)		Accounts payable	(823)		9,904
Accrued liabilities	Accrued liabilities	(13,893)		6,264		Accrued liabilities	(24,826)		(17,725)
Accrued compensation and employee benefits	Accrued compensation and employee benefits	(12,811)		(4,650)		Accrued compensation and employee benefits	(22,379)		(21,505)
Deferred revenue	Deferred revenue	3,103		(10,811)		Deferred revenue	(3,233)		2,490
Reserve for claims and performance-based arrangements	Reserve for claims and performance-based arrangements	16,784		(16,479)		Reserve for claims and performance-based arrangements	(45,334)		62,614
Right-of-use operating assets	Right-of-use operating assets	6,408		9,493		Right-of-use operating assets	(669)		4,621
Operating lease liabilities	Operating lease liabilities	(4,589)		(490)		Operating lease liabilities	179		(2,719)
Other long-term liabilities	Other long-term liabilities	1,208		4,408		Other long-term liabilities	(858)		1,518
Net cash and restricted cash used in operating activities	Net cash and restricted cash used in operating activities	(27,909)		(3,374)		Net cash and restricted cash used in operating activities	(43,778)		(72,410)
Cash Flows Provided by Investing Activities	Cash Flows Provided by Investing Activities					Cash Flows Provided by Investing Activities
Cash paid for asset acquisitions		(1,889)		—
Cash paid for asset acquisitions and business combinations						Cash paid for asset acquisitions and business combinations	(9,070)		(1,472)
Proceeds from transfer of membership and release of Passport escrow	Proceeds from transfer of membership and release of Passport escrow	42,996		—		Proceeds from transfer of membership and release of Passport escrow	22,969		42,996
Loan for implementation funding		—		(400)
Disposal of non-strategic assets and divestiture of discontinued operations, net	Disposal of non-strategic assets and divestiture of discontinued operations, net	3,490		(2,287)		Disposal of non-strategic assets and divestiture of discontinued operations, net	—		3,490
Return of equity method investments	Return of equity method investments	14,218		—		Return of equity method investments	4,175		9,372
Impact to cash and cash equivalents and restricted cash from initial consolidation		—		159,755
Purchases of investments	Purchases of investments	(2,994)		(11,168)		Purchases of investments	—		(2,994)
Maturities and sales of investments	Maturities and sales of investments	500		140,905		Maturities and sales of investments	—		500
Investments in internal-use software and purchases of property and equipment	Investments in internal-use software and purchases of property and equipment	(17,739)		(23,614)		Investments in internal-use software and purchases of property and equipment	(17,744)		(11,512)
Other investing activities		—		106
Net cash and restricted cash provided by investing activities	Net cash and restricted cash provided by investing activities	38,582		263,297		Net cash and restricted cash provided by investing activities	330		40,380
Cash Flows Provided by (Used In) Financing Activities
Cash Flows Used In Financing Activities						Cash Flows Used In Financing Activities
Changes in working capital balances related to claims processing on behalf of partners	Changes in working capital balances related to claims processing on behalf of partners	1,105		(2,212)		Changes in working capital balances related to claims processing on behalf of partners	360		2,399
Repayment and termination of Credit Agreement including settlement of warrants.		(98,420)		—
Repayment of Credit Agreement including settlement of warrants						Repayment of Credit Agreement including settlement of warrants	—		(98,420)
Proceeds from stock option exercises						Proceeds from stock option exercises	309		9,376
Distributions to Sponsors						Distributions to Sponsors	(14,884)		(1,300)
Taxes withheld and paid for vesting of equity awards						Taxes withheld and paid for vesting of equity awards	(16,471)		(3,142)
Net cash and restricted cash used in financing activities						Net cash and restricted cash used in financing activities	(30,686)		(91,087)

See accompanying Notes to Consolidated Financial Statements

For the Nine Months Ended September 30,
2021 2020
Proceeds from issuance of 2024 Notes, net of offering costs — 30,062
Repurchase of 2021 Notes and financing fees — (16,388)
Proceeds from stock option exercises 11,566 1,974
Distributions to Sponsors (1,300) —
Taxes withheld and paid for vesting of restricted stock units (3,397) (1,382)
Net cash and restricted cash provided by (used in) financing activities (90,446) 12,054
Effect of exchange rate on cash and cash equivalents and restricted cash (53) 43
Net increase (decrease) in cash and cash equivalents and restricted cash (79,826) 272,020
Cash and cash equivalents and restricted cash as of beginning-of-period (1)
361,581 128,531
Cash and cash equivalents and restricted cash as of end-of-period (1)
$ 281,755 $ 400,551


	For the Six Months Ended June 30,
	2022		2021
Effect of exchange rate on cash and cash equivalents and restricted cash	(375)		(54)
Net decrease in cash and cash equivalents and restricted cash	(74,509)		(123,171)
Cash and cash equivalents and restricted cash as of beginning-of-period (1)	354,942		361,581
Cash and cash equivalents and restricted cash as of end-of-period (1)	$	280,433	$	238,410

————————

(1)As a result of the closing of the sale of True Health ~~SPA,~~during the first quarter of 2021, the consolidated ~~statements~~statement of operations ~~consolidated balance sheets,~~ and related financial information reflect the Company’s operations and assets and liabilities of True Health as discontinued ~~operations for all periods presented.~~operations. Cash flows and comprehensive income have not been adjusted and are included in the consolidated statements of cash flows and consolidated statements of comprehensive income (loss) for ~~all periods presented.~~the six months ended June 30, 2021. See Note 5.

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization

Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware and through its subsidiaries supports leading health systems and physician organizations ~~as well as health plans~~ to move their business models from traditional fee for service reimbursement to value-based care, which we consider to be an integrated clinical and financial responsibility for populations.

The Company made organizational changes, including re-evaluating its reportable segments, as a result of the entry into the agreement to sell True Health on January 11, 2021. Effective during the first quarter of 2021, the Company bifurcated its previous Services segment into 2 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 Note 21 for a further discussion of our operating results by segment.

Since its inception, the Company has incurred losses from operations. As of ~~September~~June 30, ~~2021,~~2022, the Company had unrestricted cash and cash equivalents of ~~$252.5~~$193.1 million. The Company believes it has sufficient liquidity for the next twelve months as of the date the financial statements were available to be issued.

The Company’s headquarters is located in Arlington, Virginia.

Evolent Health LLC Governance

Our operations are conducted through Evolent Health LLC and subsequent to the offering reorganization at the time of our initial public offering (the “Offering Reorganization”), the financial results of Evolent Health LLC were consolidated in the financial statements of Evolent Health, Inc.LLC. Evolent Health, Inc. is a holding company whose only business is to act as the sole managing member of Evolent Health LLC. As such, it controls Evolent Health LLC’s business and affairs and is responsible for the management of its business.

Note 2. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principles

Basis of Presentation

In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state our financial position, results of operations and cash flows. The consolidated balance sheet as of December 31, 2020, has been derived from audited financial statements as of that date and reflects the impact of the sale of True Health. See Note 5 for a complete summary of this transaction. The interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain footnote disclosures normally included in financial statements prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission (“SEC”). The disclosures provided herein should be read in conjunction with the audited financial statements and notes thereto included in our ~~2020~~2021 Form 10-K.

Summary of Significant Accounting Policies

Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 2” in our ~~2020~~2021 Form 10-K for a complete summary of our significant accounting policies.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the valuation of assets (including intangibles assets, goodwill and long-lived assets), liabilities, consideration related to business combinations and asset acquisitions, revenue recognition (including variable consideration), estimated selling prices for performance obligations in contracts with multiple performance obligations, reserves for claims and performance-based

arrangements, credit losses, depreciable lives of assets, impairment of long-lived assets, stock-based compensation, deferred income taxes and valuation allowance, contingent liabilities, purchase price allocation in taxable stock transactions and useful lives of intangible assets.

Principles of Consolidation

The consolidated financial statements include the accounts of Evolent Health, Inc. and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

Cash and Cash Equivalents

We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company holds materially all of our cash in bank deposits with FDIC participating banks, at cost, which approximates fair value. Cash and cash equivalents held in money market funds are carried at fair value, which approximates cost.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments include cash and investments used to collateralize various contractual obligations ~~as of September 30, 2021 and December 31, 2020~~ (in thousands) as follows:


		September 30, 2021		December 31, 2020 (1)			June 30, 2022		December 31, 2021
Collateral for letters of credit for facility leases ~~(2)~~(1)	Collateral for letters of credit for facility leases ~~(2)~~(1)	$	3,410	$	3,510	Collateral for letters of credit for facility leases ~~(2)~~(1)	$	2,269	$	3,769
Collateral with financial institutions ~~(3)~~(2)	Collateral with financial institutions ~~(3)~~(2)	11,957		4,743		Collateral with financial institutions ~~(3)~~(2)	11,504		11,662
Claims processing services ~~(4)~~(3)	Claims processing services ~~(4)~~(3)	13,169		12,064		Claims processing services ~~(4)~~(3)	73,585		73,226
Other	Other	723		1,327		Other	5		5
Total restricted cash and restricted investments	Total restricted cash and restricted investments	$	29,259	$	21,644	Total restricted cash and restricted investments	$	87,363	$	88,662

Current restricted cash	Current restricted cash	16,509		14,374		Current restricted cash	74,377		75,685
Total current restricted cash and restricted investments	Total current restricted cash and restricted investments	$	16,509	$	14,374	Total current restricted cash and restricted investments	$	74,377	$	75,685

Non-current restricted cash	Non-current restricted cash	12,750		6,654		Non-current restricted cash	12,986		12,977
Total non-current restricted cash and restricted investments	Total non-current restricted cash and restricted investments	$	12,750	$	6,654	Total non-current restricted cash and restricted investments	$	12,986	$	12,977

————————

(1)Amounts exclude $0.6 million of non-current restricted investments and $0.1 million of current restricted cash from claims processing services reclassified to discontinued operations as of December 31, 2020.

~~(2)~~Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note 12 for further discussion of our lease commitments.

~~(3)~~(2)Represents collateral held with financial institutions for risk-sharing and other arrangements. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, approximately ~~$12.0~~$11.5 million and ~~$4.7~~$11.7 million, respectively, of the collateral amounts were held in a FDIC participating bank account. See Note 1817 for discussion of fair value measurement and Note 11 for discussion of our risk-sharing arrangements.

~~(4)~~(3)Represents cash held by the Company related to claims processing services on behalf of partners. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows ~~as of September 30, 2021 and 2020~~ (in thousands).:


		September 30,					June 30,
		2021		2020			2022		2021
Cash and cash equivalents	Cash and cash equivalents	$	252,496	$	370,514	Cash and cash equivalents	$	193,070	$	207,273
Restricted cash and restricted investments	Restricted cash and restricted investments	29,259		31,447		Restricted cash and restricted investments	87,363		31,137
Restricted investments included in restricted cash and restricted investments		—		(1,410)
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows (1)	Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows (1)	$	281,755	$	400,551	Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows (1)	$	280,433	$	238,410

————————

(1)As a result of the closing of the sale of True Health ~~SPA,~~during the first quarter of 2021, the consolidated ~~statements~~statement of operations ~~consolidated balance sheets~~ and related financial information reflect the Company’s operations and assets and liabilities of True Health as discontinued ~~operations for all periods presented.~~operations. Cash flows and comprehensive income have not been adjusted and are included in the consolidated statements of cash flows and consolidated statements of comprehensive income (loss) for ~~all periods presented.~~the six months ended June 30, 2021. See Note 5.

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 on 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 at each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as operating income or expense. Acquisition-related expenses ~~and post-acquisition restructuring costs~~ are recognized separately from the business combination and are expensed as incurred.

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. Following the sale of True Health, the Company has 3 reporting units and our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). ~~See Note 9 for additional discussion regarding the goodwill impairment tests conducted during 2021 and 2020.~~

Intangible Assets, Net

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 following summarizes the estimated useful lives by asset classification:


Corporate trade name			10 - 20 years
Customer relationships			10 - 25 years
Technology			5 years
Provider network contracts			43 - 5 years

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group exceed the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. See Note 9 for additional discussion regarding our intangible assets.

10Research and Development Costs

Research and development costs consist primarily of personnel and related expenses (including stock-based compensation and employee taxes and benefits) for employees engaged in research and development activities as well as third-party fees. All such costs are expensed as incurred. We focus our research and development efforts on activities that support our technology infrastructure, clinical program development, data analytics and network development capabilities. Research and development costs are recorded within selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss) and was $3.8 million and $7.9 million for the three and six months ended June 30, 2022, respectively.

Reserves for Claims and Performance-based Arrangements

Reserves for claims and performance-based arrangements reflect estimates of 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. See Note 2221 for additional discussion regarding our reserves for claims and performance-based arrangements.

Right of Offset

Certain customer arrangements give the Company the legal right to net payment for amounts due from customers and claims payable. As of June 30, 2022 and December 31, 2021, approximately 64% and 42% of gross accounts receivable was netted against claims payable in lieu of cash receipt. Furthermore, as of June 30, 2022, approximately 13% of our accounts receivable, net could ultimately be settled on a net basis, once the criteria for netting have been met.

Leases

The Company enters into various office space, data center and equipment lease agreements in conducting its normal business operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease. If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most leases include one or more options to renew or may have a termination option. The Company determines whether these options are reasonably certain to be exercised at the inception of the lease. The rent expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the terms of the respective leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

The Company also enters into sublease agreements for some of its leased office space. Rental income attributable to subleases is immaterial and is offset against rent expense over the terms of the respective leases.

Refer to Note 12 for additional lease disclosures.

Revenue Recognition

We derive revenue from ~~two~~2 sources: (1) transformation services and (2) platform and operations services. Transformation services consist of implementation services whereby we assist the customer in launching its population health or health plan programs, or implement certain platform and operations services. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. Platform and operations services generally include multi-year arrangements with customers to provide various population health, health plan operations, specialty care management and claims processing services on an ongoing basis, as well as transition or run-out services to customers receiving primarily TPA services. Revenue is recognized when control of the services is transferred to our customers.

We use the following 5-step model, outlined in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), to determine revenue recognition from our contracts with customers:

• Identify the contract(s) with a customer

• Identify the performance obligations in the contract

• Determine the transaction price

• Allocate the transaction price to performance obligations

• Recognize revenue when (or as) the entity satisfies a performance obligation

See Note 6 for further discussion of our policies related to revenue recognition.

1110

~~Foreign Currency~~

The Company formed a subsidiary in India during the first quarter of 2018. The functional currency of our international subsidiary is the Indian Rupee. We translate the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets and liabilities and monthly average rates of exchange for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity. Foreign currency translation gains and losses did not have a material impact on our consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020.

Note 3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

~~In June 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, contract assets, held-to-maturity securities, 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 after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). Results for reporting periods beginning January 1, 2020 reflect the adoption of ~~ASU 2016-13~~, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting practices. In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based solely on specific identification. Under the new accounting standard, we maintain our specific identification process but utilize several factors to develop historical losses reserves, 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. For held-to-maturity investment securities, we evaluate (i) historical information adjusted for current conditions and reasonable and supportable forecasts and (ii) qualitative factors to determine whether the zero-loss expectation exception applies. Refer to Note 7 for additional disclosures related to current expected credit losses.

In December 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.

In August 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 do not separately present in equity an embedded conversion feature of such debt. Instead, we 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 Company adopted the standard using a modified retrospective method on January 1, 2022, with adjustments which increased retained earnings by $39.8 million, reduced additional paid-in capital by $106.2 million and increased the net carrying amount of the 2024 and 2025 Notes by $25.1 million and $41.3 million, respectively.

Recent Accounting Pronouncements Not Yet Effective

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. This new standard is effective for our interim and annual periods beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the adoption impacts on our consolidated financial statements.

Note 4. Transactions

~~Passport~~Business Combinations

Vital Decisions

On ~~May 28, 2019, UHC, Passport Health Solutions, LLC (“PHS I”),~~October 1, 2021, the Company ~~and EVH Passport entered into an Asset Purchase Agreement (the “Passport APA”), which provided for the sale~~completed its acquisition of ~~substantially all~~Vital Decisions, including 100% of the ~~assets~~voting equity interests. Vital Decisions is a leading provider of ~~UHC~~technology-enabled advance care planning services, ensuring that the care of individuals with serious illness aligns with their values and ~~PHS I, including UHC’s Kentucky Medicaid contract (the “Passport Medicaid Contract”),~~changing preferences throughout their health journey and, in particular, as they approach end-of-life decisions. The transaction is expected to ~~EVH Passport for a purchase~~deepen our capabilities, allowing us to cross-sell across customers and enhance our value proposition to partners.

Total merger consideration, net of cash on hand and certain closing adjustments, was $117.7 million, based on the closing price of ~~$70.0~~the Company’s Class A common stock on the NYSE on October 1, 2021. The merger consideration consisted of $46.5 million inof cash consideration, 1.8 million shares of Class A common stock, fair valued at $56.6 million as of October 1, 2021, and an earn-out of up to $45.0 million, fair valued at $14.6 million as of October 1, 2021. See Note 18 for additional information regarding the ~~issuance~~fair value determination of ~~a 30% interest in EVH Passport (the “Passport Purchase Price”) to The University of Louisville,~~ the University of Louisville Physicians, University Medical Center, the Jewish Heritage Fund for Excellence, Norton Healthcare, Inc. and the Louisville/Jefferson County Primary Care Association (collectively, the “Sponsors”).earn-out consideration.

~~On June 18, 2019, the Company contributed $40.0 million to UHC in the form of an advance for regulatory capital requirements under an agreement with UHC (the “Passport Note”).~~ The Passport Note carried a fixed interest rate of 6.5% per annum. Additionally, on June 6, 2019, the Company and UHC entered into an Indemnity Agreement (the “Indemnity Agreement”), with an insurance company (the “Surety”). The Surety issued a performance bond in the amount of $25.0 million to secure UHC’s performance under its Medicaid Contract. Pursuantpurchase price was allocated to the ~~Indemnity Agreement, the Company~~assets acquired and ~~UHC were jointly and severally liable to the Surety in the maximum amount~~liabilities assumed based on their estimated fair values as of the bond, plus certain costs of the Surety, in the event of losses arising under the bond. The bond’s original expiry date was June 30, 2020 and during the three months ended June 30, 2020, was extended to December 31, 2020. The bond was released in October ~~2020.~~1, 2021, as follows (in thousands):


Purchase consideration:
Cash	$	46,500
Fair value of Class A common stock issued	56,626
Fair value of contingent consideration	14,600
Total consideration	$	117,726

On December 30, 2019, UHC, PHS I, the Company and EVH Passport consummated the transactions contemplated by the Passport APA (the “Passport Closing”). At the Passport Closing, $16.2 million of the cash Passport Purchase Price was held back until such time as PHS I delivers to EVH Passport certain owned real property and improvements free and clear of all encumbrances. In addition, at the Passport Closing, EVH Passport and UHC entered into an agreement that provided for the administration and assumption of the financial risks by EVH Passport of UHC’s dual eligible special needs business (the “DNP Business”) until such time as EVH Passport became certified as a Medicare Advantage Organization and the D-SNP Business could be transferred to EVH Passport. On October 1, 2020, the D-SNP Business was transferred from UHC to EVH Passport. At the Passport Closing, EVH Passport assumed UHC’s obligations under the Passport Note and the Indemnity Agreement.



Tangible assets acquired:
Cash and cash equivalents	$	1,430
Accounts receivable	3,301
Prepaid expenses and other current assets	78
Other non-current assets	2,564
Total tangible assets acquired	7,373

Identifiable intangible assets acquired:
Customer relationships	32,500
Technology	5,000
Corporate trade name	2,500
Total identifiable intangible assets acquired	40,000

Liabilities assumed:
Accounts payable	93
Accrued liabilities	661
Accrued compensation and employee benefits	970
Deferred tax liabilities, net	499
Deferred revenue	2,000
Operating lease liabilities	2,712
Total liabilities assumed	6,935

Goodwill	77,288
Net assets acquired	$	117,726

~~On July 16, 2020, EVH Passport, Evolent Health LLC~~The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and ~~Molina Healthcare, Inc. (“Molina”) entered into~~is expected to be collectible in full. Identifiable intangible assets associated with customer relationships, technology and corporate trade names will be amortized on a straight-line basis over their preliminary estimated useful lives of 13 years, 5 years, and 15 years, respectively. The customer relationships are primarily attributable to existing contracts with current customers. The technology consists primarily of a proprietary advance care planning documentation portal where patients can input information, and doctor/patient conversations are populated for later reference. The corporate trade name reflects the value that we believe the Vital Decisions brand name carries in the market. The fair value of the intangible assets was determined using the income approach and the relief from royalty approach. The income approach estimates fair value for an ~~Asset Purchase Agreement (the “Molina APA”), which contemplated~~asset based on the ~~sale by EVH Passport~~present value of cash flows projected to Molina of certain assets, including certain intellectual property rights of EVH Passport and EVH Passport’s rights under the Passport Medicaid Contract. On September 1, 2020, EVH Passport and Molina consummated the transactions contemplatedbe generated by the ~~Molina APA (the “Molina Closing”)~~asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the ~~Passport Medicaid Contract was novated~~time value of money. The relief from royalty approach estimates the fair value of an asset by calculating how much an entity would have to ~~Molina. As~~spend to lease a ~~result, EVH Passport began to wind down its business. In connection with~~similar asset. Goodwill is calculated as the ~~Molina Closing, Molina deposited $20.0 million in cash in escrow, which was subsequently released to EVH Passport in January 2021. In addition, at~~difference between the ~~Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption~~acquisition date fair value of the ~~financial risks by Molina~~total consideration and the fair value of the ~~D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare Advantage Organization~~net assets acquired and represents the ~~D-SNP Business is transferred Molina. The Company and EVH Passport continued~~future economic benefits that we expect to administer the D-SNP Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business is officially transferred to Molina effective September 1, 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 transaction, 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 of September 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquiredachieve as a result of the ~~consolidation did not meet~~acquisition. The goodwill is attributable primarily to cross-selling opportunities and the ~~criteria~~acquired assembled workforce and was all allocated to the Clinical Solutions segment. Goodwill is considered to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the Company’s consolidated financials, on November 16, 2020, EVH Passport redeemed the Sponsors’ equity interests in EVH Passport for $20.0an indefinite lived asset. $69.6 million ~~in cash 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.~~goodwill recorded on the transaction is deductible for tax purposes.

