Evolent Health 10Q 2023 Q2 Quarterly report


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 June 30, 2023

☐ 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 July 28, 2023, there were 113,244,482 shares of the registrant’s Class A common stock outstanding.

Evolent Health, Inc.

Table of Contents

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, the adoption and launch of a unified brand, 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:

•risks relating to our ability to efficiently integrate NIA into our operations;

•the financial information of NIA and the pro forma financial information of NIA may not be indicative of future results or our financial condition;

•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;

•our ability to terminate certain leases and recognize impairment charges in connection with our repositioning plan;

•evolution of the healthcare regulatory and political framework;

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

•our ability to offer new and innovative products and services and our ability to keep pace with industry standards, technology and our partners’ needs;

•risks related to completed and future acquisitions, investments, alliances and joint ventures, including our acquisitions of IPG and NIA, which could divert management resources, 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 to Molina Healthcare, Inc. may not be realized;

•the growth and success of our partners and certain revenues from our engagements, which are difficult to predict and are subject to factors outside of our control, including governmental funding reductions and other policy changes;

•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 increasing inflationary pressures and economic and business conditions and the impact thereof on the economy resulting from public health emergencies, epidemics, pandemics or contagious diseases such as the COVID-19 pandemic;

•risks related to the failure of any bank in which we deposit our funds, which could reduce the amount of cash we have available to meet our cash commitments and make additional investments;

•our ability to recover the significant upfront costs in our partner relationships and develop our partner relationships over time;

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

•the increasing number of risk-sharing arrangements we enter into with our partners could limit or negatively impact our profitability;

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

•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 audits by CMS and other governmental payers and actions, including whistleblower claims under the False Claims Act;

•our ability to partner with providers due to exclusivity provisions in our contracts in some of our partner and founder contracts;

•risks related to managing our offshore operations and cost reduction goals;

•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 on favorable terms or at all;

•our ability to achieve profitability in the future;

•the impact of litigation proceedings, government inquiries, reviews, audits or investigations;

•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 on the manner in which we access personal data and penalties as a result of privacy and data protection laws;

•liabilities and reputational risks related to our ability to safeguard the security and privacy of confidential data;

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

•adequate protection of our intellectual property, including trademarks;

•risks related to legal proceedings related to any alleged infringement, misappropriation or violation of third-party intellectual property 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;

•restrictions on 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 material 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 may contain different terms than comparable agreement we may enter into with unaffiliated third parties;

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

•interest rate risk under the Credit Agreement and the terms of our Series A Preferred Stock;

•our debt following the NIA acquisition and our ability to meet our obligations;

•our ability to service our debt and pay dividends on our Series A Preferred Stock;

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

•the potential decline of our Class A common stock price if a substantial number of shares are sold or become available for sale, including those issuable upon conversion of our Series A Preferred Stock;

•our Series A Preferred Stock has rights, preferences and privileges that are not held by and are preferential to the rights of holders of our Class A common stock, and could in the future substantially dilute the ownership interest of holders of our Class A common stock;

•provisions in our certificate of incorporation and 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 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, 2022 (the "2022 Form 10-K") 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.

iii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)




	June 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	142,530	$	188,200
Restricted cash and restricted investments	47,477		14,492
Accounts receivable, net (1)	345,276		254,684
Prepaid expenses and other current assets (1)	41,416		20,678
Total current assets	576,699		478,054
Restricted cash and restricted investments	17,592		12,466
Investments in equity method investees	4,254		4,475
Property and equipment, net	83,524		87,874
Right-of-use assets - operating	27,472		49,027
Prepaid expenses and other noncurrent assets (1)	3,163		2,378
Contract cost assets	14,648		17,461
Intangible assets, net	801,923		442,784
Goodwill	1,117,556		722,774
Total assets	$	2,646,831	$	1,817,293
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
Liabilities
Current liabilities:
Accounts payable (1)	$	76,953	$	57,174
Accrued liabilities (1)	166,676		111,198
Operating lease liability - current	6,218		7,122
Accrued compensation and employee benefits	38,290		52,460
Deferred revenue	6,950		5,758

Reserve for claims and performance - based arrangements (1)	245,811		199,730
Total current liabilities	540,898		433,442
Long-term debt, net	633,013		412,986
Other long-term liabilities	4,273		4,744
Tax receivable agreement liability	112,134		45,950
Operating lease liabilities - noncurrent	56,576		56,010
Deferred tax liabilities, net	33,889		4,744
Total liabilities	1,380,783		957,876

Commitments and Contingencies (See Note 10)

Mezzanine Equity
Preferred class A common stock - $0.01 par value; 50,000,000 shares authorized; 175,000 and 0 shares issued, respectively	172,829		—

Shareholders' Equity
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 113,082,503 and 101,500,558 shares issued, respectively	1,131		1,015
Additional paid-in-capital	1,774,784		1,486,857
Accumulated other comprehensive loss	(1,114)		(1,178)




Retained earnings (accumulated deficit)	(660,459)		(606,154)
Treasury stock, at cost; 1,537,582 shares issued, respectively	(21,123)		(21,123)
Total shareholders' equity	1,093,219		859,417
Total liabilities, mezzanine equity and shareholders' equity	$	2,646,831	$	1,817,293