~~As part~~The amounts above reflect management’s preliminary estimate of the ~~consolidation,~~fair value of the ~~Company recorded~~tangible and intangible assets ~~primarily consisting of cash~~acquired and cash equivalents and restricted cash and cash equivalents of $159.8 million, available for sale securities of $88.6 million, receivables related to unsettled sales of securities of $43.0 million and other assets of $50.2 million and total liabilities ~~primarily comprised of reserve for claims and performance-based arrangements of $164.8 million and accrued liabilities of $50.0 million. Subsequent to winddown activities, any remaining capital~~assumed. Any necessary adjustments will be ~~distributed to~~finalized by the Company subject to regulatory approval from the Kentucky Department of Insurance. In addition, the Passport Note was eliminated upon consolidation, and as of December 31, 2020, the outstanding principal balanceend of the ~~$40.0 million Passport Note was repaid in full by EVH Passport including approximately $3.6 million of accrued interest.~~

~~During the first~~third quarter of 2021, pursuant to the terms of the Molina APA, EVH Passport received a cash payment from Molina in the amount of $23.0 million based on the number of enrollees above a certain threshold in the D-SNP Business and Molina's Medicaid plan following the open enrollment period for plan year 2021. The payment is recorded in gain on transfer of membership on the consolidated statement of operations and comprehensive income (loss). The foregoing amount represents 50% of the payment that EVH Passport is eligible to receive pursuant to the terms of the Molina APA based on the number of such enrollees. The remaining 50% will be receivable in the first quarter of 2022 subject to the satisfaction of certain contingencies.2022.

Note 5. Discontinued Operations

On January 11, 2021, Evolent Health LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered into a Stock Purchase Agreement (the “True Health SPA”) with Bright Health Management, Inc. (“Bright HealthCare”), pursuant to which EH Holdings agreed to sell all of its equity interests in True Health to Bright HealthCare. Closing of the transactions contemplated by the True Health SPA occurred on March 31, 2021 (the “True Health Closing”) 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 ~~360,~~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 ~~held for sale~~discontinued operations and are not included in continuing operations in the consolidated financial statements.

The following table summarizes the results of operations of the Company’s True Health business, which are included in ~~loss~~income from discontinued operations in the consolidated statements of operations and comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020:~~2021:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Revenue
Platform and operations $ — $ 71 $ 38 $ 350
Premiums — 29,487 44,795 87,136
Total revenue — 29,558 44,833 87,486
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)
— 4,926 5,885 12,861
Claims expenses — 21,325 33,954 63,136
Selling, general and administrative expenses (2)
— 4,407 5,764 14,318
Depreciation and amortization expenses — 160 160 480
Total operating expenses — 30,818 45,763 90,795
Operating loss — (1,260) (930) (3,309)
Interest income — 129 112 415
Interest expense — (3) (4) (10)
Other loss — (1) (25) (4)
Loss before income taxes and non-controlling interests — (1,135) (847) (2,908)
Benefit for income taxes — — (326) —
Net loss $ — $ (1,135) $ (521) $ (2,908)


	For the Three Months Ended June 30, 2021		For the Six Months Ended June 30, 2021
Revenue
Platform and operations	$	—	$	38
Premiums	—		44,795
Total revenue	—		44,833

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	—		5,885
Claims expenses	—		33,954
Selling, general and administrative expenses (2)	—		5,764
Depreciation and amortization expenses	—		160
Total operating expenses	—		45,763
Operating loss	—		(930)
Interest income	—		112
Interest expense	—		(4)
Other loss	—		(25)
Loss before income taxes and non-controlling interests	—		(847)
Provision for income taxes	—		(326)
Net loss	$	—	$	(521)

————————

(1)Cost of revenue includes intercompany expenses between the Company and True Health that are recorded in income from continuing operations onin the consolidated statements of operations and comprehensive income (loss) related to an existing services agreement for claims processing and other health plan administrative functions of ~~$3.7~~$2.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2020 and $2.8 million and $10.0 million for the nine months ended September 30, 2021 and 2020, respectively.~~2021.

(2)Selling, general and administrative expenses includes intercompany expenses between the Company and True Health that are recorded in income from continuing operations on the consolidated statements of operations and comprehensive income (loss) related to an existing services agreement for claims processing and other health plan administrative functions of ~~$1.0~~$1.1 million for the ~~three~~six months ended ~~September~~June 30, ~~2020 and $1.1 million and $5.1 million for the nine months ended September 30, 2021 and 2020, respectively.~~2021.

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 the True Health business during the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020 were as follows:~~

For the Nine Months Ended September 30,
2021 2020
Cash flows provided by (used in) operating activities $ 5,002 $ 7,920
Cash flows provided by (used in) investing activities (2,494) 936

~~The following table summarizes the current and long-term assets and liabilities of the discontinued True Health business in the consolidated balance sheets as of December 31, 2020:~~2021:


~~Accounts receivable, net~~	~~3,437~~
~~Prepaid expenses and other current assets~~	~~5,198~~
~~Investments, at amortized cost~~	~~3,728~~
~~Total current assets~~	~~33,914~~
~~Restricted cash and restricted investments~~	~~616~~
~~Investments, at amortized cost~~	~~10,919~~
~~Prepaid expenses and other noncurrent assets~~	59
~~Intangible assets, net~~	~~3,080~~
~~Goodwill~~	~~5,705~~
~~Total assets~~	$	~~54,293~~

~~LIABILITIES~~
~~Current liabilities:~~
~~Accounts payable~~ ~~(1)~~	93
~~Accrued liabilities~~	~~11,265~~
~~Accrued compensation and employee benefits~~	~~1,115~~
~~Deferred revenue~~	~~4,140~~
~~Reserve for claims and performance-based arrangements~~	~~9,858~~
~~Total current liabilities~~	~~26,471~~
~~Other long-term liabilities~~	~~128~~
~~Deferred tax liabilities, net~~	49
~~Total liabilities~~	$	~~26,648~~

~~————————~~

~~(1)~~Accounts payable exclude $1.5 million between the Company and True Health related to an existing services agreement for claims processing and other health plan administrative functions as of December 31, 2020.

Note 6. Revenue Recognition

We derive revenue primarily from ~~two sources: (1) transformation services and (2)~~ 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 clients who 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 our Evolent 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 third-party administration (“TPA”) services.

Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our customers and members. Generally, we will apply the series guidance to the 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. 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.

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.

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 occasionally 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~~As we integrate goods and services provided by third parties into our ~~role is to arrange for another entity to provide~~overall service, we control the goods and services provided to the ~~customer. In these instances,~~customer prior to its delivery. As such, we ~~do not control the service before it is provided and recognize revenue on a net basis. We~~ are the principal ~~when~~and we ~~control the good or service prior to transferring control to the customer. We~~will recognize revenue on a gross ~~basis when~~basis. In certain cases, we ~~are~~act as an agent and do not control the ~~principal in~~services from third parties before it is delivered to the ~~arrangement.~~customer thereby recognizing revenue on a net basis.

Disaggregation of Revenue

The following table represents Evolent’s revenue disaggregated by segment and end-market for ~~the three and nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Three Months Ended September 30,								For the Nine Months Ended September 30,									For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2021		2020		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021		2022		2021
		Evolent Health Services				Clinical Solutions				Evolent Health Services				Clinical Solutions					Evolent Health Services				Clinical Solutions				Evolent Health Services				Clinical Solutions
Medicaid	Medicaid	$	41,857	$	51,637	$	51,829	$	73,480	$	154,850	$	165,584	$	148,816	$	197,992	Medicaid	$	55,422	$	52,064	$	86,080	$	53,648	$	122,336	$	112,993	$	156,967	$	96,987
Medicare	Medicare	4,816		28,483		91,249		63,663		19,500		57,729		267,793		190,223		Medicare	9,863		6,346		101,529		90,761		14,696		14,684		193,796		176,544
Commercial and other	Commercial and other	30,154		19,830		2,566		2,479		62,177		59,535		6,463		7,040		Commercial and other	27,051		16,453		39,994		2,785		62,162		32,023		67,039		3,897
Total	Total	$	76,827	$	99,950	$	145,644	$	139,622	$	236,527	$	282,848	$	423,072	$	395,255	Total	$	92,336	$	74,863	$	227,603	$	147,194	$	199,194	$	159,700	$	417,802	$	277,428

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term greater than one year, we have allocated approximately ~~$168.2~~$139.6 million of transaction price to performance obligations that are unsatisfied as of ~~September~~June 30, ~~2021.~~2022. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that we expect will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately ~~11%~~28%, ~~46%~~60% and ~~68%~~82% of these remaining performance obligations by December 31, ~~2021,~~ 2022, 2023 and ~~2023,~~2024, respectively, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of revenue that we actually receive may be less or greater than this estimate and the timing of recognition may not be as expected.

1614

Contract Balances

Contract balances consist of accounts receivable, contract assets and deferred revenue. Contract assets are recorded when the right to consideration for services is conditional on something other than the passage of time. Contract assets relating to unbilled receivables are transferred to accounts receivable when the right to consideration becomes unconditional. We classify contract assets as current or non-current based on the timing of our rights to the unconditional payments. Our contract assets are generally classified as current and recorded within prepaid expenses and other current assets on our consolidated balance sheets. Our current accounts receivables are classified within accounts receivable, net on our consolidated balance sheets and our non-current accounts receivable are classified within prepaid expenses and other non-current assets on our consolidated balance sheets.

Deferred revenue includes advance customer payments and billings in excess of revenue recognized. We classify deferred revenue as current or non-current based on the timing of when we expect to recognize revenue. Our current deferred revenue is recorded within deferred revenue on our consolidated balance sheets and non-current deferred revenue is recorded within other long-term liabilities on our consolidated balance sheets.

The following table provides information about receivables, contract assets and deferred revenue from contracts with customers as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands):


		September 30, 2021		December 31, 2020 (1)			June 30, 2022		December 31, 2021
Short-term receivables ~~(2)~~(1)	Short-term receivables ~~(2)~~(1)	$	172,171	$	122,167	Short-term receivables ~~(2)~~(1)	$	116,580	$	129,012
Long-term receivables ~~(2)~~(1)	Long-term receivables ~~(2)~~(1)	4,796		4,554		Long-term receivables ~~(2)~~(1)	5,038		4,877
Short-term contract assets		—		329
Short-term deferred revenue	Short-term deferred revenue	13,785		10,187		Short-term deferred revenue	8,711		11,944
Long-term deferred revenue	Long-term deferred revenue	4,457		3,593		Long-term deferred revenue	3,605		4,437

————————

(1)~~Amounts exclude $3.4 million of short-term receivables and $4.1 million of short-term deferred revenue reclassified to discontinued operations as of December 31, 2020.~~

~~(2)~~Excludes pharmacy claims receivable and premiums ~~receivable~~receivable.

Changes in deferred revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are as follows (in thousands):


Deferred revenue
Balance as of beginning-of-period	$	~~13,780~~16,381
Reclassification to revenue, as a result of performance obligations satisfied	~~(9,343)~~(10,796)
Cash received in advance of satisfaction of performance obligations	~~13,805~~6,731
Balance as of end of period	$	~~18,242~~12,316

The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in a previous period was ~~$2.0~~$19.5 million and ~~$18.1~~$46.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, respectively,~~2022, due primarily to net gain share as well as changes in other estimates.

Contract Cost Assets

Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as non-current assets and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss). As of ~~both September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had ~~$3.3~~$3.8 million and $5.2 million, respectively, of contract acquisition cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense of $0.3 million and ~~$1.3~~$1.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and ~~$0.4~~$0.6 million and ~~$1.3~~$1.0 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

In our ~~platforms~~platform and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract. Our contract fulfillment costs primarily include our employee labor costs and third-party vendor costs. The capitalized contract fulfillment costs are classified as non-current and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within cost of revenue on the accompanying consolidated statements of operations and

comprehensive income (loss). As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had ~~$21.9~~$18.9 million and ~~$23.4~~$27.4 million, respectively, of contract fulfillment cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense including the acceleration of ~~$1.3~~amortization of contract costs

for certain customers of $1.2 million and ~~$8.6~~$11.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, ~~$5.2~~and $4.6 million and ~~$14.6~~$7.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be the shorter of the contract term or five years. The period of benefit was based on our technology, the nature of our customer arrangements and other factors.

Note 7. Credit Losses

We are exposed to credit losses primarily through our accounts receivable from revenue transactions, investments held at amortized cost and customer advances for regulatory capital and other notes receivable. We estimate expected credit losses based on past events, current conditions and reasonable and supportable forecasts. Expected credit losses are measured over the remaining contractual life of these assets. As part of our consideration of current and forward-looking economic conditions, we considered the impact of the COVID-19 pandemic and current inflationary pressures on our customers’ and other third parties’ ability to pay. We did not observe notable increases in delinquencies during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Given the nature of our business, our past collection experience during recessionary and pre-recessionary periods and our forecasted impact of the COVID-19 pandemic on our business, we did not record material changes in our allowances due to the COVID-19 pandemic during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Accounts Receivable from Revenue Transactions

Accounts receivable represent the amounts owed to the Company for goods or services provided to customers or third parties. Current accounts receivables are classified within accounts receivable, net on the Company’s consolidated balance sheets, while non-current accounts receivables are classified within prepaid expenses and other noncurrent assets on the Company’s consolidated balance sheets.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms, due dates and business strategy. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ legal counsel to pursue recovery of defaulted receivables. In addition, the Company will establish a general reserve based on delinquency rates. Historical loss rates are determined for each delinquency bucket in 30-day past-due intervals and then applied to the composition of the reporting date balance based on delinquency. The allowance implied from application of the historical loss rates is then adjusted, as necessary, for current conditions and reasonable and supportable forecasts.

Based on an aging analysis of our trade accounts receivable, non-trade accounts receivable and contract assets ~~at September~~as of June 30, ~~2021, 64%~~2022, 90% were current, ~~21%~~6% were past due less than 60 days, with ~~29%~~8% past due less than 120 days and at December 31, 2021, 90% was current, 2% was past due less than 60 days, with 3% past due less than 120 days. ~~At September~~As of June 30, 2022 and December 31, 2021, in total we reported ~~$195.0~~on the consolidated balance sheet $127.7 million and $171.5 million of accounts receivable, certain non-trade accounts receivable included in prepaid expenses and other assets, ~~on the consolidated balance sheet and contract assets,~~ net of allowances of ~~$3.9 million.~~$3.1 million and $3.4 million, respectively. The following table summarizes the changes in allowance for credit losses on our accounts receivables, certain non-trade accounts receivable and contract assets ~~for the nine months ended September 30, 2021 and 2020~~ (in thousands):

For the Nine Months Ended September 30,
2021 2020
Balance as of beginning of period $ (7,056) $ (41)
Passport acquisition — (2,582)
Cumulative transition adjustment — (2,815)
Provision for credit losses (1,949) (1,438)
Charge-offs(1)
5,076 1,665
Balance as of end of period $ (3,929) $ (5,211)

~~(1)Charge offs for the nine months ended September 30, 2021, are due to balances written-off that were previously fully reserved as part of the Passport transaction.~~


	For the Six Months Ended June 30,
	2022		2021
Balance as of beginning of period	$	(3,374)	$	(7,056)
Provision for credit losses	322		(611)
Balance as of end of period	$	(3,052)	$	(7,667)

Note 8. Property and Equipment, Net

The following summarizes our property and equipment ~~as of September 30, 2021 and December 31, 2020~~ (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Computer hardware	Computer hardware	$	20,542	$	18,866	Computer hardware	$	26,452	$	21,970
Furniture and equipment	Furniture and equipment	3,546		3,559		Furniture and equipment	4,021		3,581
Internal-use software development costs	Internal-use software development costs	153,576		137,085		Internal-use software development costs	173,099		159,587
Leasehold improvements	Leasehold improvements	15,580		15,586		Leasehold improvements	23,112		15,325
Total property and equipment	Total property and equipment	193,244		175,096		Total property and equipment	226,684		200,463
Accumulated depreciation and amortization expenses	Accumulated depreciation and amortization expenses	(111,670)		(88,856)		Accumulated depreciation and amortization expenses	(134,057)		(119,098)
Total property and equipment, net	Total property and equipment, net	$	81,574	$	86,240	Total property and equipment, net	$	92,627	$	81,365

The Company capitalized ~~$5.4~~$7.1 million and ~~$16.5~~$13.5 million ~~of internal-use software development costs~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and $5.6 million and ~~$19.3~~$11.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, respectively.~~2021, respectively, of internal-use software development costs. The net book value of capitalized internal-use software development costs was ~~$71.7~~$71.5 million and ~~$75.3~~$71.2 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Depreciation expense related to property and equipment was ~~$7.4~~$7.8 million and ~~$22.8~~$15.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and ~~$7.3~~$7.6 million and ~~$21.2~~$15.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively, of which amortization expense related to capitalized internal-use software development costs was ~~$6.7~~$6.5 million and ~~$20.0~~$13.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and ~~$6.2~~$6.6 million and ~~$17.8~~$13.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

Note 9. 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.

~~Subsequent to the sale of True Health, the~~The Company has 3 reporting units, each with discrete financial information. Our assets and liabilities are employed in and relate to the operations of our reporting units. Therefore, the equity carrying value and future cash flows must be estimated each time a goodwill impairment analysis is performed on a reporting unit. As a result, our assets, liabilities and cash flows are assigned to reporting units using reasonable and consistent allocation methodologies.

Our annual goodwill impairment review occurs ~~during the fourth quarter~~on October 31 of each fiscal year. We 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 management, strategy, partners, or litigation.

~~2021 Goodwill Impairment Test~~

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during ~~the three and nine months ended September 30, 2021. We will perform our annual impairment test as of October 31, 2021.~~

~~2020 Goodwill Impairment Test~~

As of March 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its 2019 annual goodwill impairment test that would indicate that it was more likely than not that the fair values of the reporting units were less than the reporting units’ carrying amounts that would require an additional interim impairment assessment after October 31, 2019. Considering the sharp decrease in the share price of the Company’s Class A common stock during the three months ended March 31, 2020, the Company determined indicators of an impairment were present and we performed an interim goodwill impairment assessment as of March 31, 2020. As a result of this test, the Company determined that there was no goodwill impairment of the reporting unit which recognized an impairment in the year ended December 31, 2019.

During May 2020, the Kentucky Cabinet for Health and Family Services (“CHFS”) announced that EVH Passport was not awarded a Kentucky managed Medicaid contract for the next contract period and the Passport Medicaid Contract would expire on December 31, 2020. As a result of this announcement, the Company determined there were events or changes in circumstances since its 2019 annual goodwill impairment test that indicated it was more likely than not that the fair value of 1 of its 2 reporting units in the EHS segment was less than the reporting unit’s carrying amount triggering an interim quantitative assessment.

In performing this interim quantitative assessment, we estimated the fair value of the reporting unit by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value in a quantitative analysis, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates.

As of May 31, 2020, we determined that the reporting unit under review had an estimated fair value less than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $215.1 million on our consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, ~~2020. In addition,~~2022. We will perform our annual impairment test on October 31, 2022.

2021 Goodwill Impairment Test

On October 31, 2021, the Company ~~reviewed~~performed its ~~interim~~annual goodwill impairment ~~analysis as of June 30, 2020 and~~review for fiscal year 2021. Based on our qualitative assessment, we did not identify ~~any additional information or events~~sufficient indicators of impairment that would ~~contradict or change the conclusion reached by the Company as of May 31, 2020.~~

During the three months ended September 30, 2020, we evaluated qualitative factors that could indicate the fair value of each of our reporting units may be lower than the carrying value. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three months ended September 30, 2020.

During the Company’s annual impairment analysis as of October 31, 2020, the Company concluded that previous impairment charges of $199.8 million and $215.1 million recorded during the three months ended December 31, 2019 and June 30, 2020, respectively, in 1 of our 2 reporting units in the EHS segment left that specific reporting unit with a limited fair value cushion. Therefore, the Company elected to forego the qualitative assessment and proceed directly to the quantitative assessment of the goodwill impairment test for that specific reporting unit. This election does not preclude management from performing the qualitative assessment in any subsequent period. For the remaining reporting units, after assessing the totality of events and circumstances including the results of our previous valuations, the minimal impacts of the Passport loss and COVID-19, the Company does not believe that an event occurred or circumstances changed during the period under consideration that would, more likely than not, reducesuggest the fair value of any of our 3 reporting ~~unit~~units was below their respective carrying ~~amount. Therefore, the Company concluded that the~~values. As a result, a quantitative ~~assessment~~goodwill impairment analysis was not required.

In performing our October 31, 2020 impairment test for 1 of the specific reporting units referenced above, we estimated the fair value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates. As of October 31, 2020, we determined that the specific reporting unit had an estimated fair value greater than its carrying value and as a result, goodwill is not impaired.

~~As of December 31, 2020, the Company assessed whether there were additional events or changes~~Change in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting unit was less than the reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2020. The Company determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as of December 31, 2020.

Goodwill

The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the ~~nine months ended September 30, 2021 and 2020~~periods presented (in thousands):

EHS Clinical Solutions Consolidated
Balance as of December 31, 2020 (1)
$ 214,354 $ 134,675 $ 349,029
Foreign currency translation (19) — (19)
Balance as of September 30, 2021 $ 214,335 $ 134,675 $ 349,010

EHS Clinical Solutions Consolidated
Balance as of December 31, 2019 (1)
$ 431,684 $ 134,675 $ 566,359
Goodwill disposal (2)
(2,200) — (2,200)
Impairment (215,100) — (215,100)
Foreign currency translation (42) — (42)
Balance as of September 30, 2020 $ 214,342 $ 134,675 $ 349,017


	EHS		Clinical Solutions		Consolidated
Balance as of December 31, 2021(1)	$	214,334	$	211,963	$	426,297
Foreign currency translation	(69)		—		(69)
Balance as of June 30, 2022	$	214,265	$	211,963	$	426,228

Balance as of December 31, 2020(1)	$	214,354	$	134,675	$	349,029
Foreign currency translation	(20)		—		(20)
Balance as of June 30, 2021	$	214,334	$	134,675	$	349,009

————————

(1)Net of cumulative inception to date impairment of $575.5 million ~~and $360.4 million~~ as of both December 31, ~~2020~~2021 and ~~2019, respectively.~~2020.

~~(2)~~
~~Goodwill written-off upon disposal of a consolidated subsidiary.~~

Intangible Assets, Net

Details of our intangible assets (in thousands, except weighted-average useful lives) as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are presented below:

September 30, 2021 December 31, 2020
Weighted- Average Remaining Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Value
Corporate trade name 12.4 $ 23,300 $ 7,306 $ 15,994 13.2 $ 23,300 $ 6,271 $ 17,029
Customer relationships (1)
15.4 278,519 68,483 210,036 16.2 278,519 57,716 220,803
Technology 1.7 82,922 71,460 11,462 1.8 82,922 63,507 19,415
Below market lease, net 1.6 1,218 899 319 2.3 1,118 648 470
Provider network contracts (1)
2.3 14,364 7,106 7,258 2.9 12,175 4,900 7,275
Total intangible assets, net $ 400,323 $ 155,254 $ 245,069 $ 398,034 $ 133,042 $ 264,992

~~————————~~

~~(1)~~Amounts exclude $2.2 million and $0.9 million of customer relationships and provider network contracts, respectively, net of accumulated amortization, with weighted average remaining useful lives of 15 years and 10 months reclassified to discontinued operations as of December 31, 2020.


	June 30, 2022							December 31, 2021
	Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Corporate trade name	11.9	$	25,800	$	8,466	$	17,334	12.4	$	25,800	$	7,693	$	18,107
Customer relationships	14.4	311,019		81,125		229,894		14.9	311,019		72,697		238,322
Technology	1.7	87,922		77,041		10,881		2.0	87,922		73,378		14,544
Below market lease, net	0.8	1,218		1,050		168		1.3	1,218		950		268
Provider network contracts (1)	1.7	16,236		9,667		6,569		2.2	16,417		7,874		8,543
Total intangible assets, net		$	442,195	$	177,349	$	264,846		$	442,376	$	162,592	$	279,784

Amortization expense related to intangible assets was $7.3 million and $14.8 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021, was $7.4~~2022, respectively, and $7.2 million and ~~$22.1~~$14.7 million ~~respectively. Amortization expense related to intangible assets~~ for the three and ~~nine~~six months ended ~~September~~June 30, 2020 was $7.2 million and $24.9 million, respectively, excluding $0.2 million and $0.5 million of amortization expense related to discontinued operations for the three and nine months ended September 30, 2020.2021, respectively.

Future estimated amortization of intangible assets (in thousands) as of ~~September~~June 30, ~~2021,~~2022, is as follows:


2021		$	6,421
2022	2022	24,751		2022	$	14,375
2023	2023	22,447		2023	26,760
2024	2024	16,563		2024	20,875
2025	2025	15,736		2025	19,330
2026				2026	19,153
Thereafter	Thereafter	159,151		Thereafter	164,353
Total future amortization of intangible assets	Total future amortization of intangible assets	$	245,069	Total future amortization of intangible assets	$	264,846

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the assets’ carrying value. We did not identify any circumstances during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, that would require an impairment test for our intangible assets.

Note 10. Long-term Debt

2024 Notes

In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and certain new investors. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2024 Notes. The closing of the private placement of the 2024 Notes occurred on August 19, 2020.

Holders of the 2024 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020, at a rate equal to 3.50% per annum. The 2024 Notes will mature on December 1, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $1.0 million and ~~$3.0~~$2.0 million for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022 and 2021, respectively.

The 2024 Notes are convertible into cash, shares of the Company's Class A common stock, or a combination of cash and shares of the Company's Class A common stock, at the Company's election, based on an initial conversion rate of 54.8667 shares of Class A common stock per $1,000 principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $18.23 per share of the Company’s Class A common stock. In the aggregate, the 2024 Notes are initially convertible into 6.4 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole provision upon a fundamental change or a notice of redemption under the governing indenture). The conversion rate may be adjusted under certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.

The option to settle the 2024 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2024 Notes into a debt component and an equity ~~component.~~component prior to the adoption of ASU 2020-06. The debt component was determined to be $78.9 million, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $38.1 million before issuance costs and was recorded within additional paid-in capital. ~~The equity component is the difference between the aggregate principal amount of the debt and the fair value of the debt component.~~ Issuance costs of $1.7 million and $1.3 million ~~are~~were allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $38.1 million, $1.7 million of issuance costs ~~will be~~was amortized to interest expense on the consolidated statements of operations and comprehensive income (loss) using the effective interest method.

On January 1, 2022, we adopted ASU 2020-06 using the retrospective transition method. As a result, prior period financial information and disclosures are not adjusted and continue to be reported under the accounting standards that were in effect prior to the adoption of ASU 2020-06. The adoption of ASU 2020-06 resulted in the combination of the debt and equity components of the 2024 Notes into a single debt instrument recorded in long term debt, net on the consolidated balance sheet. This resulted in a $38.1 million decrease in additional paid-in capital and a $1.3 million increase in additional paid-in capital from the previously bifurcated equity component from deferred financing fees, respectively, and an $11.7 million decrease to the January 1, 2022 accumulated deficit, representing the cumulative non-cash interest expense recognized related to the amortization of the debt discount associated with the bifurcated equity component of the 2024 Notes. These adjustments resulted in an increase of $25.1 million to the debt component of the 2024 Notes. Additionally, the allocation of the issuance costs to the equity component and all issuance costs related to the 2024 Notes are being amortized to interest expense using the effective interest method over the contractual term of the 2024 ~~Notes. The equity component recorded within additional paid-in capital will not be remeasured as long as it meets~~Notes which is included in the ~~conditions for equity classification.~~cumulative adjustment to the opening balance of accumulated deficit. The Company recorded ~~$2.0 million and $5.9 million of~~ interest expense related to the amortization of the ~~debt discount and the~~ issuance costs ~~allocated to the debt component~~of $0.2 million and $0.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022, respectively, and $2.0 million and $3.9 million for the three and six months ended June 30, 2021, respectively.

Holders of the 2024 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2024 Notes prior to March 1, 2023. The Company may redeem for cash all or any portion of the 2024 Notes, at its option, on or after March 1, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading

days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Credit Agreement

On December 30, 2019, the Company entered into a credit agreement, by and among the Company, Evolent Health LLC, as the borrower (the “Borrower”), certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent and collateral agent, together with the Company (the ~~“Credit~~“2019 Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) an initial secured term loan in the aggregate principal amount of $75.0 million (the “Initial Term Loan Facility”) and (ii) a delayed draw secured term loan facility in the aggregate principal amount of up to $50.0 million (the “DDTL Facility” and, together with the Initial Term Loan Facility, the “Senior Credit Facilities”), subject to the satisfaction of specified conditions. The Borrower borrowed the loan under the Initial Term Loan Facility on December 30, 2019. In connection with the Credit Agreement, on December 30, 2019, the Company entered into a Security Agreement, by and among the Company, the Borrower, the other guarantors and the collateral agent for the benefit of the secured parties, and a Guarantee Agreement, by the Company and each of the other guarantors in favor of the collateral agent for the benefit of the secured parties. The Senior Credit Facilities were guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain exceptions. The Senior Credit Facilities were secured by a first priority security interest in all of the capital stock of the borrower and each guarantor (other than the Company) and substantially all of the assets of the borrower and each guarantor, subject to certain exceptions.

The proceeds of the Initial Term Loan were used to finance the transactions contemplated by the Passport APA and pay fees and expenses incurred in connection therewith. The proceeds of the DDTL Facility were permitted to be used, subject to the Company’s satisfaction of specified conditions, to finance the repayment or repurchase of the Company’s 2.00% Convertible Senior Notes due December 1, 2021 and to fund permitted acquisitions. The Initial Term Loan and any loans under the DDTL Facility would have matured on the date that is the earliest of (a) December 30, 2024, (b) the date on which all amounts outstanding under the Credit Agreement would have been declared or have automatically become due and payable under the terms of the Credit Agreement and (c) the date that is ninety-one (91) days prior to the maturity date of the 2021 Convertible Notes unless certain liquidity conditions were satisfied (the foregoing, the “Maturity Date”). The interest rate for each loan under the Senior Credit Facilities was calculated, at the option of the Borrower, at either the Eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum was payable by the Borrower quarterly in arrears on the unused portion of the DDTL Facility.

Amounts outstanding under the Senior Credit Facilities could have been prepaid at the option of the Borrower subject to applicable premiums, including a make-whole premium payable on certain prepayments made prior to the second anniversary of the closing of the Senior Credit Facilities, and a call protection premium payable on the amount prepaid in certain instances as follows: (i) 4.00% of the principal amount so prepaid after the second anniversary of the closing of the Senior Credit Facilities but prior the third anniversary of the closing of the Senior Credit Facilities; (ii) 3.00% of the principal amount so prepaid after the third anniversary of the closing of the Senior Credit Facilities but prior the fourth anniversary of the closing of the Senior Credit Facilities; and (iii) 2.00% of the principal amount so prepaid after the fourth anniversary of the closing of the Senior Credit Facilities but prior the fifth anniversary of the closing of the Senior Credit Facilities. Amounts outstanding under the Senior Credit Facility were subject to mandatory prepayment upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt of certain casualty proceeds, issuances of certain debt obligations and a change of control transaction.

The Senior Credit Facilities contained customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company was required to comply at certain times with certain financial covenants comprised of a minimum net revenue test and a minimum liquidity test commencing upon closing of the Senior Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal quarter ending March 31, 2021. If an event of default had occurred, the lenders would be entitled to take enforcement action, including foreclosure on collateral and acceleration of amounts owed under the Senior Credit Facilities. We incurred $4.7 million of debt issuance costs in connection with this Credit Agreement, which was included in long-term debt, net of discount on our consolidated balance sheets and amortized into interest expense over the life of the agreement. The Company recorded $0.6 million and $1.7 million in interest expense related to the amortization of the debt discount and the issuance costs for the three and nine months ended September 30, 2020, respectively.

On August 19, 2020, an amendment to the Company's 2019 Credit Agreement became effective. The amendment effected changes to, among other things, permit the Company's use of cash in the exchange transactions in connection with the issuance of the 2024 Notes, permit the issuance of the 2024 Notes and permit certain note repurchases, as well as to implement amendments to certain minimum liquidity thresholds.

2319

On January 8, 2021, the Company repaid all outstanding amounts owed under and terminated the 2019 Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the 2019 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 a 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 $35 thousand of legal expenses.

Warrant Agreement

In conjunction with the Company’s entry into the 2019 Credit Agreement, the Company entered into warrant agreements whereby it agreed to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock at a per share purchase price equal to $8.05. The holders could exercise the warrants at any time until thirty days after the maturity of the 2019 Credit Agreement. The Company, at its sole discretion, could elect to pay the holders in cash in an amount determined based on the fair market value of the Class A common stock for the shares of Class A common stock issuable upon exercise of the warrants in lieu of delivering the shares.

On January 8, 2021, the Company settled the outstanding warrants associated with the 2019 Credit Agreement for $13.7 million.

2025 Notes

In October 2018, the Company issued $172.5 million aggregate principal amount of its 1.50% Convertible Senior Notes due 2025 (the “2025 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes were issued at par for net proceeds of $166.6 million. We incurred $5.9 million of debt issuance costs in connection with the 2025 Notes. The closing of the private placement of $150.0 million aggregate principal amount of the 2025 Notes occurred on October 22, 2018 and the Company completed the offering and sale of an additional $22.5 million aggregate principal amount of the 2025 Notes on October 24, 2018, pursuant to the initial purchasers’ exercise in full of their option to purchase additional notes.

Holders of the 2025 Notes are entitled to cash interest payments, which are payable semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2019, at a rate equal to 1.50% per annum. The Company recorded interest expense of ~~$0.6~~$0.7 million and ~~$1.9~~$1.3 million for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021 respectively. The 2025 Notes will mature on October 15, 2025, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date.

Prior to the close of business on the business day immediately preceding April 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the satisfaction of certain conditions, as described in the indenture, dated as of October 22, 2018, between the Company and U.S. Bank National Association, as trustee. At any time on or after April 15, 2025, until the close of business on the business day immediately preceding the maturity date, holders may convert, at their option, all or any portion of their notes at the conversion rate.

The 2025 Notes will be convertible at an initial conversion rate of 29.9135 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $33.43 per share of the Company’s Class A common stock. In the aggregate, the 2025 Notes are initially convertible into 5.2 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole fundamental change or a notice of redemption as described in the governing indenture). The conversion rate may be adjusted under certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.

The option to settle the 2025 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2025 Notes into a debt component and an equity ~~component.~~component prior to the adoption of ASU 2020-06. The debt component was determined to be $100.7 million, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $71.8 million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the aggregate principal amount of the debt and the debt component. Issuance costs of $3.4 million and $2.5 million are allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $71.8 million, $3.4 million of issuance costs will be amortized to interest expense on the consolidated statements of operations and comprehensive income (loss) using the effective interest method over the contractual term of the 2025 Notes.

decrease in additional paid-in capital ~~will not be remeasured as long as it meets~~and a $2.5 million increase in additional paid-in capital from the ~~conditions for~~previously bifurcated equity ~~classification.~~component from deferred financing fees, respectively, and a $28.1 million decrease to the January 1, 2022 accumulated deficit, representing the cumulative non-cash interest expense recognized related to the amortization of the debt discount associated with the bifurcated equity component of the 2025 Notes. These adjustments resulted in an increase of $41.3 million to the debt component of the 2025 Notes. Additionally, the allocation of the issuance costs to the equity component and all issuance costs related to the 2025 Notes are being amortized to interest expense using the effective interest method over the contractual term of the 2025 Notes which is included in the cumulative adjustment to the opening balance of accumulated deficit. The Company recorded $2.5 million and $7.4 million for the three and nine months ended September 30, 2021, respectively, and $2.3 million and $6.6 million for the three and nine months ended September 30, 2020, respectively, in interest expense related to the amortization of the ~~debt discount and the~~ issuance costs ~~allocated to~~of $0.3 million and $0.6 million for the ~~debt component.~~three and six months ended June 30, 2022, respectively, and $2.4 million and $4.8 million for the three and six months ended June 30, 2021, respectively.

Holders of the 2025 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2025 Notes prior to October 20, 2022. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after October 20, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

2021 Notes

In December 2016, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act. The 2021 Notes were issued at par for net proceeds of $120.4 million. We incurred $4.6 million of debt issuance costs in connection with the 2021 Notes, which we ~~are amortizing~~amortized to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes, since this method was not materially different from the effective interest method. The closing of the private placement of the 2021 Notes occurred on December 5, 2016.

Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017, at a rate equal to 2.00% per annum. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require the Company to repurchase all or part of their 2021 Notes upon the occurrence of a fundamental change at a price equal to 100.00% of the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental repurchase date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $0.1 million and $0.4 million for the three and nine months ended September 30, 2021, respectively, and $0.3 million and $1.5 million for the three and nine months ended September 30, 2020, respectively. We recorded non-cash interest expense related to the amortization of deferred financing costs of $0.1 million and $0.2 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million and $0.6 million for the three and nine months ended September 30, 2020, respectively.

The 2021 Notes are convertible into shares of the Company’s Class A common stock, based on an initial conversion rate of 41.6082 shares of Class A common stock per $1,000 principal amount of the 2021 Notes, which is equivalent to an initial conversion price of approximately $24.03 per share of the Company’s Class A common stock. In the aggregate, the 2021 Notes are initially convertible into 5.2 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole provision upon a fundamental change under the governing indenture). The conversion rate may be adjusted under certain circumstances.

The 2021 Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, we will deliver for each $1,000 principal amount of notes converted a number of shares of our Class A common stock equal to the applicable conversion rate (together with a cash payment in lieu of delivering any fractional share) on the third business day following the relevant conversion date.

In August 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. There was no cash consideration in these exchanges outside of an aggregate cash payment of $2.5 million paid to exchanging noteholders. 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 of $2.5 million paid to exchanging noteholders.

In August 2020, we also repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on extinguishment of debt.

Upon maturity of the 2021 Notes on December 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) for the year ended December 31, 2021.

Convertible Senior Notes Carrying Value

The ~~2025 Notes,~~ 2024 Notes and ~~2021~~2025 Notes are recorded on our accompanying consolidated balance sheets at their net carrying values as of ~~September~~June 30, ~~2021.~~2022. However, the ~~2025 Notes,~~ 2024 Notes and ~~2021~~2025 Notes are privately traded by qualified institutional buyers (within the meaning of Rule 144A under the Securities Act) and their fair values are Level 2 inputs. The ~~2025 Notes,~~ 2024 Notes and ~~the 2021~~2025 Notes also have embedded conversion options and contingent interest provisions, which have not been recorded as separate financial instruments. The following table summarizes the carrying value of the long-term convertible debt as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (in thousands):


	June 30, 2022		December 31, 2021
2024 Notes
Carrying value	$	114,893	$	89,361
Unamortized debt discount and issuance costs	2,158		27,690
Principal amount	$	117,051	$	117,051
Remaining amortization period (years)	2.4		2.9
Fair value(1)	$	197,477	$	195,445

2025 Notes
Carrying value	$	168,245	$	126,315
Unamortized debt discount and issuance costs	4,255		46,185
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	3.3		3.8
Fair value(1)	$	195,434	$	177,251

25————————

(1)

September
30, 2021 December
31, 2020
2024 Notes
Carrying value $ 87,317 $ 81,462
Unamortized debt discount and issuance costs 29,734 35,589
Principal amount $ 117,051 $ 117,051
Remaining amortization period (years) 3.2 3.9
Fair value $ 174,962 $ 153,220
2025 Notes
Carrying value $ 123,746 $ 116,349
Unamortized debt discount and issuance costs 48,754 56,151
Principal amount $ 172,500 $ 172,500
Remaining amortization period (years) 4.0 4.8
Fair value $ 193,799 $ 147,488
2021 Notes
Carrying value $ 26,704 $ 26,557
Unamortized issuance costs 33 180
Principal amount $ 26,737 $ 26,737
Remaining amortization period (years) 0.2 0.9
Fair value $ 29,404 $ 26,470
Fair values for notes are derived from available trading prices closest to the respective balance sheet date.

Note 11. Commitments and Contingencies

Commitments

Letters of Credit

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company ~~established~~was party to irrevocable standby letters of credit with a bank for ~~$14.9~~$13.8 million and ~~$7.4~~$15.4 million, respectively, for the benefit of a regulatory authorities, real estate and risk-sharing agreements. As such, we held ~~$14.9~~$13.8 million and ~~$7.4~~$15.4 million, respectively, in restricted cash and restricted investments as collateral as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, respectively.~~2021. The letters of credit have current expiration dates between ~~October 2021~~June 2022 and March 2032 and will automatically extend without amendment for an additional one-year period and will continue to automatically extend after each one-year term from the expiry date unless the bank elects not to extend beyond the initial or any extended expiry date.

Indemnifications

The Company’s customer agreements generally include a provision by which the Company agrees to defend its partners against third-party claims (a) for death, bodily injury, or damage to personal property caused by Company negligence or willful misconduct, (b) by former or current Company employees arising from such managed service agreements, (c) for intellectual property infringement under specified conditions and (d) for Company violation of applicable laws, and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

Pre-IPO Investor Registration Rights Agreement

We entered into a registration rights agreement with The Advisory Board, UPMC, TPG and another investor to register for sale under the Securities Act shares of our Class A common stock, including those delivered in exchange for Class B common stock and Class B common units. Subject to certain conditions and limitations, this agreement provides these investors with certain demand, piggyback and shelf registration rights. The registration rights granted under the registration rights agreement will terminate upon the date the holders of shares that are a party thereto no longer hold any such shares that are entitled to registration rights. Pursuant to our contractual obligations under this agreement, we filed a registration statement on Form S-3 with the SEC on July 28, 2016, which was declared effective on August 12, 2016.

2622

We will pay all expenses relating to any demand, piggyback or shelf registration, other than underwriting discounts and commissions and any transfer taxes, subject to specified conditions and limitations. The registration rights agreement includes customary indemnification provisions, including indemnification of the participating holders of shares of Class A common stock and their directors, officers and employees by us for any losses, claims, damages or liabilities in respect thereof and expenses to which such holders may become subject under the Securities Act, state law or otherwise. We did not incur any expenses related to secondary offerings or other sales of shares by our investor stockholders during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, respectively.

Guarantees

On July 16, 2020, EVH Passport, Evolent Health LLC and Molina Healthcare, Inc. (“Molina”) entered into an Asset Purchase Agreement (the “Molina APA”), which contemplated the sale by EVH Passport to Molina of certain assets, including certain intellectual property rights of EVH Passport and EVH Passport’s rights under the Passport Medicaid Contract. On September 1, 2020, EVH Passport and Molina consummated the transactions contemplated by the Molina APA (the “Molina Closing”) and the Passport Medicaid Contract was novated to Molina. In connection with the Molina Closing, the Company continued to provide administrative support services relating to the Passport Medicaid Contract to Molina through the end of 2020. Following the Molina Closing, EVH Passport began working with regulatory authorities including the Kentucky Department of Insurance (“KY DOI”) regarding the wind down of its operations throughout 2021. As part of that wind down process, the Company, as the parent of EVH Passport, entered into a guarantee for the benefit of the KY DOI to satisfy any EVH Passport liability or obligation in the event EVH Passport is not able to meet its wind down liabilities or obligations. As of ~~September~~June 30, ~~2021,~~2022, no amounts have been funded under this guarantee.

Reinsurance Agreements

On December 30, 2019, UHC, PHS I, the Company and EVH Passport consummated the transactions contemplated by the Passport APA (the “Passport Closing”). As part of the Passport Closing, EVH Passport and UHC entered into an agreement that provided for the administration and assumption of the financial risks by EVH Passport of the D-SNP Business until such time as EVH Passport became certified as a Medicare Advantage Organization and the D-SNP Business could be transferred to EVH Passport. On October 1, 2020, the D-SNP Business was transferred from UHC to EVH Passport.

At the Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption of the financial risks by Molina of the D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare Advantage Organization and the D-SNP Business is transferred to Molina. The Company and EVH Passport continued to administer the D-SNP Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business was officially transferred to Molina effective September 1, 2021.

The following summarizes premiums and claims assumed under the Reinsurance Agreements ~~for the nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Nine Months Ended September 30,					For the Six Months Ended June 30,
		2021		2020			2022		2021
Reinsurance premiums assumed	Reinsurance premiums assumed	$	22,827	$	3,275	Reinsurance premiums assumed	$	(2)	$	17,576
Reinsurance premiums ceded		(1,614)		(3,275)
Claims assumed	Claims assumed	20,298		2,959		Claims assumed	149		16,863
Claims ceded		—		(422)
Claims-related administrative expenses	Claims-related administrative expenses	2,160		—		Claims-related administrative expenses	—		545
Increase in reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement		1,983		2,537
Increase (decrease) in reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement						Increase (decrease) in reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement	(151)		168
Reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement at the beginning of the period	Reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement at the beginning of the period	4,002		(502)		Reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement at the beginning of the period	90		4,002
Impact of consolidation on payable for claims and performance-based arrangements attributable to the Reinsurance Agreement	Impact of consolidation on payable for claims and performance-based arrangements attributable to the Reinsurance Agreement	—		—		Impact of consolidation on payable for claims and performance-based arrangements attributable to the Reinsurance Agreement	—		—
Reinsurance payments paid (received)	Reinsurance payments paid (received)	7,936		(502)		Reinsurance payments paid (received)	(328)		7,506
Payable (receivable) for claims and performance-based arrangements attributable to the Reinsurance Agreement at the end of the period	Payable (receivable) for claims and performance-based arrangements attributable to the Reinsurance Agreement at the end of the period	$	(1,951)	$	2,537	Payable (receivable) for claims and performance-based arrangements attributable to the Reinsurance Agreement at the end of the period	$	267	$	(3,336)

UPMC Reseller Agreement

The Company and UPMC are parties to a reseller, services and non-competition agreement, dated August 31, 2011, which was amended and restated by the parties on June 27, 2013 (as amended through the date hereof, the “UPMC Reseller Agreement”). Under the terms of the UPMC Reseller Agreement, UPMC has appointed the Company as a non-exclusive reseller of certain services, subject to certain conditions and limitations specified in the UPMC Reseller Agreement. In consideration for the Company’s obligations under

the UPMC Reseller Agreement and subject to certain conditions described therein, UPMC has agreed not to sell certain products and services directly to a defined list of 20 of the Company’s customers.

Contingencies

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the Tax Receivables Agreement (the “TRA”) with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs.

Due to the items noted above, and the fact that Evolent Health, Inc. is in a full valuation allowance position such that the deferred tax assets related to the Company’s historical pre-IPO losses and tax basis increase benefit from exchanges have not been realized, the Company has not recorded a liability pursuant to the TRA.

Litigation Matters

We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment claims. When the likelihood of a loss contingency becomes probable and the amount of the loss can be reasonably estimated, we accrue a liability for the loss contingency. We continue to review accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made.

On August 8, 2019, a shareholder of the Company filed a class action complaint against the Company, asserting claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, in the United States District Court, Eastern District of Virginia, Alexandria Division. An amended complaint was filed on January 10, 2020, ~~and~~ a second amended complaint was filed on June 8, ~~2020. The case,~~ 2020, and a third amended complaint, now titled Plymouth County Retirement System v. Evolent Health, Inc., Frank Williams, Nicholas McGrane, Seth Blackley ~~Christie Spencer,~~, was filed on December 2, 2021. On July 13, 2022, the parties to the class action executed a term sheet for settlement of the litigation, subject to documentation of the settlement and ~~Steven Wigginton, alleges~~approval of the court after notice to class members. On August 2, 2022, the lead plaintiff in the case filed an unopposed motion seeking preliminary approval of the settlement and related exhibits, including draft notice to class members and a proposed final order. The settlement stipulation is subject to preliminary and final approval by the court. If the settlement is approved, we expect that the ~~Company’s executives made false~~agreed-upon settlement payment of $23.5 million will be funded entirely by applicable directors’ and officers’ liability insurance. As such, we do not expect to incur a significant net loss or ~~misleading statements regarding its business with Passport. The Company filed~~cash outflow as a motion to dismiss the second amended complaint, and the Eastern District of Virginia granted in part and denied in part the motion on March 24, 2021. The Company and Plaintiffs then filed separate motions to reconsider that are pending. While the scoperesult of the allegations that remain is still unclear pending the court’s further decision, the case has now proceeded to the discovery phase. Based on the Company’s investigation so far, we believe the case has little legal or factual merit. However, the outcomesettlement of ~~any litigation is uncertain, and at~~ this ~~stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.~~matter.

On June 8, 2021, a shareholder of the Company filed a derivative action in the Delaware Chancery Court against some current and former Board members and against the Company as a nominal defendant, alleging that the Company’s Board was negligent in its oversight of the Company’s relationship with Passport Health Plan. The case is Lincolnshire Police Pension Fund, derivatively on behalf of of Evolent Health, Inc., v. Blackley, Williams, Scott, Holder, Farner, D’Amato, Duffy, Felt, Samet, Hobart, and Payson, and Evolent Health, ~~Inc.~~Inc. (“Derivative Action”). The Company and the Director-Defendants filed a motion to dismiss the complaint on August 27, 2021, and Plaintiffs responded by filing an amended complaint on October 26, 2021. ~~The Company anticipates that another round of~~Defendants filed a motion to dismiss the amended complaint on December 17, 2021. Plaintiffs have not yet responded to the motion to dismiss and there is not currently a briefing ~~will occur later this year.~~schedule on file with the Delaware Chancery Court. Based on the Company’s investigation, ~~so far,~~ we believe the case has little legal or factual merit. However, the outcome of any litigation is ~~uncertain, and at this stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.~~

uncertain.

The Company is not aware of any other legal proceedings or claims as of September 30, 2021, that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.

Credit and Concentration Risk

The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of ~~September~~June 30, ~~2021,~~2022, approximately ~~99.5%~~98.6% of our ~~$281.8~~$280.4 million of cash and cash equivalents, restricted cash and restricted investments were held in bank deposits with FDIC participating banks and approximately ~~0.5%~~0.9% were held in international banks. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any realized losses on cash and cash equivalents to date.

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The Company is also subject to significant concentration of accounts receivable risk as a substantial portion of our trade accounts receivable is derived from a small number of our partners. The following table summarizes the partners who represented at least 10.0% of our consolidated short-term trade accounts receivable, excluding pharmacy claims receivable and premiums receivable, as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

September 30, 2021 December 31, 2020
Cook County Health and Hospitals System 43.7 % 61.5 %
Florida Blue Medicare, Inc 33.3 % *


	June 30, 2022	December 31, 2021
Cook County Health and Hospitals System	24.5%	*
Florida Blue Medicare, Inc.	*	46.4%
Molina Healthcare	10.3%	10.4%
The Centers for Medicare and Medicaid Services	12.0%	*
Bright Health Management, Inc.	11.4%	*

————————

* Represents less than 10.0% of the respective ~~balance~~balance.

In addition, the Company is subject to significant concentration of revenue risk as a substantial portion of our revenue is derived from a small number of contractual relationships with our operating partners.

The following table summarizes those partners who represented at least 10.0% of our consolidated revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021:


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended June 30,		For the Six Months Ended June 30,
		2021		2020 (1)		2021		2020 (1)			2022	2021	2022	2021
Cook County Health and Hospitals Systems	Cook County Health and Hospitals Systems	29.0	%	23.1	%	29.0	%	22.0	%	Cook County Health and Hospitals Systems	24.1%	29.6%	24.0%	29.2%
Florida Blue Medicare, Inc.	Florida Blue Medicare, Inc.	13.8	%	*		14.2	%	*		Florida Blue Medicare, Inc.	11.7%	14.2%	11.8%	14.5%
Passport		*		22.9	%	*		25.0	%
Blue Cross and Blue Shield of North Carolina										Blue Cross and Blue Shield of North Carolina	10.2%	*	*	*

————————

~~(1)The denominator excludes $29.5 million and $87.1 million of True Health premium revenue reclassified to discontinued operations for the three and nine months ended September 30, 2020, respectively.~~

* Represents less than 10.0% of the respective ~~balance~~balance.

We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or contract with any significant partner or multiple partners in the aggregate could have a material adverse effect on the Company's financial condition and results of operations.

Note 12. Leases

The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease. If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most leases include one or more options to renew or may have a termination option. The Company determines whether these options are reasonably certain to be exercised or not at the inception of the lease. In addition, some leases contain escalation clauses. The rent expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the term of the lease. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Further, the Company treats all lease and non-lease components as a single combined lease component for all classes of underlying assets. The Company also enters into sublease agreements for some of its leased office space. Immaterial rental income attributable to subleases is offset against rent expense over the terms of the respective leases.

The Company leases office space and computer and other equipment under operating lease agreements expiring at various dates through 2031. Under the lease agreements, in addition to base rent, the Company is generally responsible for operating and maintenance costs and related fees. Several of these agreements include tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability on our consolidated balance sheets equal to the difference between rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis over the terms of the leases. The Company’s primary office location is in Arlington, Virginia, which has served as its corporate headquarters since 2013. The Arlington, Virginia office lease expires in January 2032. Certain leases acquired as part of the Valence Health transaction included existing sublease agreements for office locations in Chicago, Illinois.

In connection with various lease agreements, the Company is required to maintain ~~$3.4~~$2.3 million and ~~$3.5~~$3.8 million in letters of credit as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company held ~~$3.4~~$2.3 million

and ~~$3.5~~$3.8 million in restricted cash and restricted investments on the consolidated balance sheet as collateral for the letters of credit, respectively.

The following table summarizes our primary office leases as of ~~September~~June 30, ~~2021~~2022 (in thousands, other than term):


Location	Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required		Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required
Arlington, VA	Arlington, VA	10.3	$	36,364	$	1,579	Arlington, VA	9.6	$	34,014	$	1,579
Riverside, IL	Riverside, IL	9.5	42,205		232		Riverside, IL	8.8	39,712		232
Edison, NJ							Edison, NJ	3.8	1,981		222
Pune, India	Pune, India	2.0	1,612		—		Pune, India	1.3	864		—
Brea, CA	Brea, CA	0.7	739		—		Brea, CA	4.9	4,304		—

The following table summarizes the components of our lease expense ~~for the three and nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Operating lease cost	Operating lease cost	$	2,417	$	6,389	$	9,672	$	13,031	Operating lease cost	$	2,231	$	2,437	$	4,505	$	7,255
Amortization of right-of-use assets		—		—		—		299
Interest expense		—		—		—		3
Variable lease cost	Variable lease cost	1,183		1,327		3,696		3,844		Variable lease cost	1,171		1,192		2,497		2,513
Total lease cost	Total lease cost	$	3,600	$	7,716	$	13,368	$	17,177	Total lease cost	$	3,402	$	3,629	$	7,002	$	9,768

Maturity of lease liabilities (in thousands) as of ~~September~~June 30, ~~2021,~~2022, is as follows:


		Operating lease expense			Operating lease expense
2021		2,955
2022	2022	9,832		2022	$	5,196
2023	2023	8,645		2023	10,271
2024	2024	8,378		2024	10,025
2025	2025	8,145		2025	9,651
2026				2026	8,987
Thereafter	Thereafter	47,762		Thereafter	40,377
Total lease payments	Total lease payments	85,717		Total lease payments	84,507
Less:	Less:			Less:
Interest	Interest	21,704		Interest	19,537
Present value of lease liabilities	Present value of lease liabilities	$	64,013	Present value of lease liabilities	$	64,970

Our weighted-average discount rate and our weighted remaining lease terms (in years) ~~as of September 30, 2021~~ are as follows:


	June 30, 2022
Weighted average discount rate	~~6.43~~6.30	%
Weighted average remaining lease term	~~9.1~~8.3

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Note 13. ~~Earnings (Loss)~~Loss Per Common Share

The following table sets forth the computation of basic and diluted earnings per share available for common stockholders ~~for the three and nine months ended September 30, 2021 and 2020~~ (in thousands, except per share data):

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Income (loss) from continuing operations $ (13,040) $ (37,035) $ (33,337) $ (317,535)
Income (loss) from discontinued operations, net of tax — (1,135) 1,383 (2,908)
Net income (loss) (13,040) (38,170) (31,954) (320,443)
Less:
Net loss attributable to non-controlling interests — (822) — (822)
Net income (loss) available for common shareholders - basic and diluted $ (13,040) $ (37,348) $ (31,954) $ (319,621)
Weighted-average common shares outstanding - basic and diluted 85,800 85,172 85,306 82,615
Income (loss) per common share
Basic and diluted
Continuing operations $ (0.15) $ (0.43) $ (0.39) $ (3.84)
Discontinued operations — (0.01) 0.02 (0.03)
Basic and diluted income (loss) per share attributable to common shareholders of Evolent Health, Inc. $ (0.15) $ (0.44) $ (0.37) $ (3.87)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Loss from continuing operations	$	(4,125)	$	(9,107)	$	(9,475)	$	(20,297)
Income (loss) from discontinued operations, net of tax	(463)		—		(463)		1,383
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(4,588)	$	(9,107)	$	(9,938)	$	(18,914)

Weighted-average common shares outstanding - basic and diluted	90,071		85,448		89,792		85,056

Loss per common share
Basic and diluted
Continuing operations	$	(0.05)	$	(0.11)	$	(0.11)	$	(0.24)
Discontinued operations	—		—		—		0.02
Basic and diluted loss per share attributable to common shareholders of Evolent Health, Inc.	$	(0.05)	$	(0.11)	$	(0.11)	$	(0.22)

Anti-dilutive shares ~~(in thousands)~~ excluded from the calculation of weighted-average common shares presented above ~~for the three and nine months ended September 30, 2021 and 2020~~ are presented ~~below:~~below (in thousands):


		For the Three Months Ended September 30,		For the Nine Months Ended September 30,			For the Three Months Ended June 30,		For the Six Months Ended June 30,
		2021	2020	2021	2020		2022	2021	2022	2021
Restricted stock units ("RSUs"), performance-based RSUs and leveraged stock units ("LSUs")		2,012	1,042	1,700	600
Restricted stock units ("RSUs"), performance-based RSUs (“PSUs”) and leveraged stock units ("LSUs")						Restricted stock units ("RSUs"), performance-based RSUs (“PSUs”) and leveraged stock units ("LSUs")	1,642	2,052	1,817	1,793
Stock options	Stock options	2,004	1,362	2,008	1,016	Stock options	1,852	1,801	1,807	1,833
Convertible senior notes	Convertible senior notes	12,696	9,789	12,696	10,169	Convertible senior notes	11,582	12,696	11,582	12,696
Total	Total	16,712	12,193	16,404	11,785	Total	15,076	16,549	15,206	16,322

Note 14. Stock-based Compensation

Total compensation expense by award type and line item in our consolidated financial statements ~~for the three and nine months ended September 30, 2021 and 2020~~ was as follows (in thousands):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Award Type	Award Type									Award Type
Stock options	Stock options	$	274	$	584	$	945	$	1,972	Stock options	$	91	$	267	$	253	$	671
Performance-based stock options		—		—		—		75
RSUs	RSUs	2,381		1,704		6,782		5,566		RSUs	4,647		2,427		7,948		4,401
LSUs	LSUs	995		876		2,302		2,762		LSUs	382		222		1,157		1,307
PSUs	PSUs	745		—		1,725		—		PSUs	1,892		737		3,000		980
Total compensation expense by award type	Total compensation expense by award type	$	4,395	$	3,164	$	11,754	$	10,375	Total compensation expense by award type	$	7,012	$	3,653	$	12,358	$	7,359

Line Item	Line Item									Line Item
Cost of revenue	Cost of revenue	$	131	$	436	$	1,618	$	1,354	Cost of revenue	$	1,162	$	892	$	1,962	$	1,487
Selling, general and administrative expenses										Selling, general and administrative expenses	5,850		2,761		10,396		5,872
Total compensation expense by financial statement line item										Total compensation expense by financial statement line item	$	7,012	$	3,653	$	12,358	$	7,359

3127

Selling, general and administrative expenses 4,264 2,728 10,136 9,021
Total compensation expense by financial statement line item $ 4,395 $ 3,164 $ 11,754 $ 10,375

No stock-based compensation was capitalized as software development costs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Stock-based awards were granted ~~for the three and nine months ended September 30, 2021 and 2020~~ as follows (in thousands):


		For the Three Months Ended September 30,		For the Nine Months Ended September 30,			For the Three Months Ended June 30,		For the Six Months Ended June 30,
		2021	2020	2021	2020		2022	2021	2022	2021
RSUs	RSUs	134	52	1,162	1,192	RSUs	63	89	980	1,028
PSUs	PSUs	—	—	319	—	PSUs	—	—	479	319
LSUs		—	—	—	520

Note 15. Income Taxes

For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the full year.

An income tax expense (benefit) of ~~$0.2~~$(0.2) million and ~~$0.9~~$1.0 million and was recognized for the three and six months ended June 30, 2022, respectively, which resulted in effective tax rates of 3.9% and (11.4)%, respectively. An income tax expense (benefit) of $0.1 million and $0.7 million was recognized for the three and ~~nine~~six months ended ~~September~~June 30, 2021, respectively, which resulted in effective tax rates of ~~(1.8)~~(1.0)% and ~~(2.9)~~(3.6)%, respectively. An income tax expense (benefit) of $0.5 million and $(3.1) million was recognized for the three and nine months ended September 30, 2020, respectively, which resulted in effective tax rates of (1.3)% and 1.0%, respectively. The Company and its U.S. subsidiaries continue to record a valuation allowance against its net deferred tax assets, with the exception of indefinite lived components. The income tax expense recorded during the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 primarily relates to foreign taxes.

As of December 31, ~~2020,~~2021, the Company had unrecognized tax benefits of ~~$0.7~~$0.6 million that, if recognized, would not affect the effective tax rate due to the valuation allowance against its net deferred tax asset. As of ~~September~~June 30, ~~2021,~~2022, there are no changes to the unrecognized tax benefits. The Company is not currently subject to income tax audits in any U.S., state, or foreign jurisdictions for any tax year.

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the TRA with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs. See Note 11 above for discussion of our TRA.

Note 16. Investments in ~~and Advances to~~ Equity Method Investees

The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. The Company evaluates its interests in these entities to determine whether they meet the definition of a VIE and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE. The Company has determined that its interests in these entities meet the definition of a variable interest, however, the Company is not the primary beneficiary since it does not have the power to direct activities, therefore, the Company did not consolidate the VIEs.

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s economic interests in its equity method investments ranged between 4% and ~~39%,~~38% and 4% and ~~38%~~39%, respectively, and voting interests in its equity method investments ranged between 25% and 40%, respectively. The Company determined that it has significant influence over these entities but that it does not have control over any of the entities. Accordingly, the investments are accounted for under the equity method of accounting and the Company is allocated its proportional share of the entities’ earnings and losses for each reporting period. The Company’s proportional share of the ~~(gain) losses~~gain from these investments was approximately ~~$0.1~~$2.0 million and $2.5 million for the three and six months ended June 30, 2022, respectively, and $4.9 million and $12.7 million for the three and ~~nine~~six months ended ~~September~~June 30, 2021, ~~respectively, and $(13.7) million and $11.0 million for the three and nine months ended September 30, 2020,~~ respectively.

The Company signed services agreements with certain of the aforementioned entities to provide certain management, operational and support services to help manage elements of their service offerings. Revenue related to these services agreements were ~~$4.0~~$3.9 million and ~~$12.6~~$7.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and ~~$65.9~~$2.3 million and ~~$197.2~~$8.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

~~Note 17. Non-controlling Interests~~

Immediately following the Offering Reorganization and IPO in May 2015, the Company owned 70.3% of Evolent Health LLC. The Company’s ownership percentage changes with the issuance of Class A or Class B common stock and Class B Exchanges. In order to account for any changes in the Company’s ownership of Evolent Health LLC, we record a reclassification of equity between non-controlling interests and shareholders’ equity attributable to Evolent Health, Inc.

~~2020~~

On September 1, 2020, in connection with the consolidation of EVH Passport, the Company recognized a $25.7 million non-controlling interest for the Sponsors’ 30% equity interest in EVH Passport which represented the fair value of the non-controlling interest as of the date of consolidation. Pursuant to the shareholders’ agreement with the Sponsors, the Company was required to acquire the Sponsors’ 30% ownership interest for $20.0 million on or prior to December 31, 2021. On November 16, 2020, the Company acquired the Sponsors’ 30% equity interest and reclassified the non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc. As a result of this transaction, the Company recorded a $5.7 million gain on consolidation for the year ended December 31, 2020 in gain (loss) on disposal of assets and consolidation on the consolidated statements of operations.

~~Changes in non-controlling interests (in thousands) for the periods presented were as follows:~~

For the Three Months Ended September 30, 2020 For the Nine Months Ended September 30, 2020
Non-controlling interests balance as of beginning of period $ — $ 6,689
Issuance of non-controlling interest 25,749 25,749
Net loss attributable to non-controlling interest (822) (822)
Reclassification of non-controlling interests — (6,689)
Non-controlling interests balance as of end of period $ 24,927 $ 24,927

Note ~~18.~~17. Fair Value Measurement

GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) assuming an orderly transaction in the most advantageous market at the measurement date. GAAP also establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

•Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date;

•Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date and the fair value can be determined through the use of models or other valuation methodologies; and

•Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the particular asset or liability being measured.

Recurring Fair Value Measurements

In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis ~~as of December 31, 2020~~ (in thousands):

Level 1 Level 2 Level 3 Total
Assets
Cash and cash equivalents (1)
$ 5,877 $ — $ — $ 5,877
Total fair value of assets measured on a recurring basis $ 5,877 $ — $ — $ 5,877
Liabilities
Warrants (2)
$ — $ — $ 13,730 $ 13,730
Total fair value of liabilities measured on a recurring basis $ — $ — $ 13,730 $ 13,730


	June 30, 2022
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration(1)	$	—	$	—	$	33,400	$	33,400
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	33,400	$	33,400


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration(1)	$	—	$	—	$	28,700	$	28,700
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	28,700	$	28,700

(1) ~~Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of December 31, 2020.~~

~~(2)~~ Represents the fair value of ~~1,513,786 shares issuable under~~earn-out consideration related to the ~~warrant agreements discussed~~Vital Decisions transaction as described in Note ~~10. The warrants were settled in January 2021.~~4.

The Company recognizes any transfers between levels within the hierarchy as of the beginning of the reporting period. There were no transfers between fair value levels during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

In the absence of observable market prices, the fair value is based on the best information available and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks.

~~In conjunction with the Credit Agreement~~As discussed in Note ~~10,~~4, the acquisition of Vital Decisions includes a provision for additional equity consideration contingent upon the Company ~~entered into warrant agreements whereby it agreed to sell to~~obtaining certain annualized performance metrics during the ~~holders of the warrants an aggregate of 1,513,786 shares of Class A common stock.~~three months ending December 31, 2022. The fair value of the ~~warrants~~contingent equity consideration was estimated based on the ~~Black-Scholes model which incorporates the constant price variation~~real options approach, a form of the ~~stock,~~income approach, which estimated the ~~time value~~probability of ~~money,~~ the ~~option's strike price, and~~Company achieving future revenues under the ~~time to the option's expiry.~~agreement. The significant unobservable inputs used in the fair value measurement of the ~~warrants~~Vital Decisions contingent consideration are the ~~stock price volatility~~risk-neutral (probability weighted) earnout consideration and ~~annual risk free~~the applicable discount rate. A significant increase in the ~~stock price~~risk-neutral (probability weighted) earnout consideration or decrease in discount rate in isolation would result in a significantly higher fair value of the contingent consideration.

The changes in our liabilities measured at fair value for which the Company uses Level 3 inputs to determine fair value ~~for the nine months ended September 30, 2021 and 2020~~ are as follows (in thousands):


		For the Nine Months Ended September 30,					For the Six Months Ended June 30,
		2021		2020			2022		2021
Balance as of beginning of period	Balance as of beginning of period	$	13,730	$	16,975	Balance as of beginning of period	$	28,700	$	13,730
Settlements	Settlements	(13,730)		(3,500)		Settlements	—		(13,730)
Realized and unrealized gains (losses), net		—		(2,363)
Unrealized losses						Unrealized losses	4,700		—
Balance as of end of period	Balance as of end of period	$	—	$	11,112	Balance as of end of period	$	33,400	$	—

The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3 fair value measurements as of ~~December 31, 2020:~~the periods presented:

Fair Valuation Significant Assumption or
Value Technique Unobservable Inputs Input Ranges
Warrants $ 13,730 Black-Scholes Stock price volatility 62.2 %
Annual risk free rate 0.2 %

June 30, 2022

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

33,400

Real options approach

Risk-neutral expected earnout consideration

36,277

Discount rate

10.83

December 31, 2021

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

28,700

Real options approach

Risk-neutral expected earnout consideration

30,935

Discount rate

6.04

Nonrecurring Fair Value Measurements

In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. This includes assets and liabilities recorded in business combinations or asset acquisitions, goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not

carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value.

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents (those not held in a money market fund), restricted cash, receivables, prepaid expenses, accounts payable, accrued liabilities and accrued compensation approximate their fair values because of the relatively short-term maturities of these items and financial instruments.

See Note 10 for information regarding the fair value of the 2024 Notes ~~2025 Notes~~ and ~~2021~~2025 Notes.

Note ~~19.~~18. Related Parties

The entities described below are considered related parties and the balances and/or transactions with them are reported in our consolidated financial statements.

As discussed in Note 16, the Company had economic interests in several entities that ~~were previously~~are accounted for under the equity method of ~~accounting, including EVH Passport (which has been consolidated into the Company’s financial results since September 1, 2020).~~accounting. The Company has allocated its proportional share of the investees’ earnings and losses each reporting period. In addition, Evolent has entered into services agreements with certain of the entities to provide certain management, operational and support services to help the entities manage elements of their service offerings.

The Company also works with UPMC, one of its founding investors. The Company’s relationship with UPMC is a subcontractor relationship where UPMC has agreed to execute certain tasks (primarily TPA services) relating to certain customer commitments. This relationship is currently in wind-down.

The following table presents assets and liabilities attributable to our related parties ~~as of September 30, 2021 and December 31, 2020~~ (in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Assets	Assets					Assets
Accounts receivable, net	Accounts receivable, net	$	4,829	$	9,474	Accounts receivable, net	$	4,191	$	2,719
Prepaid expenses and other current assets	Prepaid expenses and other current assets	10		51		Prepaid expenses and other current assets	—		15
Prepaid expenses and other noncurrent assets	Prepaid expenses and other noncurrent assets	4,796		4,554		Prepaid expenses and other noncurrent assets	5,038		4,877

Liabilities	Liabilities					Liabilities
Accounts payable	Accounts payable	$	2,396	$	2,509	Accounts payable	$	323	$	1,967
Accrued liabilities	Accrued liabilities	840		1,520		Accrued liabilities	972		1,120
Reserve for claims and performance-based arrangements	Reserve for claims and performance-based arrangements	129		435		Reserve for claims and performance-based arrangements	—		734

The following table presents revenues and expenses attributable to our related parties ~~for the three and nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended June 30, 2022				For the Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue									Revenue	$	42,810	$	10,368	$	74,874	$	25,943
Transformation services		$	—	$	3,716	$	—	$	5,416
Platform and operations services		9,775		72,383		35,718		214,216

Expenses	Expenses									Expenses
Cost of revenue (exclusive of depreciation and amortization expenses)	Cost of revenue (exclusive of depreciation and amortization expenses)	751		(63)		1,850		1,013		Cost of revenue (exclusive of depreciation and amortization expenses)	36,684		606		63,145		1,099
Selling, general and administrative expenses	Selling, general and administrative expenses	74		—		186		97		Selling, general and administrative expenses	236		81		302		112

Note ~~20.~~19. Repositioning and Other Changes

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 certain assets of EVH Passport, which represented a significant revenue stream for the Company. In parallel with these divestitures, we contracted with a third-party vendor to review our operating model and organizational design in order to improve our profitability, create value through our solutions and invest in strategic opportunities in future periods.

In the fourth quarter of 2020, we committed to certain operational efficiency and profitability actions that we are taking in order to accomplish these objectives (“Repositioning Plan”). These actions included making organizational changes across our business as well as other profitability initiatives expected to result in reductions in force, re-aligning of resources as well as other potential operational efficiency and cost-reduction ~~initiatives.~~initiatives that will provide future benefit to the Company. The Repositioning Plan ~~is expected to conclude~~concluded in the fourth quarter of 2021.

The following table provides a summary of our total costs associated with the Repositioning Plan ~~for the three and nine months ended September 30, 2021,~~ by major type of cost (in thousands):


		Incurred For the Three Months Ended September 30, 2021		Incurred for the Nine Months Ended September 30, 2021		Total Amount Expected to be Incurred in the Repositioning Plan		Cumulative Amount Incurred through September 30, 2021			Cumulative Costs Incurred through December 31, 2021		Incurred For the Three Months Ended June 30, 2021		Incurred For the Six Months Ended June 30, 2021
Severance and termination benefits	Severance and termination benefits	$	—	$	185	$	185	$	185	Severance and termination benefits	$	185	$	76	$	185
Office space consolidation	Office space consolidation	—		2,071		2,321		2,071		Office space consolidation	2,742		—		2,071
Professional services	Professional services	—		3,787		5,562		5,062		Professional services	5,666		587		3,787
Total	Total	$	—	$	6,043	$	8,068	$	7,318	Total	$	8,593	$	663	$	6,043

Note ~~21.~~20. Segment Reporting

~~Commencing with the three months ended March 31, 2021, we~~We define our reportable segments based on the way the CODM, the chief executive officer, manages the operations for purposes of allocating resources and assessing performance. We classify our operations into 2 reportable segments as follows:

•Evolent Health Services, which houses our Administrative Simplification solution and certain supporting population health infrastructure; and

•Clinical Solutions, which includes our specialty care management and physician-oriented total cost of care solutions, along with the New Century Health and Evolent Care Partners brands.

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.

The CODM uses revenue in accordance with U.S. GAAP and Adjusted EBITDA as the relevant segment performance measures to evaluate the performance of the segments and allocate resources.

Adjusted EBITDA is a segment performance financial measure that offers a useful view of the overall operation of our businesses and may be different than similarly-titled segment performance financial measures used by other companies.

Adjusted EBITDA is defined as net loss attributable to common shareholders of Evolent Health, Inc. before interest income, interest expense, ~~(provision) benefit~~provision for income taxes, depreciation and amortization expenses, adjusted to exclude ~~equity method investment impairment,~~gain on transfer of membership, loss on ~~extinguishment~~repayment of debt, net, gain ~~(loss)~~ from equity method investees, ~~gain (loss) on disposal of assets and consolidation, goodwill impairment,~~ changes in fair value of contingent consideration, ~~and indemnification asset,~~ other income (expense), net, ~~net loss attributable to non-controlling interests, ASC 606 transition adjustments, purchase accounting adjustments,~~ repositioning costs, stock-based compensation expense, severance costs, amortization of contract cost assets, strategy and shareholder advisory services, acquisition-related costs and gain ~~(loss)~~ from discontinued operations.

Management considers revenue and Adjusted EBITDA to be the appropriate metrics to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as they eliminate the effect of items which are not indicative of each segment's core operating performance.

The following tables present our segment information ~~for the three and nine months ended September 30, 2021 and 2020~~ (in thousands)~~. Prior-year segment information (including segments total Adjusted EBITDA) has been restated to conform to the reporting structure change described in Note 1.~~:

Evolent Health Services Clinical Solutions Intersegment
Eliminations Subtotal
Corporate (1)
Consolidated
Revenue
For the Three Months Ended September 30, 2021
Transformation services $ 2,075 $ — $ — $ 2,075 $ — $ 2,075
Platform and operations services 61,240 159,614 (458) 220,396 — 220,396
Total revenue $ 63,315 $ 159,614 $ (458) $ 222,471 $ — $ 222,471
For the Three Months Ended September 30, 2020
Transformation services $ 4,807 $ — $ — $ 4,807 $ — $ 4,807
Platform and operations services 95,361 140,071 (667) 234,765 — 234,765
Total revenue $ 100,168 $ 140,071 $ (667) $ 239,572 $ — $ 239,572
Evolent Health Services Clinical Solutions Subtotal
Corporate (1)
Segments Total
For the Three Months Ended September 30, 2021
Adjusted EBITDA $ (3,353) $ 23,883 $ 20,530 $ (6,765) $ 13,765
For the Three Months Ended September 30, 2020
Adjusted EBITDA $ 24,645 $ (974) $ 23,671 $ (9,888) $ 13,783


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated Total
Revenue
For the Three Months Ended June 30, 2022
Total revenue	$	92,796	$	227,603	$	(460)	$	319,939	$	—	$	319,939

For the Three Months Ended June 30, 2021
Total revenue	$	75,323	$	147,194	$	(460)	$	222,057	$	—	$	222,057

	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Consolidated Total
For the Three Months Ended June 30, 2022
Adjusted EBITDA	$	15,129	$	13,492	$	28,621	$	(6,882)	$	21,739

For the Three Months Ended June 30, 2021
Adjusted EBITDA	$	6,531	$	13,597	$	20,128	$	(6,782)	$	13,346

Evolent Health Services Clinical Solutions Intersegment
Eliminations Subtotal
Corporate (1)
Consolidated
Revenue
For the Nine Months Ended September 30, 2021
Transformation services $ 4,984 $ — $ — $ 4,984 $ — $ 4,984
Platform and operations services 218,940 437,031 (1,356) 654,615 — 654,615
Total revenue $ 223,924 $ 437,031 $ (1,356) $ 659,599 $ — $ 659,599
For the Nine Months Ended September 30, 2020
Transformation services $ 10,800 $ — $ — $ 10,800 $ — $ 10,800
Platform and operations services 273,583 395,723 (2,003) 667,303 — 667,303
Total revenue $ 284,383 $ 395,723 $ (2,003) $ 678,103 $ — $ 678,103
Evolent Health Services Clinical Solutions Subtotal
Corporate (1)
Segments Total
For the Nine Months Ended September 30, 2021
Adjusted EBITDA $ 9,120 $ 53,456 $ 62,576 $ (20,558) $ 42,018
For the Nine Months Ended September 30, 2020
Adjusted EBITDA $ 36,361 $ 18,269 $ 54,630 $ (26,452) $ 28,178


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated Total
Revenue
For the Six Months Ended June 30, 2022
Total revenue	$	200,114	$	417,802	$	(920)	$	616,996	$	—	$	616,996

For the Six Months Ended June 30, 2021
Total revenue	$	160,609	$	277,417	$	(898)	$	437,128	$	—	$	437,128


	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Consolidated Total
For the Six Months Ended June 30, 2022
Adjusted EBITDA	$	23,346	$	35,688	$	59,034	$	(13,040)	$	45,994

For the Six Months Ended June 30, 2021
Adjusted EBITDA	$	12,473	$	29,573	$	42,046	$	(13,793)	$	28,253

————————

(1)Corporate includes various finance, human resources, legal, executive and other corporate infrastructure expenses.

The following table presents our reconciliation of consolidated segments total Adjusted EBITDA to net loss attributable to common shareholders of Evolent Health, Inc. ~~for the three and nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Net loss attributable to common shareholders of Evolent Health, Inc.	Net loss attributable to common shareholders of Evolent Health, Inc.	$	(13,040)	$	(37,348)	$	(31,954)	$	(319,621)	Net loss attributable to common shareholders of Evolent Health, Inc.	$	(4,588)	$	(9,107)	$	(9,938)	$	(18,914)
Less:	Less:									Less:
Interest income	Interest income	120		1,159		311		2,634		Interest income	223		68		340		191
Interest expense	Interest expense	(6,367)		(7,416)		(18,978)		(19,987)		Interest expense	(2,148)		(6,274)		(4,389)		(12,611)
(Provision) benefit for income taxes		(234)		(503)		(936)		3,131
Benefit from (provision for) income taxes										Benefit from (provision for) income taxes	184		(91)		(1,018)		(702)
Depreciation and amortization expenses	Depreciation and amortization expenses	(14,859)		(14,534)		(44,962)		(46,130)		Depreciation and amortization expenses	(15,112)		(14,916)		(30,218)		(30,103)
Equity method investment impairment		—		—		—		(47,133)
Gain on transfer of membership	Gain on transfer of membership	—		—		22,969		—		Gain on transfer of membership	—		—		—		22,969
Loss on repayment of debt, net	Loss on repayment of debt, net	—		—		(19,158)		—		Loss on repayment of debt, net	—		—		—		(19,158)
Loss on extinguishment of debt		—		(4,789)		—		(4,789)
Goodwill impairment		—		—		—		(215,100)
Gain from equity method investees	Gain from equity method investees	63		(13,717)		12,725		11,014		Gain from equity method investees	1,952		4,879		2,548		12,662
Loss on disposal of assets		—		—		—		(6,447)
Change in fair value of contingent consideration and indemnification asset		225		(2,570)		819		492
Net loss attributable to non-controlling interests		—		822		—		822
Change in fair value of contingent consideration										Change in fair value of contingent consideration	(800)		—		(6,878)		594
Other income (expense), net	Other income (expense), net	(41)		(110)		(73)		174		Other income (expense), net	297		(18)		475		(32)
Repositioning costs	Repositioning costs	—		—		(6,043)		—		Repositioning costs	—		(663)		—		(6,043)
Stock-based compensation expense	Stock-based compensation expense	(4,395)		(3,164)		(11,754)		(10,375)		Stock-based compensation expense	(7,012)		(3,653)		(12,358)		(7,359)
Severance costs	Severance costs	—		(1,757)		(52)		(7,890)		Severance costs	—		—		(39)		(52)
Amortization of contract cost assets	Amortization of contract cost assets	(110)		(2,610)		(433)		(3,817)		Amortization of contract cost assets	(27)		(196)		(54)		(323)
Strategy and shareholder advisory expenses	Strategy and shareholder advisory expenses	—		—		(6,513)		—		Strategy and shareholder advisory expenses	—		(1,513)		—		(6,513)
Acquisition costs	Acquisition costs	(1,207)		(807)		(3,277)		(1,490)		Acquisition costs	(3,421)		(76)		(3,878)		(2,070)
Gain (loss) from discontinued operations (1)	Gain (loss) from discontinued operations (1)	—		(1,135)		1,383		(2,908)		Gain (loss) from discontinued operations (1)	(463)		—		(463)		1,383
Adjusted EBITDA	Adjusted EBITDA	$	13,765	$	13,783	$	42,018	$	28,178	Adjusted EBITDA	$	21,739	$	13,346	$	45,994	$	28,253

————————

(1)Includes $(0.5) million loss on disposal of discontinued operations for the three and six months ended June 30, 2022 and $1.9 million gain on disposal of discontinued operations for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2021, respectively.

Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment.

Note ~~22.~~21. Reserve for Claims and Performance-Based Arrangements

The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based arrangements related to its total cost of care and specialty care management services.

Reserves for claims and performance-based arrangements for our EHS and Clinical Solutions segments 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. Reserves for claims and performance-based arrangements also reflect estimated amounts owed under the reinsurance agreements, as discussed further in Note 11.

The Company uses actuarial principles and assumptions that are consistently applied 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.

This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The liability for reserves related to its total cost of care and specialty care management services is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.

The Company’s policy for reserves related to its total cost of care and specialty care management services is to use historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.

For more recent months, and for newer lines of business where there is not sufficient paid claims history to develop completion factors, the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflects expected claim payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.

For each reporting period, the Company compares key assumptions used to establish the reserves for claims and performance-based arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based arrangements are adjusted through current period net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.

Activity in reserves for claims and performance-based arrangements ~~for the nine months ended September 30, 2021 and 2020,~~ was as follows (in thousands):


		For the Nine Months Ended September 30,																	For the Six Months Ended June 30,
		2021								2020									2022						2021
		EHS (1)		Clinical Solutions (1)		True Health		Total		EHS (1)		Clinical Solutions (1)		True Health		Total			EHS (1)		Clinical Solutions (1)		Total		EHS (1)		Clinical Solutions (1)		Total
Beginning balance	Beginning balance	$	56,295	$	122,532	$	9,859	$	188,686	$	4,265	$	50,245	$	6,640	$	61,150	Beginning balance	$	25,618	$	145,676	$	171,294	$	56,295	$	122,532	$	178,827

Incurred costs related to current year		8,669		340,582		34,228		383,479		2,376		313,259		63,571		379,206
Incurred costs related to prior year		527		92		(241)		378		2,319		8		1,488		3,815
Paid costs related to current year		20,801		205,236		23,274		249,311		74,939		260,660		55,014		390,613
Paid costs related to prior year		19,174		98,363		7,378		124,915		1,608		7,460		6,975		16,043
Incurred costs related to current period																		Incurred costs related to current period	—		246,955		246,955		8,669		219,343		228,012
Incurred costs related to prior period																		Incurred costs related to prior period	(10,289)		32,727		22,438		6,293		215		6,508
Less:																		Less:
Paid costs related to current period																		Paid costs related to current period	(1,239)		202,747		201,508		20,801		73,379		94,180
Paid costs related to prior period																		Paid costs related to prior period	436		100,709		101,145		20,673		71,392		92,065
Change during the year	Change during the year	(30,779)		37,075		3,335		9,631		(71,852)		45,147		3,070		(23,635)		Change during the year	(9,486)		(23,774)		(33,260)		(26,512)		74,787		48,275

Impact of consolidation on reserves for claims and performance-based arrangements	Impact of consolidation on reserves for claims and performance-based arrangements	—		—		—		—		164,297		—		—		164,297		Impact of consolidation on reserves for claims and performance-based arrangements	—		—		—		—		—		—
Disposal of discontinued operations		—		—		(13,194)		(13,194)		—		—		—		—
Other adjustments (2)	Other adjustments (2)	(2,047)		8,802		—		6,755		501		6,000		—		6,501		Other adjustments (2)	—		(12,074)		(12,074)		3,721		7,282		11,003
Ending balance	Ending balance	$	23,469	$	168,409	$	—	$	191,878	$	97,211	$	101,392	$	9,710	$	208,313	Ending balance	$	16,132	$	109,828	$	125,960	$	33,504	$	204,601	$	238,105

————————

(1)Costs incurred to provide specialty care management and EVH Passport are recorded within cost of revenue in our statement of operations.

(2)Other adjustments to reserves for claims and performance-based arrangements reflect changes in accrual for amounts payable to facilities and amounts owed to our payer partners for claims paid on our behalf.

3934

Note ~~23.~~22. Supplemental Cash Flow Information

The following represents supplemental cash flow information ~~the nine months ended September 30, 2021 and 2020~~ (in thousands):

For the Nine Months Ended September 30,
2021 2020
Supplemental Disclosure of Non-cash Investing and Financing Activities
Increase/decrease to goodwill from measurement period adjustments/business combinations $ — $ 2,200
Class A common stock issued for payment of earn-outs — 4,185
Accrued property and equipment purchases 497 37
Accrued deferred financing costs — 218
Effects of Leases
Operating cash flows from operating leases 9,854 10,287
Leased assets obtained in exchange for operating lease liabilities (2,157) (1,781)


	For the Six Months Ended June 30,
	2022		2021
Supplemental Disclosure of Non-cash Investing and Financing Activities
Accrued property and equipment purchases	$	1,118	$	668
Effects of Leases
Operating cash flows from operating leases	7,010		6,622
Leased assets disposed of (obtained in) exchange for operating lease liabilities	4,153		(2,157)

Note ~~24.~~23. Subsequent Events

Acquisition of ~~Vital Decision~~IPG

On ~~August 2, 2021,~~June 24, 2022, the Company, Evolent Health LLC, and ~~EV Thunder~~Endzone Merger Sub, ~~LLC, each wholly owned subsidiaries~~Inc, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TPG Growth Iceman Parent, Inc., and TPG Growth V Iceman, L.P. to acquire Implantable Provider Group, Inc. (“IPG”) for $250.0 million in cash and $125.0 million in Class A Common Stock of the Company, ~~entered into~~together with a ~~definitive agreement for Evolent to acquire WindRose Health Investors III, L.P. portfolio company Vital Decisions for $85 million, with an additional earn out~~potential earnout of up to ~~$45 million. Vital Decisions~~$87.0 million payable in in cash and shares of Class A Common Stock of the Company in 2023. On August 1, 2022, the transactions contemplated by the Merger Agreement were consummated and the Company issued 3.7 million shares of Class A Common Stock in connection therewith. IPG will report into Evolent’s specialty care management offering, New Century Health, and will be consolidated into the Company’s Clinical Solutions segment.

Ares Secured Credit Facilities

On August 1, 2022 (the “Closing Date”), the Company entered into a Credit Agreement, by and among the Company, Evolent Health LLC (“Evolent”), Endzone Merger Sub, Inc. (“Endzone” or “Initial Borrower”), which upon consummation of the transactions contemplated by the Merger Agreement will be merged with and into TPG Growth Iceman Parent, Inc., Implantable Provider Group, Inc. (“Implantable”, collectively with Evolent, Endzone and TPG Growth Iceman Parent, the “Borrowers” and each a “Borrower”), certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, Ares Capital Corporation, as administrative agent, and ACF Finco I LP, as collateral agent and as revolver agent (the “2022 Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrowers in the form of (i) an initial term loan in the aggregate principal amount of $175.0 million (the “Initial Term Loan Facility”) and (ii) a revolving credit facility in the aggregate principal amount of up to $50.0 million, to be determined by reference to the lesser of $50.0 million, to be determined by reference to the lesser of $50.0 million and a borrowing base (the “Revolving Facility” and, together with the Initial Term Loan Facility, the “2022 Credit Facilities”), subject to the satisfaction of specified conditions. The ~~transaction closed~~Borrowers borrowed the loan under the Initial Term Loan Facility on ~~October~~August 1, ~~2021.~~2022 (the “Initial Term Loan”), and also borrowed $50.0 million under the Revolving Facility on the Closing Date.

In connection with the 2022 Credit Agreement, on August 1, 2022, the Company entered into a Security Agreement, by and among the Company, the Borrowers, the other guarantors and the collateral agent for the benefit of the secured parties and a Guarantee Agreement, by the Company and each of the other guarantors in favor of the collateral agent for the benefit of the secured parties.

Use of Proceeds. The proceeds of the Initial Term Loan may be used to fund ongoing working capital needs and other growth capital expenditure investments, and to finance the transactions contemplated by the Merger Agreement and fund fees and expenses incurred in connection therewith. The proceeds of the Revolving Facility may be used to finance the transactions contemplated by the Merger Agreement and to pay fees and expenses incurred in connection therewith on the Closing Date and thereafter to fund acquisitions, ongoing working capital needs and other growth capital investments and to pay fees and expenses in connection therewith.

Maturity. The Initial Term Loan and loans under the Revolving Facility will mature on the date that is the earliest of (a) August 1, 2027, (b) the date on which all amounts outstanding under the 2022 Credit Agreement have been declared or have automatically become due and payable under the terms of the 2022 Credit Agreement and (c) the date that is ninety-one (91) days prior to the maturity date of any Junior Debt (as defined in the 2022 Credit Agreement) unless certain liquidity conditions are satisfied.

base rate plus 2.50%. A commitment fee of (a) 2.00% per annum of the aggregate amount of the commitments in respect of the Term Loan Facility as of the Closing Date and (b) 2.00% of the aggregate amount of the commitments in respect of the Revolving Facility as of the Closing Date is payable by the Borrowers quarterly in arrears.

Prepayment. Amounts outstanding under the Credit Facility may be prepaid at the option of the Company subject to applicable premiums and a call protection premium payable on the amount prepaid in certain instances as follows: (1) 3.00% of the principal amount so prepaid after the Closing Date but prior to the first anniversary of the Closing Date; (2) 2.00% of the principal amount so prepaid after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date; (3) 1.00% of the principal amount so prepaid after the second anniversary of the Closing Date but prior to the third anniversary of the Closing Date; and (4) 0.00% of the principal amount so prepaid on or after the third anniversary of the Closing Date. Amounts outstanding under the Credit Facility are subject to mandatory prepayment upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt of certain casualty proceeds, issuances of certain debt obligations and a change of control transaction.

Guarantees and Collateral. The 2022 Credit Facilities are guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain exceptions. The 2022 Credit Facilities are secured by a first priority security interest in all of the capital stock of each borrower and guarantor (other than the Company) and substantially all of the assets of each borrower and guarantor, subject to certain exceptions.

Covenants and Other Provisions. The 2022 Credit Facilities contain customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company is required to comply at certain times with certain financial covenants comprised of a minimum liquidity test commencing upon closing of the 2022 Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal quarter ending September 30, 2022. If an event of default occurs, the lenders would be entitled to take enforcement action, including foreclosure on collateral and acceleration of amounts owed under the 2022 Credit Facilities.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial statements presented in “Part I – Item 1. Financial Statements” of this Form 10-Q; our ~~2020~~2021 Form 10-K, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and our current reports on Form 8-K filed in ~~2021.~~2022.

INTRODUCTION

Background

Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC, and its only business is to act as sole managing member of Evolent Health LLC. Substantially all of our operations are conducted through Evolent Health LLC and its consolidated subsidiaries. The financial results of Evolent Health LLC are consolidated in the financial statements of Evolent 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,~~value-based care, founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board Company.

~~Today we~~We manage our operations and allocate resources across two reportable segments: ~~Clinical Solutions and~~ Evolent Health ~~Services.~~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 name New Century Health, and for our Total Cost of Care solution under the brand name Evolent Care Partners.

~~The Company’s EHS segment provides an integrated administrative and clinical platform for health plan administration and population health management.~~

All of our revenue is recognized in the United States and substantially all of our long-lived assets are located in the United States.

We have incurred operating losses since our inception, in part because we have invested heavily in resources to support our growth. We intend to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities. We also expect to continue to incur operating losses for the foreseeable future and if we are unable to achieve our revenue growth and cost management objectives, we may not be able to achieve profitability.

~~As of the date the financial statements were available to be issued, we believe we have sufficient liquidity for the next 12 months.~~

Recent Events

Evolent Health’s Response to COVID-19

On March 11, 2020, the World Health Organization (the “WHO”) declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. While responseDue 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, orthe results of operations, or our outlook. As of ~~September~~June 30, ~~2021,~~2022, we had cash and cash equivalents of ~~$252.5~~$193.1 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~~pandemic has also affected global access to capital and caused significant volatility in financial markets. In addition, we have and are experiencing varying levels of inflation resulting in part from higher labor costs. Significant deterioration of the U.S. and global economies or rapid increases in inflation could have ~~a significant~~an 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 medical costs (including in oncology and cardiology), 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.~~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 ~~high quality~~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 and Chief 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 who have provided an approved religious or medical exemption are permitted to return to the Company’s offices in-person.

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,~~addition, we focused on possible changes in membership and medical utilization trends. Based on our analysis, we do not believe that our overall membership has been significantly impacted by the pandemic to date.With regards to medical utilization trends, in particular in our two largest specialties oncology and cardiology, while forecasting future impact is challenging, our analysis suggests that utilization during the six months ended June 30, 2022 (as measured by authorizations per thousand members) is similar to what it was before the pandemic.

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.~~Impact of Inflation

Across 2020 and into the first nine months of 2021, we saw changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The pandemic resulted in a significant increase in unemploymentWe experience pricing pressures in the ~~United States. Historically, Medicaid enrollment has increased during periods~~form of competitive prices in addition to rising ~~unemployment~~costs for certain inflation-sensitive operating expenses such as ~~individuals lose access~~labor, employee benefits and facility leases. We do not believe these impacts were material to ~~employer sponsored health care and turn to government sponsored health care. In addition, with respect to Medicaid, many states (including Florida, Kentucky and Illinois) put in place new rules~~our revenues or net income 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 of Septembersix months ended June 30, 2021, are in Medicaid and we generally earn revenue with respect to those lives based on a per member per month model, we have experienced a modest net benefit in our business from increased membership in that market in the near-term. We cannot predict the magnitude of this potential benefit, or how long it will last.

~~With respect to medical utilization, following the declaration of the pandemic~~2022. However, significant sustained inflation driven by the WHO, many state-wide mandates deferred non-essential medical procedures to allow hospitals to focus on providing care to COVID-19 patients. Across all markets, our partners experienced declines in non-essential care throughout the year ended December 31, 2020 and through the first nine months of 2021, offset in part by increased costs for care of COVID-19 patients. We continue to monitor medical utilization trends closely as the pandemic progresses. Beginning late in the first quarter of 2020 after declaration of the pandemic and continuing through the first nine months of 2021, we have seen a modest benefit in our business from lower utilization trends. However, we cannot predict with any certainty the net impact of lower utilization on our business, as it is possible we will experience a surge in utilization as consumer behavior changes (for example if the novel coronavirus is controlled by the available vaccinesmacroeconomic environment or other ~~measures).~~

~~Overall, we are unable to determine or predict the nature, duration, or scope of the overall~~factors could negatively impact ~~the COVID-19 pandemic will have on~~ our ~~business,~~margins, profitability and 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.~~future periods.

Customers

The following table summarizes those partners who represented at least 10.0% of our consolidated ~~revenue for the three and nine months ended September 30, 2021 and 2020:~~revenue:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021
2020 (1)
2021
2020 (1)
Cook County Health and Hospitals Systems 29.0 % 23.1 % 29.0 % 22.0 %
Florida Blue Medicare, Inc. 13.8 % * 14.2 % *
Passport * 22.9 % * 25.0 %


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2022	2021	2022	2021
Cook County Health and Hospitals Systems	24.1%	29.6%	24.0%	29.2%
Florida Blue Medicare, Inc.	11.7%	14.2%	11.8%	14.5%
Blue Cross and Blue Shield of North Carolina	10.2%	*	*	*

————————

* Represents less than 10.0% of the respective balance.

Cook County Health and Hospital Systems utilizes both our administrative simplification solutions provided by Evolent Health Services, which accounted for 9.2% of our consolidated revenue for both the three and nine months ended September 30, 2021 and our specialty care management solutions provided by New Century Health which accounted for 19.8% of our consolidated revenue for both the three and nine months ended September 30, 2021. Florida Blue Medicare, Inc. utilizes our specialty care management solutions provided by New Century Health.

Transactions

The Company has undertaken several transactions, some of which may impact year-to-year comparisons. The following is a discussion of certain of those transactions.

Acquisition of ~~Vital Decision~~IPG

On ~~August 2, 2021,~~June 24, 2022, the Company, Evolent Health LLC, and ~~EV Thunder~~Endzone Merger Sub, ~~LLC, each wholly owned subsidiaries~~Inc, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TPG Growth Iceman Parent, Inc., and TPG Growth V Iceman, L.P. to acquire Implantable Provider Group, Inc. (“IPG”) for $250.0 million in cash and $125.0 million in Class A Common Stock of the Company, ~~entered into~~together with a ~~definitive agreement for Evolent to acquire Windrose Health Investors III, L.P. portfolio company Vital Decisions for $85 million, with an additional earn out~~potential earnout of up to ~~$45 million. Vital Decisions~~$87.0 million payable in in cash and shares of Class A Common Stock of the Company in 2023. On August 1, 2022, the transactions contemplated by the Merger Agreement were consummated and the Company issued 3.7 million shares of Class A Common Stock in connection therewith. IPG will report into Evolent’s specialty care management offering, New Century Health, and will be consolidated into the Company’s Clinical Solutions segment. ~~The transaction closed on October 1, 2021.~~

~~Sale of True Health New Mexico~~Ares Secured Credit Facilities

On ~~January 11, 2021,~~August 1, 2022 (the “Closing Date”), the Company entered into a Credit Agreement, by and among the Company, Evolent Health LLC ~~EH Holdings~~(“Evolent”), Endzone Merger Sub, Inc. (“Endzone” or “Initial Borrower”), which upon consummation of the transactions contemplated by the Merger Agreement will be merged with and ~~True Health,~~into TPG Growth Iceman Parent, Inc., Implantable Provider Group, Inc. (“Implantable”, collectively with Evolent, Endzone and TPG Growth Iceman Parent, the “Borrowers” and each ~~wholly owned~~a “Borrower”), certain subsidiaries of the Company, ~~entered into~~as guarantors, the ~~SPA with Bright HealthCare,~~lenders from time to time party thereto, Ares Capital Corporation, as administrative agent, and ACF Finco I LP, as collateral agent and as revolver agent (the “2022 Credit Agreement”), pursuant to which ~~EH Holdings~~the lenders agreed to ~~sell all~~extend credit to the Borrowers in the form of ~~its equity interest~~(i) an initial term loan in ~~True Health~~the aggregate principal amount of $175.0 million (the “Initial Term Loan Facility”) and (ii) a revolving credit facility in the aggregate principal amount of up to ~~Bright HealthCare for~~$50.0 million, to be determined by reference to the lesser of $50.0 million and a ~~purchase price of $22.0 million plus excess risk based capital,~~borrowing base (the “Revolving Facility” and, together with the Initial Term Loan Facility, the “2022 Credit Facilities”), subject to the satisfaction of ~~customary closing conditions, including regulatory approvals.~~specified conditions. The ~~purchase price is subject to a customary purchase price adjustment following~~Borrowers borrowed the ~~True Health Closing based in part~~loan under the Initial Term Loan Facility on ~~actual medical claims experience. The True Health Closing occurred~~August 1, 2022 (the “Initial Term Loan”), and also borrowed $50.0 million under the Revolving Facility 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. Refer to “Part I - Item 1. Financial Statements - Note 5” for additional discussion regarding the True Health sale.Date.

In ~~addition, in conjunction~~connection with the ~~sale of True Health,~~2022 Credit Agreement, on August 1, 2022, the Company ~~made organizational changes, including re-evaluating its reportable segments. Effective during the first quarter of 2021,~~entered into a Security Agreement, by and among the Company, ~~bifurcated its previous Services segment into two segments. The Company’s Evolent Health Services segment (“EHS”) includes our administrative simplification solution~~the Borrowers, the other guarantors and ~~certain supporting population health infrastructure. Our Clinical Solutions segment includes our specialty care management~~the collateral agent for the benefit of the secured parties and ~~physician-oriented total cost~~a Guarantee Agreement, by the Company and each of ~~care solutions, along with~~ the ~~New Century Health and Evolent Care Partners brands. Refer to “Part I - Item 1. Financial Statements - Note 21~~other guarantors in favor of the collateral agent for ~~a further discussion~~the benefit of ~~our operating results by segment.~~the secured parties.

~~Passport~~Use of Proceeds. The proceeds of the Initial Term Loan may be used to fund ongoing working capital needs and other growth capital expenditure investments, and to finance the transactions contemplated by the Merger Agreement and fund fees and expenses incurred in connection therewith. The proceeds of the Revolving Facility may be used to finance the transactions contemplated by the Merger Agreement and to pay fees and expenses incurred in connection therewith on the Closing Date and thereafter to fund acquisitions, ongoing working capital needs and other growth capital investments and to pay fees and expenses in connection therewith.

~~On December 30, 2019, UHC, Passport Health Solutions, LLC (“PHS I”)~~Maturity. The Initial Term Loan and loans under the Revolving Facility will mature on the date that is the earliest of (a) August 1, 2027, (b) the date on which all amounts outstanding under the 2022 Credit Agreement have been declared or have automatically become due and payable under the terms of the 2022 Credit Agreement and (c) the date that is ninety-one (91) days prior to the maturity date of any Junior Debt (as defined in the 2022 Credit Agreement) unless certain liquidity conditions are satisfied.

Interest and Fees. The interest rate for each loan under the 2022 Credit Facilities is calculated, at the option of the Borrowers, (a) in the case of a Term Loan, at either the Adjusted Term SOFR Rate (as defined in the 2022 Credit Agreement) plus 5.50%, or the base rate plus 4.50% and (b) in the case of a Revolving Loan, at either the Adjusted Term SOFR Rate plus 3.50%, or the base rate plus 2.50%. A commitment fee of (a) 2.00% per annum of the aggregate amount of the commitments in respect of the Term Loan Facility as of the Closing Date and (b) 2.00% of the aggregate amount of the commitments in respect of the Revolving Facility as of the Closing Date is payable by the Borrowers quarterly in arrears.

Guarantees and Collateral. The 2022 Credit Facilities are guaranteed by the Company and ~~EVH Passport, closed~~the Company’s domestic subsidiaries, subject to certain exceptions. The 2022 Credit Facilities are secured by a ~~transaction whereby EVH Passport acquired~~first priority security interest in all of the capital stock of each borrower and guarantor (other than the Company) and substantially all of the assets of each borrower and ~~assumed substantially all of the liabilities of UHC, including the~~guarantor, subject to certain exceptions.

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~~Passport Medicaid Contract.~~Covenants and Other Provisions. The ~~purchase price paid by EVH Passport consisted~~2022 Credit Facilities contain customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of ~~$70.0 million in cash~~default, including cross-defaults to other material indebtedness. In addition, the Company is required to comply at certain times with certain financial covenants comprised of a minimum liquidity test commencing upon closing of the 2022 Credit Facilities and a ~~30% equity interest in EVH Passport issued to~~total secured leverage ratio commencing on the ~~Sponsors; however, $16.2 million~~last day of the ~~foregoing cash purchase price was held back until such time as PHS I delivers~~fiscal quarter ending September 30, 2022. If an event of default occurs, the lenders would be entitled to ~~EVH Passport certain owned real property~~take enforcement action, including foreclosure on collateral and ~~improvements.~~

On September 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 in January 2021. Prior to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under the equity methodacceleration 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 of September 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the Company’s consolidated financials, EVH Passport redeemed the Sponsors’ equity interests in EVH Passport in accordance with the terms of EVH Passport's Stockholders' Agreement, and, as a result, EVH Passport became a wholly owned subsidiary of the Company. The Company expects a return of capital from EVH Passport, expected to be between $130 million and $170 million in total, which is subject to regulatory approval from the Kentucky Department of Insurance. Refer to “Part I - Item 1. Financial Statements - Note 4” for additional discussion regarding the Passport transactions.

~~Repayment and Termination of Existing Credit Agreement~~

~~On January 8, 2021, the Company repaid all outstanding~~ amounts owed under ~~and terminated,~~ the 2022 Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Corporation under the Credit Agreement in connection with the prepayment was $98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. In addition to the payment of the Credit Agreement, the Company settled the outstanding warrants associated with the debt for $13.7 million. Refer to “Part I - Item 1. Financial Statements - Note 10” for additional discussion relating to the repayment of the Credit Agreement.

Facilities.

~~Repositioning Plan~~

We continually assess opportunities to improve operational effectiveness and efficiency to better align our expenses with revenues, while continuing to make investments in our solutions, systems and people that we believe are important to our long-term goals. Across 2020, we divested or agreed to divest a majority of our health plan assets, including the assets of EVH Passport, which represented a significant revenue stream for the Company. In parallel with these divestitures, we contracted with a third-party vendor to review our operating model and organizational design in order to improve our profitability, create value through our solutions and invest in strategic opportunities in future periods.

In the fourth quarter of 2020, we committed to certain operational efficiency and profitability actions that we are taking in order to accomplish these objectives (“Repositioning Plan”). These actions included making organizational changes across our business as well as other profitability initiatives expected to result in reductions in force, re-aligning of resources as well as other potential operational efficiency and cost-reduction initiatives. The Repositioning Plan is expected to conclude in the fourth quarter of 2021.

~~The following table provides a summary of our total costs associated with the Repositioning Plan for the three and nine months ended September 30, 2021, by major type of cost (in thousands):~~

Incurred For the Three Months Ended
September 30, 2021 Incurred for the Nine Months Ended September 30, 2021 Total Amount Expected to be Incurred in the Repositioning Plan Cumulative Amount Incurred through September 30, 2021
Severance and termination benefits $ — $ 185 $ 185 $ 185
Office space consolidation — 2,071 2,321 2,071
Professional services — 3,787 5,562 5,062
Total $ — $ 6,043 $ 8,068 $ 7,318

Critical Accounting Policies and Estimates

The ~~“Management Discussion and Analysis”~~MD&A included in our ~~2020~~2021 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates since our ~~2020~~2021 Form ~~10-~~

K.10-K. See “Item 1. Financial Statements - Note 2” in this Form 10-Q for a summary of our significant accounting policies and see “Item 1. Financial Statements - Note 3” in this Form 10-Q for information regarding the Company’s adoption of new accounting standards.

Summary of Significant Accounting Policies

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.

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 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.

On October 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.

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the ~~three and nine~~six months ended ~~September~~June 30, ~~2021.~~2022. We will perform our annual impairment test ~~as of~~on October 31, ~~2021.~~

2022.

~~A description of our 2020 goodwill impairment test follows below.~~

The Company performed an interim goodwill impairment assessment in one of our three reporting units in the EHS segment as of March 31, 2020 due to the decline in the Company’s stock price during the first quarter of 2020 and lack of excess of fair value over the carrying value considering the $199.8 million impairment charge taken in the fourth quarter of 2019. The Company concluded that the fair value of its reporting unit was more than its carrying value as of March 31, 2020. In addition, the Company performed an interim goodwill impairment assessment as of May 31, 2020 and concluded that the fair value of one of our three reporting units in the EHS segment was less than its carrying value by $215.1 million as of May 31, 2020. The decrease in fair value was due to our largest customer, EVH Passport, not obtaining a renewal of its Kentucky managed Medicaid contract, which was its sole business. The non-renewal of EVH Passport’s contract caused a reduction in the Company’s cash flow projections.

As a result of the impairment charges in the fourth quarter of 2019 and second quarter of 2020, the Company elected to forego the qualitative assessment and proceed directly to the quantitative assessment of the goodwill impairment test for the specific reporting unit that incurred those impairment charges. This election does not preclude Management from performing the qualitative assessment in any subsequent period. For the remaining reporting units, after assessing the totality of events and circumstances including the results of our previous valuations, the minimal impacts of the Passport loss and COVID-19, the Company does not believe that an event occurred or circumstances changed during the period under consideration that would, more likely than not, reduce the fair value of any reporting unit below their carrying amount. Therefore, the Company concluded that the quantitative assessment was not required.

In performing our October 31, 2020 impairment test for one of the specific reporting unit reference above, we estimated the fair value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates. As of October 31, 2020, we determined that the specific reporting unit had an estimated fair value greater than its carrying value and as a result, goodwill is not impaired.

As of December 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting units was less than the

reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2020. The Company determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as of December 31, 2020. As of December 31, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge earlier in the year was $214.3 million.

Adoption of New Accounting Standards

~~In June 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 after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 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.

In December 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~~on January 1, 2022 however, it did not have a material impact on our consolidated financial statements.

In August 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 Company adopted the standard using a modified retrospective method as of January 1, 2022, with adjustments which reduced additional paid-in capital by $106.2 million and increased retained earnings by $39.8 million and increased the net carrying amount of the 2024 Notes and 2025 Notes by $25.1 million and $41.3 million.

RESULTS OF OPERATIONS

Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units in Evolent Health LLC, which has owned all of our operating assets and substantially all of our business since inception. The financial results of Evolent Health LLC are consolidated in the financial statements of Evolent 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~~

Platform and Operations Services Revenue

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.

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

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 on September 1, 2020, our cost of revenue includes the consolidated impact of the ~~runout~~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~~Amortization Expense

Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value of Evolent Health LLC’s assets and liabilities for the Offering Reorganization, amortization of intangible assets recorded as part of our various business combinations and asset acquisitions and depreciation of property and equipment, including the amortization of capitalized software.

Lives on Platform and PMPM Fees

Evolent Health Services ~~lives~~Lives on ~~platform~~Platform are calculated by summing members on our value-based care and comprehensive health plan administrative platform. Clinical Solutions ~~lives~~Lives on ~~platform~~Platform are calculated by summing the Clinical Solutions Lives on Platform in our Performance suite and New 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~~Lives on ~~platform~~Platform are calculated by summing members covered for oncology specialty care services, ~~and~~ 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~~average per member per month (“PMPM”) fee is defined as platform and operations revenue pertaining to the Evolent Health Services segment induring the period reported divided by the average of the beginning and ending Evolent Health Services segment membership during the ~~quarter~~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 induring the period reported divided by the average of the beginning and ending Clinical Solutions Performance suite membership ~~for~~during the ~~relevant~~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 the New Century Health Technology and Services suite induring the period reported divided by the average of the beginning and ending New Century Heath Technology and Services ~~suite~~Suite membership ~~for~~during the ~~relevant~~ 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.

Evolent Health, Inc. Consolidated Results

(in thousands, except percentages) For the Three Months Ended September 30, Change Over Prior Period For the Nine Months Ended September 30, Change Over Prior Period
2021 2020 $ % 2021 2020 $ %
Revenue
Transformation services $ 2,075 $ 4,807 $ (2,732) (56.8)% $ 4,984 $ 10,800 $ (5,816) (53.9)%
Platform and operations services 220,396 234,765 (14,369) (6.1)% 654,615 667,303 (12,688) (1.9)%
Total revenue 222,471 239,572 (17,101) (7.1)% 659,599 678,103 (18,504) (2.7)%
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) 163,126 181,761 (18,635) (10.3)% 493,071 521,748 (28,677) (5.5)%
Selling, general and administrative expenses 51,292 52,366 (1,074) (2.1)% 152,582 151,749 833 0.5%
Depreciation and amortization expenses 14,859 14,534 325 2.2% 44,962 46,130 (1,168) (2.5)%
Loss on extinguishment of debt, net — 4,789 (4,789) (100.0)% — 4,789 (4,789) (100.0)%
Loss on disposal of assets and consolidation — — — —% — 6,447 (6,447) (100.0)%
Goodwill impairment — — — —% — 215,100 (215,100) (100.0)%
Change in fair value of contingent consideration and indemnification asset (225) 2,570 (2,795) (108.8)% (819) (492) (327) (66.5)%
Total operating expenses 229,052 256,020 (26,968) (10.5)% 689,796 945,471 (255,675) (27.0)%
Operating loss $ (6,581) $ (16,448) $ 9,867 60.0% $ (30,197) $ (267,368) $ 237,171 88.7%
Transformation services revenue as a % of total revenue 0.9 % 2.0 % 0.8 % 1.6 %
Platform and operations services revenue as a % of total revenue 99.1 % 98.0 % 99.2 % 98.4 %
Cost of revenue as a % of revenue 73.3 % 75.9 % 74.8 % 76.9 %
Selling, general and administrative expenses as a % of total revenue 23.1 % 21.9 % 23.1 % 22.4 %


(in thousands, except percentages)	For the Three Months Ended June 30,						Change Over Prior Period			For the Six Months Ended June 30,						Change Over Prior Period
	2022			2021			$		%	2022			2021			$		%
Revenue	$	319,939		$	222,057		$	97,882	44.1%	$	616,996		$	437,128		$	179,868	41.1%

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	249,705			172,113			77,592		45.1%	469,444			329,945			139,499		42.3%
Selling, general and administrative expenses	58,955			42,699			16,256		38.1%	117,887			101,290			16,597		16.4%
Depreciation and amortization expenses	15,112			14,916			196		1.3%	30,218			30,103			115		0.4%
Change in fair value of contingent consideration	800			—			800		100.0%	6,878			(594)			7,472		(1,257.9)%
Total operating expenses	324,572			229,728			94,844		41.3%	624,427			460,744			163,683		35.5%
Operating loss	$	(4,633)		$	(7,671)		$	3,038	39.6%	$	(7,431)		$	(23,616)		$	16,185	68.5%

Cost of revenue as a % of revenue	78.0		%	77.5		%				76.1		%	75.5		%
Selling, general and administrative expenses as a % of total revenue	18.4		%	19.2		%				19.1		%	23.2		%

Comparison of the Results for the Three Months Ended ~~September~~June 30, ~~2021~~2022 to ~~2020~~2021

Revenue

Total revenue ~~decreased~~increased by ~~$17.1~~$97.9 million, or ~~7.1%~~44.1%, to ~~$222.5~~$319.9 million for the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020.~~2021. This increase is primarily due to the addition of new partners and expansion with existing partners.

Transformation services revenue decreased by $2.7 million, or 56.8%, to $2.1 million for the three months ended September 30, 2021, as compared to 2020, due primarily to the timing and volume of implementation activities. Transformation services revenue accounted for 0.9% and 2.0% of our total revenue for the three months ended September 30, 2021 and 2020, respectively.

Platform and operations services revenue decreased by $14.4 million, or 6.1%, to $220.4 million for the three months ended September 30, 2021, as compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact of new customer additions, offset, in part by the wind-down of EVH Passport’s operations compared to 2020.~~Platform and operations services revenue accounted for 99.1% and 98.0% of our total revenue for the three months ended September 30, 2021 and 2020, respectively.~~

The following table represents Evolent’s revenue disaggregated by segment and end-market ~~for the three months ended September 30, 2021 and 2020~~ (in thousands):

For the Three Months Ended September 30,
2021 2020 2021 2020
Evolent Health Services Clinical Solutions
Medicaid $ 41,857 $ 51,637 $ 51,829 $ 73,480
Medicare 4,816 28,483 91,249 63,663
Commercial and other 30,154 19,830 2,566 2,479
Total $ 76,827 $ 99,950 $ 145,644 $ 139,622


	For the Three Months Ended June 30,
	2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions
Medicaid	$	55,422	$	52,064	$	86,080	$	53,648
Medicare	9,863		6,346		101,529		90,761
Commercial and other	27,051		16,453		39,994		2,785
Total	$	92,336	$	74,863	$	227,603	$	147,194

Revenue from our Evolent Health Services segment ~~decreased~~increased by ~~$23.1~~$17.5 million for the three months ended ~~September~~June 30, ~~2021~~2022, as compared to ~~2020~~2021 due to ~~the runout~~expansion of services ~~for EVH Passport, partially offset by new partner additions.~~with existing customers. Revenue from our Clinical Solutions segment increased by ~~$6.0~~$80.4 million for ~~the~~ three months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~2020~~2021 due to new partner additions 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 ~~September~~June 30, 2022 and 2021 and PMPM fees for the three months ended ~~September~~June 30, 2022 and 2021 ~~and 2020 (lives~~(Lives on ~~platform~~Platform in thousands):


		Lives on Platform		Average PMPM Fees					Lives on Platform		Average PMPM Fees
		September 30,		For the Three Months Ended September 30,					June 30,		For the Three Months Ended June 30,
		2021	2020	2021		2020			2022	2021	2022		2021
Evolent Health Services	Evolent Health Services	1,564	1,841	$	13.19	$	17.64	Evolent Health Services	2,095	1,534	$	14.58	$	13.81
Clinical Solutions	Clinical Solutions							Clinical Solutions
Performance suite	Performance suite	1,471	1,611	$	34.16	$	29.92	Performance suite	2,539	1,436	34.58		32.39
New Century Technology and Services suite		11,670	4,946	$	0.36	$	0.41
New Century Health Technology and Services suite								New Century Health Technology and Services suite	17,299	9,248	0.36		0.37

We had 4148 and 3441 operating partners as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Cost of Revenue

The following table provides a summary of our total cost of revenue by segment ~~for the three months ended September 30, 2021, as compared to 2020~~ (amounts in thousands):

For the Three Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 42,651 $ 44,007 $ 119,894 $ 130,558 $ 581 $ 7,196 $ 163,126 $ 181,761


	For the Three Months Ended June 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	105,595	$	49,256	$	143,457	$	122,355	$	653	$	502	$	249,705	$	172,113

Cost of revenue ~~decreased~~increased by ~~$18.6~~$77.6 million, or ~~(10.3)%~~45.1%, to ~~$163.1~~$249.7 million for the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020.~~2021. Cost of revenue ~~decreased~~increased by approximately ~~$13.1~~$57.5 million ~~period over period as a result of lower capitation expenses~~due to higher claims activity in our Clinical Solutions and ~~$3.1~~Evolent Health Services segments, $12.9 million ~~in our~~due to higher personnel costs due to ~~a lower headcount. The principal driver of these decreases was~~increased headcount and expected benefits accruals to employees and $7.3 million in higher professional fees primarily due to costs incurred for contracts that went live during the ~~wind-down of EVH Passport relative to 2020. Cost of revenue~~quarter and third-party service fees for ~~three months ended September 30, 2021 includes approximately $2.7 million associated with the wind-down of EVH Passport, inclusive of a reduction in Passport’s claims reserve.~~existing customers. Approximately ~~$0.1~~$1.2 million and ~~$0.4~~$0.9 million of total personnel costs was attributable to stock-based compensation expense for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Cost of revenue represented ~~73.3%~~78.0% and ~~75.9%~~77.5% of total ~~services~~ revenue for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Our cost of revenue ~~decreased~~increased as a percentage of our total ~~services~~ revenue due to a change in the mix of our service offerings towards higher gross margin services with divestiture of our health plans combined with our Repositioning Plan. We expect our cost of revenue to ~~continue to~~ decrease as a percentage of total ~~services~~ revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

The following table provides a summary of our total selling, general and administrative ~~expenses~~ by segment ~~for the three months ended September 30, 2021, as compared to 2020~~ (amounts in thousands):

For the Three Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 26,826 $ 18,589 $ 4,314 $ 4,630 $ 20,152 $ 29,147 $ 51,292 $ 52,366


	For the Three Months Ended June 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	18,351	$	18,763	$	14,034	$	9,592	$	26,570	$	14,344	$	58,955	$	42,699

Selling, general, and administrative expenses ~~decreased~~increased by ~~$1.1~~$16.3 million, or ~~2.1%~~38.1%, to ~~$51.3~~$59.0 million for the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020. Selling, general, and administrative expenses decreased approximately $4.1 million period over period~~2021. The increase is driven primarily by higher personnel fees due to ~~termination~~increased headcount and expected benefits accruals to employees of ~~leases at Passport, legal expense decreased $1.0~~$8.3 million ~~due to the timing~~ and ~~volume~~higher stock compensation of ~~transactions. These were~~$3.1 million offset, in part by ~~stock compensation increases of $1.5 million due primarily to restricted stock awards to employees and~~lower professional fees ~~of $1.4 million primarily due to~~from the Repositioning Plan and shareholder advisory ~~services. Approximately $4.3~~services of $2.9 million and ~~$2.7~~the termination of certain leases of $0.3 million. Approximately $5.9 million and $2.8 million of total personnel costs were attributable to stock-based compensation expense for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Acquisition and severance costs accounted for approximately ~~$1.2~~$3.4 million and ~~$2.6~~$0.1 million of total selling, general and administrative expenses for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Selling, general and administrative expenses represented ~~23.1%~~18.4% and ~~21.9%~~19.2% of total revenue for the three months ended ~~September~~June 30, ~~2021,~~ 2022,

as compared to ~~2020,~~2021, 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~~completed in the fourth quarter of ~~2020.~~2021.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased ~~$0.3~~$0.2 million, or ~~2.2%~~1.3%, to ~~$14.9~~$15.1 million for the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020. The increase was due primarily to higher amortization of internal-use software, offset, in part by, a decrease in amortization expense for existing technology intangibles.~~2021. We expect depreciation and amortization expenses ~~to continue~~ to increase in future periods as we continue to capitalize internal-use software and amortize intangible assets resulting from asset acquisitions and business combinations.

~~Loss on extinguishment of debt, net~~

In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment to noteholders of $2.5 million, which is included in loss on extinguishment of debt, net on the consolidated statement of operations.

Change in Fair Value of Contingent Consideration ~~and Indemnification Asset~~

We recorded a ~~gain (loss)~~loss on change in fair value of contingent consideration ~~and indemnification asset~~ of ~~$(0.2) million and $2.6~~$0.8 million for the three months ended ~~September~~June 30, ~~2021 and 2020, respectively. This variance is the result of changes in the fair values of~~2022 related to contingent ~~liabilities~~consideration incurred ~~from entering in the warrant agreements compared to the liabilities acquired~~ as a result of ~~business combinations and asset acquisitions during 2016, 2018, 2019 and 2020.~~the acquisition of Vital Decisions in October 2021.

Comparison of the Results for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 to ~~2020~~2021

Revenue

Total revenue ~~decreased~~increased by ~~$18.5~~$179.9 million, or ~~2.7%~~41.1%, to ~~$659.6~~$617.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020.~~

Transformation services revenue decreased by $5.8 million, or 53.9%, to $5.0 million for the nine months ended September 30, 2021, as compared to 2020, due primarily to the timing and volume of implementation activities. Transformation services revenue accounted for 0.8% and 1.6% of our total revenue for the nine months ended September 30, 2021 and 2020, respectively.

~~Platform and operations services revenue decreased by $12.7 million, or 1.9%, to $654.6 million for the nine months ended September 30, 2021, as compared to 2020.~~2021. This ~~decrease~~increase is primarily due to the ~~consolidation and wind-down of EVH Passport’s operations~~

~~compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact~~addition of new ~~customer additions, including Florida Blue Medicare, Inc. Platform~~partners and ~~operations services revenue accounted for 99.2% and 98.4% of our total revenue for the nine months ended September 30, 2021 and 2020, respectively.~~expansion with existing partners.

The following table represents Evolent’s revenue disaggregated by segment and end-market ~~for the nine months ended September 30, 2021 and 2020~~ (in thousands):


		For the Nine Months Ended September 30,									For the Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
		Evolent Health Services				Clinical Solutions					Evolent Health Services				Clinical Solutions
Medicaid	Medicaid	$	154,850	$	165,584	$	148,816	$	197,992	Medicaid	$	122,336	$	112,993	$	156,967	$	96,987
Medicare	Medicare	19,500		57,729		267,793		190,223		Medicare	14,696		14,684		193,796		176,544
Commercial and other	Commercial and other	62,177		59,535		6,463		7,040		Commercial and other	62,162		32,023		67,039		3,897
Total	Total	$	236,527	$	282,848	$	423,072	$	395,255	Total	$	199,194	$	159,700	$	417,802	$	277,428

Revenue from our Evolent Health Services segment ~~decreased~~increased by ~~$46.3~~$39.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, as compared to ~~2020~~2021 due to ~~the runout~~expansion of services ~~for EVH Passport, partially offset by new partner additions.~~with existing customers. Revenue from our Clinical Solutions segment increased by ~~$27.8~~$140.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to ~~2020~~2021 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 ~~September~~June 30, 2022 and 2021 and PMPM fees for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Lives on Platform in thousands):


		Lives on Platform		Average PMPM Fees					Lives on Platform		Average PMPM Fees
		September 30,		For the Nine Months Ended September 30,					June 30,		For the Six Months Ended June 30,
		2021	2020	2021		2020			2022	2021	2022		2021
Evolent Health Services	Evolent Health Services	1,564	1,841	$	12.23	$	14.56	Evolent Health Services	2,095	1,534	$	17.81	$	15.33
Clinical Solutions	Clinical Solutions							Clinical Solutions
Performance suite	Performance suite	1,471	1,611	28.78		29.83		Performance suite	2,539	1,436	31.38		27.93
New Century Technology and Services suite		11,670	4,946	0.38		0.41
New Century Health Technology and Services suite								New Century Health Technology and Services suite	17,299	9,248	0.36		0.41

We had 4148 and 3441 operating partners as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Cost of Revenue

The following table provides a summary of our total cost of revenue by segment for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020~~2021 (amounts in thousands):

For the Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 145,354 $ 163,386 $ 345,874 $ 347,980 $ 1,843 $ 10,382 $ 493,071 $ 521,748


	For the Six Months Ended June 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	175,396	$	102,703	$	292,839	$	225,980	$	1,209	$	1,262	$	469,444	$	329,945

Cost of revenue ~~decreased~~increased by ~~$28.7~~$139.5 million, or ~~5.5%~~42.3%, to ~~$493.1~~$469.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020.~~2021. Cost of revenue ~~decreased~~increased by approximately ~~$21.0~~$96.0 million due to ~~lower~~higher claims activity in our Clinical Solutions and Evolent Health Services segments, $21.2 million due to higher personnel costs ~~$4.4~~due to increased headcount and expected benefits accruals to employees and $17.1 million in ~~lower~~higher professional fees primarily due to costs incurred for contracts that went live during the quarter and ~~$3.3 million in our technology services, TPA~~third-party service fees ~~brokerage fees and other costs. The principal driver of these decreases was the wind-down of EVH Passport relative to 2020. Cost of revenue~~ for ~~the nine months ended September 30, 2021 includes approximately $8.5 million associated with the wind-down of EVH Passport, inclusive of a reduction in Passport’s claims reserve.~~existing customers. Approximately ~~$1.6~~$2.0 million and ~~$1.4~~$1.5 million of total personnel costs was attributable to stock-based compensation expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Cost of revenue represented ~~74.8%~~76.1% and ~~76.9%~~75.5% of total ~~services~~ revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Our cost of revenue ~~decreased~~increased 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.

Selling, General and Administrative Expenses

The following table provides a summary of our total selling, general and administrative by segment for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020~~2021 (amounts in thousands):

For the Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Evolent Health Services Clinical Solutions Corporate Total
Total $ 69,555 $ 68,736 $ 21,086 $ 16,272 $ 61,941 $ 66,741 $ 152,582 $ 151,749


	For the Six Months Ended June 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	41,730	$	32,822	$	26,223	$	16,772	$	49,934	$	51,696	$	117,887	$	101,290

Selling, general, and administrative expenses increased by ~~$0.8~~$16.6 million, or ~~0.5%~~16.4%, to ~~$152.6~~$117.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020. Professional~~2021. The increase is driven primarily by higher personnel fees ~~increased by $11.2 million for the nine months ended September 30, 2021, as compared to 2020, respectively, primarily~~ due to increased headcount and expected benefits accruals to employees of $16.6 million and higher stock compensation of $4.5 million offset, in part by lower professional fees from the Repositioning Plan and shareholder advisory ~~services. During the nine months ended September 30, 2021, personnel costs decreased by $3.2~~services of $10.3 million ~~period over period due to a reduction in employee headcount, other expenses decreased by $3.5 million due to~~and the termination of certain leases ~~at Passport during the third quarter~~ of ~~2020 and legal fees decreased $3.2 million due to the timing and volume of transactions.~~$2.8 million. Approximately ~~$10.1~~$10.4 million and ~~$9.0~~$5.9 million of total personnel costs were attributable to stock-based compensation expense for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Acquisition and severance costs accounted for approximately ~~$3.3~~$3.9 million and ~~$9.4~~$2.1 million of total selling, general and administrative expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Selling, general and administrative expenses represented ~~23.1%~~19.1% and ~~22.4%~~23.2% of total revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020,~~2021, 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~~completed in the fourth quarter of ~~2020.~~2021.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased ~~$1.2~~$0.1 million, or ~~2.5%~~0.4%, to ~~$45.0~~$30.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~2020.~~2021. The decrease was due primarily to lower amortization on existing technology ~~intangibles,~~of $1.7 million, offset in part by ~~an increase in~~higher amortization ~~expense for internal-use software.~~from ongoing customer relationships of $1.3 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~~

In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment to noteholders of $2.5 million, which is included in loss on extinguishment of debt, net on the consolidated statement of operations.

~~Gain (Loss) on Disposal of Assets and Consolidation~~

During 2019, the Company, through a non-wholly owned consolidated subsidiary, entered into an agreement with an unrelated party to provide services and support to providers, independent physician associations, and other provider groups. During the nine months ended September 30, 2020, the Company sold its interest in the subsidiary and recorded a $6.4 million loss on disposal of assets and consolidation on the consolidated statements of operations. The Company did not have any continuing involvement with the entity after the consummation of this transaction.

~~Goodwill Impairment~~

During the nine months ended September 30, 2020 we recorded a non-cash impairment charge of $215.1 million on our consolidated statements of operations as we determined that the implied fair value of goodwill of one of the two reporting units in the EHS segment was less than the carrying amount. See “Part I - Item 1. Financial Statements - Note 9” for further details of the impairment charge to goodwill.

Change in Fair Value of Contingent Consideration ~~and Indemnification Asset~~

We recorded a ~~gain~~(gain) loss on change in fair value of contingent consideration ~~and indemnification asset~~ of ~~$0.8 million and $0.5~~$6.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020, respectively. This variance is the result of changes in the fair values of contingent liabilities incurred from entering in the warrant agreements compared~~2022 related to the liabilities acquired as a result of ~~business combinations~~the acquisition of Vital Decisions in October 2021 and ~~asset acquisitions during 2016, 2018, 2019 and 2020.~~$(0.6) million for the six months ended June 30, 2021 related to liabilities incurred from entering into our warrant agreements that were settled in January 2021.

Discussion of Non-Operating Results

~~Interest Income~~

Interest income consists of interest from investing cash in money market funds and interest from both our short-term and long-term investments. We recorded interest income of $0.1 million and $0.3 million and for the three and nine months ended September 30, 2021, respectively, and $1.2 million and $2.6 million for the three and nine months ended September 30, 2020, respectively. Interest income decreased during 2021 as a result of the repayment of the $40.0 million Passport Note on November 24, 2020.

Interest Expense

Our interest expense is primarily attributable to our 2021 Notes, 2024 Notes, 2025 Notes and 2019 Credit Agreement with Ares Capital Corporation. We recorded interest expense (including amortization of deferred financing costs) of approximately ~~$6.4~~$2.1 million and ~~$19.0~~$4.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and ~~$7.4~~$6.3 million and ~~$20.0~~$12.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively. The decrease in interest expense during the three and six months ended June 30, 2022 compared to 2021 is driven primarily by the adoption of ASU 2020-06 combined with the termination of the ~~Ares~~2019 Credit Agreement in January ~~2021, offset, in part by the issuance of the 2024 Notes in August 2020.~~2021. See “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for ~~further details.~~

~~Impairment of Equity Method Investments~~

~~As of June 30, 2020,~~ the ~~Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response~~information related to the COVID-19 pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 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 in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13, 2020. As a result of this transaction, we have recorded a non-cash impairment charge of approximately $47.1 million, representing the total value of our investment, in impairment of equity method investments on the consolidated statements of operations for the nine months ended September 30, 2020.interest expense.

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~~gain from ~~its equity method~~these investments was approximately ~~$0.1~~$2.0 million and $2.5 million for the three and six months ended June 30, 2022, respectively, and $4.9 million and $12.7 million for the three and ~~nine~~six months ended ~~September~~June 30, 2021, ~~respectively and $(13.7) million and $11.0 million for the three and nine months ended September 30, 2020,~~ respectively. The change in gain from equity method investees for the three and six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~2020~~2021 is driven primarily by the Company’s investment in Passport. The change in gain from equity method investees for the nine months ended September 30, 2021 compared to 2020 is driven primarily by the Company’s investment in Passport during 2020 combined with gains on the sale of our Florida equity investee’s membership during the three months ended March 31, 2021.

Gain from Transfer of Membership

~~During~~In the ~~nine~~three months ended ~~September 30,~~March 31, 2021, EVH Passport received a cash payment from Molina in the amount of $23.0 million based on the number of enrollees above a certain threshold in the D-SNP Business and Molina's Medicaid plan following the open enrollment period for plan year 2021. The foregoing amount represents 50% of the payment that EVH Passport is eligible to receive based on the number of such enrollees. The remaining 50% ~~will be receivable~~was received in the first quarter of ~~2022 subject to the satisfaction of certain contingencies.~~2022.

Loss Onon Repayment of Debt

On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the 2019 Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the 2019 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.

Provision for (Benefit) Income Taxes

~~The Company recorded $0.2~~An income tax (benefit) provision of $(0.2) million and ~~$0.9~~$1.0 million ~~in income tax expense (benefit)~~and was recognized for the three and ~~nine~~six months ended ~~September~~June 30, 2022, respectively, which resulted in effective tax rates of 3.9% and (11.4)%, respectively. An income tax expense of $0.1 million and $0.7 million for the three and six months ended June 30, 2021, respectively, which resulted in effective tax rates of ~~(1.8)~~(1.0)% and ~~(2.9)~~(3.6)%~~, respectively, and $0.5 million and $(3.1) million for the three and nine months ended September 30, 2020, respectively, which resulted in effective tax rates of (1.3)% and 1.0%~~, respectively. The ~~difference between our effective tax rate~~Company and ~~our statutory rate is due primarily~~its U.S. subsidiaries continue to ~~the fact that the Company maintains~~record a ~~full~~ valuation allowance ~~recorded~~ against its net deferred tax assets, with the exception of ~~certain indefinite-lived~~indefinite lived components.

~~Loss~~Income (Loss) from Discontinued Operations, Net of Tax

As of ~~September 30,~~March 31, 2021, the Company determined that True Health met the held for sale criteria under ASC ~~360,~~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 ~~held for sale~~discontinued operations and are not included in continuing operations in the consolidated financial statements. The True Health Closing occurred on March 31, 2021.

The following table summarizes the results of operations of the Company’s True Health business, which are included in the loss from discontinued operations in the consolidated statements of operations for the ~~three and nine~~six months ended ~~September~~June 30, ~~2021 and 2020.~~2021.

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Revenue
Platform and operations — 71 38 350
Premiums — 29,487 44,795 87,136
Total revenue — 29,558 44,833 87,486
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)
— 4,926 5,885 12,861
Claims expenses — 21,325 33,954 63,136
Selling, general and administrative expenses (2)
— 4,407 5,764 14,318
Depreciation and amortization expenses — 160 160 480
Total operating expenses — 30,818 45,763 90,795
Operating loss — (1,260) (930) (3,309)
Interest income — 129 112 415
Interest expense — (3) (4) (10)
Other loss — (1) (25) (4)
Loss before income taxes and non-controlling interests — (1,135) (847) (2,908)
Benefit for income taxes — — (326) —
Net loss $ — $ (1,135) $ (521) $ (2,908)


Revenue
Platform and operations	$	38
Premiums	44,795
Total revenue	44,833


Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	5,885
Claims expenses	33,954
Selling, general and administrative expenses (2)	5,764
Depreciation and amortization expenses	160
Total operating expenses	45,763
Operating loss	(930)
Interest income	112
Interest expense	(4)
Other loss	(25)
Loss before income taxes and non-controlling interests	(847)
Provision for income taxes	(326)
Net loss	$	(521)

————————

(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 ~~$3.7~~$2.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2020 and $2.8 million and $10.0 million for the nine months ended September 30, 2021 and 2020, respectively.~~2021.

(2)Selling, general and administrative expenses ~~includes~~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 ~~$1.0 million of for the three months ended September 30, 2020 and~~ $1.1 ~~million and $5.1~~ million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 and 2020, respectively.~~2021.

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 ~~$30.2~~$7.4 million and ~~$267.4~~$23.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Net cash and restricted cash used in operating activities was ~~$27.9~~$43.8 million and ~~$3.4~~$72.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~$252.5~~$193.1 million of cash and cash equivalents and ~~$29.3~~$87.4 million in restricted cash and restricted investments.

We believe our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies.

Cash Flows

The following summary of cash flows ~~for the nine months ended September 30, 2021 and 2020~~ (in thousands) has been derived from our financial statements included in “Part I - Item 1. Financial Statements - Consolidated Statements of Cash Flows:”


		For the Nine Months Ended September 30,					For the Six Months Ended June 30,
		2021		2020			2022		2021
Net cash and restricted cash used in operating activities	Net cash and restricted cash used in operating activities	$	(27,909)	$	(3,374)	Net cash and restricted cash used in operating activities	$	(43,778)	$	(72,410)
Net cash and restricted cash provided by investing activities	Net cash and restricted cash provided by investing activities	38,582		263,297		Net cash and restricted cash provided by investing activities	330		40,380
Net cash and restricted cash provided by (used in) financing activities		(90,446)		12,054
Net cash and restricted cash used in financing activities						Net cash and restricted cash used in financing activities	(30,686)		(91,087)

Operating Activities

Cash flows used in operating activities of ~~$27.9~~$43.8 million for the ~~nine~~six months ended ~~September~~June 30, 2022 were primarily due to our net loss of $9.9 million, non-cash items including depreciation and amortization expenses of $30.2 million, stock-based compensation expense of $12.4 million, amortization of contract cost assets of $13.2 million and change in fair value of contingent consideration of $6.9 million. Our operating cash outflows were affected by the timing of our customer and vendor payments driven by increases in

accounts receivables and prepaid expenses and other assets and reductions in reserves for claims, performance-based arrangements and accrued compensation and employee benefits and accrued liabilities contributed approximately $88.0 million to our cash outflows.

Cash flows used in operating activities of $72.4 million for the six months ended June 30, 2021 were primarily due to our net loss of ~~$32.0~~$18.9 million, a loss on the repayment and termination of our Credit Agreement of $19.2 million, a gain on the disposal of assets of $1.9 million, gain on the transfer of memberships of $23.0 million and non cash items including depreciation and amortization expenses of ~~$45.1~~$30.3 million and stock-based compensation expense of ~~$11.8~~$7.4 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts receivables and contract cost assets and reductions in accrued liabilities and accrued compensation and employee benefits contributed approximately ~~$88.0~~$163.3 million to our cash outflows. Those cash outflows were offset, in part by increased reserves for claims and performance-based arrangements of approximately ~~$16.8 million.~~

Cash flows used in operating activities of $3.4 million in the nine months ended September 30, 2020 were due primarily to our net loss of $320.4 million, partially offset by non-cash items, including an impairment of goodwill of $215.1 million, an impairment of an equity method investment of $47.1 million, depreciation and amortization expenses of $46.6 million, stock-based compensation expense of $10.4 million and a loss on the disposal of assets of $6.4 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts payable, accrued liabilities and claims reserves contributed approximately $10.6 million to our cash outflows. Those cash inflows were partially offset by an increase in accounts receivable and contract assets and contract costs assets and a decrease in accrued compensation and employee benefits contributed of approximately $28.3$62.6 million.

Investing Activities

Cash flows provided by investing activities of ~~$38.6~~$0.3 million in the ~~nine~~six months ended ~~September~~June 30, 2022 were primarily attributable to $23.0 million from the transfer of membership and release of Passport escrow and $4.2 million from returns from our equity method investments offset, in part by $17.7 million of investments in internal-use software and purchases of property and equipment and a $9.0 million paid for our acquisition of IPG.

Cash flows provided by investing activities of $40.4 million in the six months ended June 30, 2021 were primarily attributable to cash flows of $43.0 million from the transfer of membership and release of Passport escrow and returns of investment on equity method investments of ~~$14.2~~$9.4 million offset, in part by ~~$17.7~~$11.5 million from investments in internal-use software and purchases of property and equipment and $3.0 million of purchases of investments.

Cash flows from investing activities of $263.3 million in the nine months ended September 30, 2020 were primarily attributable to cash flows from the impact of the initial consolidation of Passport of $159.8 million, maturities and sales of investments of $140.9 million, offset, in part by investments in internal-use software and purchases of property and equipment of $23.6 million, disposal of non-strategic assets of $2.3 million and purchases of investments of $11.2 million.

Financing Activities

Cash flows used in financing activities of ~~$90.4~~$30.7 million in the ~~nine~~six months ended ~~September~~June 30, 2022 were primarily related to $16.5 million from taxes withheld for restricted stock unit vesting.

Cash flows used in financing activities of $91.1 million in the six months ended June 30, 2021 were primarily related to the repayment and termination of our Credit Agreement and settlement of our outstanding warrant agreements with Ares Capital Corporation of $98.4 million, offset, in part by a ~~$1.1~~$2.4 million decrease in net working capital balances held on behalf of our partners for claims processing services.

Cash flows from financing activities of $12.1 million in the nine months ended September 30, 2020 were primarily related to $30.1 million from proceeds of convertible debt, offset, in part by repurchase of our 2021 Notes of $16.4 million, $1.4 million of taxes withheld and paid for vests of restricted stock units and a $2.2 million decrease in working capital balances held on behalf of our partners for claims processing services. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.

Cash flows from Discontinued Operations

The consolidated statements of cash flows for all periods have not been adjusted to separately disclose cash flows related to discontinued operations. Cash flows related to the True Health business ~~which was sold on March 31, 2021,~~ during the ~~nine~~six months ended ~~September~~June 30, 2021 ~~and 2020~~ were as follows:

For the Nine Months Ended September 30,
2021 2020
Cash flows provided by (used in) operating activities $ 5,002 $ 7,920
Cash flows provided by (used in) investing activities (2,494) 936


Cash flows provided by operating activities	$	5,002
Cash flows used in investing activities	(2,494)

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 of ~~September~~June 30, ~~2021,~~2022, were as follows:

2021 2022-2023 2024-2025 2026+ Total
Operating leases for facilities $ 2,961 $ 18,626 $ 16,594 $ 47,760 $ 85,941
Purchase obligations related to vendor contracts 3,814 8,380 123 — 12,317
Debt interest and termination payments 3,613 13,369 9,279 — 26,261
Debt principal repayment (1)
26,737 — 289,551 — 316,288
Total contractual obligations $ 37,125 $ 40,375 $ 315,547 $ 47,760 $ 440,807

~~————————~~

~~(1)Debt principal repayments in 2021 includes the remaining $26.7 million of 2021 Notes.Refer to “Part I - Item 1. Financial Statements - Note 10” for additional discussion relating to the repayment of the 2021 Notes.~~


	2022		2023-2024		2025-2026		2027+		Total
Operating leases for facilities	$	5,196	$	20,296	$	18,638	$	40,377	$	84,507
Purchase obligations related to vendor contracts	1,643		4,565		—		—		6,208
Debt interest and termination payments	3,342		13,369		2,588		—		19,299
Debt principal repayment	—		117,051		172,500		—		289,551
Total contractual obligations	$	10,181	$	155,281	$	193,726	$	40,377	$	399,565

During the nine months ended September 30, 2021, the only material change from December 31, 2020 outside the ordinary course of business in the contractual obligations set forth above was the repayment and termination of our Credit Agreement and settlement of our warrant agreements with Ares Capital Corporation. Refer to the discussion in “Part I - Item 1. Financial Statements - Note 10” for additional information on our long-term debt.

Accounts Receivable, net

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, accounts receivable, net, increased due primarily to ~~the impact of new customers of $60.0 million and~~ the timing of cash receipts from existing customers combined with modest receivables from new customers.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments of ~~$29.3~~$87.4 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of ~~$13.2~~$73.6 million, collateral for letters of credit required as security deposits for facility leases of ~~$3.4~~$2.3 million, amounts held with financial institutions for risk-sharing arrangements of ~~$12.0 million and other restricted balances of $0.7~~$11.5 million as of ~~September~~June 30, ~~2021.~~2022. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.

57Goodwill and Intangible Assets

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.

Uses of Capital

Our principal uses of cash are in the operation and expansion of our business. The Company does not anticipate paying a cash dividend on our Class A common stock in the foreseeable future.

~~OTHER MATTERS~~

~~Off-balance Sheet Arrangements~~

Through September 30, 2021, the Company had not entered into any off-balance sheet arrangements, other than the operating leases and notes receivable noted above, and did not have any holdings in variable interest entities, other than the unconsolidated variable interest entities discussed in “Part I - Item 1. Financial Statements - Note 16” within this Form 10-Q.

~~Related Party Transactions~~

In the ordinary course of business, we enter into transactions with related parties. Information regarding transactions and amounts with related parties is discussed in “Part I - Item 1. Financial Statements - Note 19” within this Form 10-Q.

~~Other Factors Affecting Our Business~~

In general, our business is subject to a changing social, economic, legal, legislative and regulatory environment. Although the eventual impact on us of the changing environment in which we operate remains uncertain, these factors and others could have a material effect on our results of operations, liquidity and capital resources. Factors that could cause actual results to differ materially from those set forth in this section are described in “Part I - Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language.”

5850

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

Interest Rate Risk

As of ~~September~~June 30, ~~2021,~~2022, the Company had cash and cash equivalents and restricted cash and restricted investments of ~~$281.8~~$280.4 million, which consisted of bank deposits with FDIC participating banks of ~~$280.5~~$276.4 million, bank deposits in international banks of ~~$1.3~~$2.5 million and investments in money market funds of $1.5 million.

Changes in interest rates affect the interest earned on our cash and cash equivalents (including restricted cash). Our investments (including restricted investments) are classified as held-to-maturity and therefore are not subject to interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

As of ~~September~~June 30, ~~2021,~~2022, we had ~~$316.3~~$289.6 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. Refer to the discussion in “Part I - Item 1. Financial Statements - Note 10” for additional information on our long-term debt.

Foreign Currency Exchange Risk

Beginning in 2018, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee. In general, we are a net payor of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating results as expressed in U.S. dollars. At this time, we have not entered into, but in the future, we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized a foreign currency translation ~~loss~~losses of ~~$4 thousand~~$0.3 million and ~~$85 thousand~~$0.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2021 and,~~2022, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

Inherent Limitations of Internal Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II

Item 1. Legal Proceedings

The discussion inof legal proceedings included within “Part I – Item 1. Financial Statements and Supplementary Data - Note 11 - Commitments and Contingencies - Litigation Matters” is incorporated by reference into this ~~Part II,~~ Item 1.

Item 1A. Risk Factors

Our significant business risks are described in Item 1A to our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021 (the “2021 Form 10-K”). These risk factors are supplemented for the item described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.

~~We derive~~Increasing inflationary pressures and consumer costs may have a ~~significant portion~~negative effect on our margins, profitability and results of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or contract with a significant partner, or multiple partners in the aggregate, could negatively impact our results.operations.

~~Historically,~~The broader U.S. economy has experienced higher than expected inflationary pressures during the first six months of 2022 related to continued supply chain disruptions, labor shortages and geopolitical instability. Increasing inflationary pressures may have a negative effect on our profit margins and earnings due to associated costs increases. Additionally, we face an increasingly competitive labor market due to sustained labor shortages in part from the COVID-19 pandemic and are subject to inflationary pressures on employee wages and salaries which may increase labor costs. Failure to retain highly skilled employees due to wage inflation could have ~~relied~~a material adverse impact on ~~a limited number~~our business, results of ~~partners~~operations or financial condition. See the risk factor captioned “If we lose key members of our management team or employees or are unable to attract and retain the employees we need, our compensation costs will increase and our business and operating results will be adversely affected,” in our 2021 Form 10-K. While we are unable to predict the direction of the economy or if inflation will increase or revert to normal levels, if the current inflationary trends continue for a ~~substantial portion~~sustained period of time, our margins, profitability and results of operations could be adversely affected.

Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Restrictive covenants in our 2022 Credit Agreement may interfere with our ability to access the revolving credit facility under the 2022 Credit Agreement, or to obtain new financing or to engage in other business activities.

Our 2022 Credit Agreement imposes significant operating and financial restrictions on us. These restrictions limit our ability and/or the ability of certain of our subsidiaries to, among other things:

•incur or guarantee additional debt;

•incur certain liens;

•merge or consolidate;

•transfer or sell assets;

•make certain investments;

•pay dividends and make other distributions on, or redeem or repurchase, capital stock; and

•enter into transactions with affiliates.

In addition, we are required to comply with certain financial covenants consisting of a minimum liquidity test, and, commencing on the last day of the fiscal quarter ending September 30, 2022, a total ~~revenue~~secured leverage test. As a result of these restrictions, we will be limited as to how we conduct our business and ~~accounts receivable. Our largest partner in~~we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of both revenue and accounts receivable, Cook County Health and Hospitals System, comprised 29.0% of our revenue for both the three and nine months ended September 30, 2021 and 43.7% and 61.5% of our accounts receivable as of September 30, 2021 and December 31, 2020, respectively. The loss of Cook County Health and Hospitals System or any ~~other significant partner, pursuant to a reprocurement process or otherwise, or the non-renewal or renegotiation of any of our significant partner contracts,~~future indebtedness we may incur could adversely affect our results. In May 2020, Passport, our largest partner at the time, was not awarded a Kentucky managed Medicaid contract for the next contract period, which adversely affected our results.include more restrictive covenants. We cannot assure you that ~~similar facts~~the Company will ~~not occur~~be able to maintain compliance with ~~a different partner~~these covenants in the future ~~as often our customers who are county or municipal run bodies have requirements~~and, if it fails to ~~run public procurement processes for renewals.~~

In the ordinary course of business, we engage in active discussions and renegotiations, and at times we are required to participate in reprocurement or other RFP exercises with our partners in respect of the services we provide and the terms of our partner agreements, including our fees. As our partners’ businesses respond to market dynamics and financial pressures, and as our partners make strategic business decisions in respect of the lines of business they pursue and programs in which they participate, certain of our partners have renegotiated or terminated, or not renewed, and we expectdo so, that ~~in the future additional partners~~it will from time to time, seek to renegotiate or terminate or not renew their agreements with us. These discussions and future discussions have resulted and could result in reductions to the fees and changes to the scope of services contemplated by our original partner contracts and consequently have and could negatively impact our revenues, business and prospects. In addition, we may not successfully win new contracts or renewals of existing contracts through competitive market standard reprocurement or RFP processes.

Because we rely on a limited number of partners for a significant portion of our revenues, we depend on the creditworthiness of these partners. Our partners are subject to a number of risks including reductions in payment rates from governmental payers, higher than expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-risk populations, such as plans established under the ACA and Aged, Blind and Disabled Medicaid. If the financial condition of our partners declines, our credit risk could increase. Should one or more of our significant partners (including Cook County) declare bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable and affect our bad debt reserves and net income (loss).

Although we have long-term contracts with many partners, these contracts may be terminated before their term expires for various reasons, such as changes in the regulatory landscape and poor performance by us, subject to certain conditions. For example, after a specified period, certain of these contracts are terminable for convenience by our partners after a notice period has passed and the partner has paid a termination fee. Certain of our contracts are terminable immediately upon the occurrence of certain events. For example, some of our contracts may be terminated by the partner if we fail to achieve target performance metrics over a specified period. Certain of our contracts may be terminated by the partner immediately following repeated failures by us to provide specified levels of service over periods ranging from six months to more than a year. Certain of our contracts may be terminated immediately by the partner if we lose applicable licenses, go bankrupt, lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities. Additionally, if a partner were to lose applicable licenses, go bankrupt, lose liability insurance, become insolvent, file for bankruptcy or receive an exclusion, suspension or debarment from state or federal government authorities, our contract with such partner could in effect be terminated. In addition, certain of our contracts may be terminated immediately if we become insolvent or file for bankruptcy. If any of our contracts with our partners is terminated, we may not be able to ~~recover all fees due under~~obtain waivers from the ~~terminated contract, which may adversely affect our operating results. In addition, certain of our contracts provide that if we fail~~lenders and/or amend the covenants. The Company’s failure to meet specified implementation targets, the contracts will terminate and we will be subject to financial penalties. Separately, the contracts of New Century Health typically run for one-year terms. While they typically containcomply

6153

~~year-to-year renewal provisions,~~with the restrictive covenants described above as well as the terms of any future indebtedness could result in an event of default, which, if not cured or waived, could result in it being required to repay these borrowings before their due date and the lenders would be entitled to foreclose on collateral. If the Company is forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected. In addition, we ~~cannot assure that any or all of these contracts will~~may be ~~renewed in any particular year. We expect that~~unable to access future ~~contracts will contain similar provisions~~borrowings under our revolving facility if we are unable to ~~those described in this paragraph.~~satisfy the applicable conditions precedent.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EVOLENT HEALTH, INC.

Exhibit Index


2.1 *						Asset Purchase Agreement, dated May 28, 2019, by and among University Health Care, Inc., d/b/a Passport Health Plan, Passport Health Solutions, LLC, Evolent Health, Inc. and Justify Holdings, Inc., filed as Exhibit 2.4 to the Company’s Report on Form 10-Q filed with the SEC on August 9, 2019, and incorporated herein by reference.

2.2 *						First Amendment to Asset Purchase Agreement, dated as of December 30, 2019, by and among University Health Care, Inc., d/b/a Passport Health Plan, Passport Health Solutions, LLC, Justify Holdings, Inc., and Evolent Health, Inc., filed as Exhibit 2.1 to the Company’s Report on Form 8-K with the SEC on December 31, 2019, and incorporated herein by reference.

22..33 *						Purchase ~~Agreement and~~ Agreement and Plan of Merger, dated August 2, 2021, by and among Evolent Health, Inc., Evolent Health LLC, EV Thunder Merger Sub, LLC, WindRose Health Investors III, L.P., Vital Decisions Acquisition, LLC and WindRose Health Investors, LLC, as the representative, filed as Exhibit 2.1 to the Company’s report on Form 8-K filed with the SEC on August 4, 2021 and incorporated herein by reference.

2.4 *						Agreement and Plan of Merger, dated August 1, 2022, by and among Evolent Health, Inc., Evolent Health LLC, Endzone Merger Sub, Inc, TPG Growth Iceman Parent, Inc. and the Sellers’ R epresentative.

4.1						Registration Rights Agreement, dated August 1, 2022, by and between Evolent Health, Inc., TPG Growth V Iceman, L.P., and the individuals in Schedule I of the agreement.

10.1*						Credit Agreement, by and among Evolent Health, Inc., Evolent Health LLC, certain subsidiaries of Evolent Health, Inc, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent, and ACF Finco I LP, as revolving agent and collateral agent, dated as of August 1, 2022.

10.2 *						Security Agreement, by and among Evolent Health, Inc., Evolent Health LLC, the other guarantors and ACF Finco I LP, as collateral agent for the benefit of the secured parties, dated as of August 1, 2022.

10.3*						Guarantee Agreement, by Evolent Health, Inc. and each of the other guarantors in favor of Ares Capital Corporation, as administrative age nt for the lenders , and A CF Finco I LP, as collateral agent for the lenders , dated as of August 1, 2022.

31.1						Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

104						The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL

————————

* The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601(b)(2) of Regulation S-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


EVOLENT HEALTH, INC.
Registrant

By:			/s/ John Johnson
Name:			John Johnson
Title:			Chief Financial Officer

By:			/s/ Aammaad Shams
Name:			Aammaad Shams
Title:			Chief Accounting Officer and Controller

Dated: ~~November~~August 3, ~~2021~~2022

6456


	EHS		Clinical Solutions		Consolidated
Balance as of December 31, 2020 (1)	$	214,354	$	134,675	$	349,029
Foreign currency translation	(19)		—		(19)
Balance as of September 30, 2021	$	214,335	$	134,675	$	349,010


	EHS		Clinical Solutions		Consolidated
Balance as of December 31, 2019 (1)	$	431,684	$	134,675	$	566,359
Goodwill disposal (2)	(2,200)		—		(2,200)
Impairment	(215,100)		—		(215,100)
Foreign currency translation	(42)		—		(42)
Balance as of September 30, 2020	$	214,342	$	134,675	$	349,017


	September 30, 2021		December 31, 2020
2024 Notes
Carrying value	$	87,317	$	81,462
Unamortized debt discount and issuance costs	29,734		35,589
Principal amount	$	117,051	$	117,051
Remaining amortization period (years)	3.2		3.9
Fair value	$	174,962	$	153,220

2025 Notes
Carrying value	$	123,746	$	116,349
Unamortized debt discount and issuance costs	48,754		56,151
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	4.0		4.8
Fair value	$	193,799	$	147,488

2021 Notes
Carrying value	$	26,704	$	26,557
Unamortized issuance costs	33		180
Principal amount	$	26,737	$	26,737
Remaining amortization period (years)	0.2		0.9
Fair value	$	29,404	$	26,470


Selling, general and administrative expenses	4,264		2,728		10,136		9,021
Total compensation expense by financial statement line item	$	4,395	$	3,164	$	11,754	$	10,375


	For the Three Months Ended September 30, 2020		For the Nine Months Ended September 30, 2020
Non-controlling interests balance as of beginning of period	$	—	$	6,689
Issuance of non-controlling interest	25,749		25,749
Net loss attributable to non-controlling interest	(822)		(822)
Reclassification of non-controlling interests	—		(6,689)
Non-controlling interests balance as of end of period	$	24,927	$	24,927


	2021		2022-2023		2024-2025		2026+		Total
Operating leases for facilities	$	2,961	$	18,626	$	16,594	$	47,760	$	85,941
Purchase obligations related to vendor contracts	3,814		8,380		123		—		12,317
Debt interest and termination payments	3,613		13,369		9,279		—		26,261
Debt principal repayment (1)	26,737		—		289,551		—		316,288
Total contractual obligations	$	37,125	$	40,375	$	315,547	$	47,760	$	440,807

Cash flows provided by operating activities

~~December 31, 2020~~

~~ASSETS~~$

~~Current assets:~~5,002

Cash ~~and cash equivalents~~flows used in investing activities

~~21,488~~

~~Restricted cash and restricted investments~~