(1) See Note 18 for amounts attributable to 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 June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenue(1)	$	469,136	$	319,939	$	896,826	$	616,996
Expenses
Cost of revenue (1)	351,938		249,705		662,413		469,444
Selling, general and administrative expenses (1)	90,389		58,955		180,115		117,887
Depreciation and amortization expenses	32,134		15,112		61,409		30,218

Right-of-use assets impairment	24,065		—		24,065		—

Change in fair value of contingent consideration	(7,822)		800		747		6,878
Total operating expenses	490,704		324,572		928,749		624,427
Operating loss	(21,568)		(4,633)		(31,923)		(7,431)
Interest income	604		223		1,664		340
Interest expense	(14,458)		(2,148)		(27,353)		(4,389)

Gain from equity method investees	155		1,952		578		2,548


Change in tax receivable agreement liability	—		—		(66,184)		—
Other income (expense), net	(26)		297		(246)		475
Loss before income taxes	(35,293)		(4,309)		(123,464)		(8,457)
Provision for (benefit from) income taxes	(970)		(184)		(69,159)		1,018
Loss from continuing operations	(34,323)		(4,125)		(54,305)		(9,475)
Loss from discontinued operations, net of tax (2)	—		(463)		—		(463)

Loss before preferred dividends and accretion of Series A Preferred Stock	(34,323)		(4,588)		(54,305)		(9,938)
Dividends and accretion of Series A Preferred Stock	(7,088)		—		(13,364)		—
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(41,411)	$	(4,588)	$	(67,669)	$	(9,938)

Loss per common share
Basic and diluted:
Continuing operations	$	(0.37)	$	(0.05)	$	(0.62)	$	(0.11)
Discontinued operations	—		—		—		—
Basic and diluted	$	(0.37)	$	(0.05)	$	(0.62)	$	(0.11)





Weighted-average common shares outstanding
Basic and diluted	111,278		90,071		109,540		89,792


Comprehensive loss
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(41,411)	$	(4,588)	$	(67,669)	$	(9,938)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment	8		(288)		64		(420)
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc.	$	(41,403)	$	(4,876)	$	(67,605)	$	(10,358)

————————

(1)See Note 18 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.

See accompanying Notes to Consolidated Financial Statements.

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY

(unaudited, in thousands)


	For the Three Months Ended June 30, 2023
	Mezzanine Equity			Shareholders’ Equity
	Series A Preferred Stock			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 March 31, 2023	175	$	170,625	112,552	$	1,125	$	1,768,999	$	(1,122)	$	(626,136)	$	(21,123)	$	1,121,743

Stock-based compensation expense	—	—		—	—		8,966		—		—		—		8,966
Exercise of stock options	—	—		446	5		3,068		—		—		—		3,073
Restricted stock units vested, net of shares withheld for taxes	—	—		58	—		(138)		—		—		—		(138)




Class A common stock issued for payment of earn-outs	—	—		27	1		977		—		—		—		978


Foreign currency translation adjustment	—	—		—	—		—		8		—		—		8
Net loss attributable to common shareholders of Evolent Health, Inc.	—	2,204		—	—		(7,088)		—		(34,323)		—		(41,411)

Balance as of June 30, 2023	175	$	172,829	113,083	$	1,131	$	1,774,784	$	(1,114)	$	(660,459)	$	(21,123)	$	1,093,219

	For the Three Months Ended June 30, 2022
	Mezzanine Equity			Shareholders’ Equity
	Series A Preferred Stock			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 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 attributable to common shareholders of Evolent Health, Inc.	—	—		—	—		—		—		(4,588)		—		(4,588)

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

See accompanying Notes to Consolidated Financial Statements


	For the Six Months Ended June 30, 2023
	Mezzanine Equity			Shareholders’ Equity
	Series A Preferred Stock			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, 2022	—	$	—	101,501	$	1,015	$	1,486,857	$	(1,178)	$	(606,154)	$	(21,123)	$	859,417

Stock-based compensation expense	—	—		—	—		19,676		—		—		—		19,676
Exercise of stock options	—	—		776	8		4,646		—		—		—		4,654
Restricted stock units vested, net of shares withheld for taxes	—	—		492	4		(8,774)		—		—		—		(8,770)
Performance stock units vested, net of shares withheld for taxes	—	—		202	2		(3,977)		—		—		—		(3,975)
Leveraged stock units vested, net of shares withheld for taxes	—	—		760	8		(8)		—		—		—		—
Shares issued for acquisition	—	—		8,475	85		261,186		—		—		—		261,271
Class A common stock issued for payment of earn-outs	—	—		877	9		28,542		—		—		—		28,551
Issuance of series A preferred stock, net of issuance costs	175	168,000		—	—		—		—		—		—		—
Foreign currency translation adjustment	—	—		—	—		—		64		—		—		64
Net loss attributable to common shareholders of Evolent Health, Inc.	—	4,829		—	—		(13,364)		—		(54,305)		—		(67,669)

Balance as of June 30, 2023	175	$	172,829	113,083	$	1,131	$	1,774,784	$	(1,114)	$	(660,459)	$	(21,123)	$	1,093,219

	For the Six Months Ended June 30, 2022
	Mezzanine Equity			Shareholders’ Equity
	Series A Preferred Stock			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, 2021	—	—		90,759	$	908	$	1,340,989	$	(362)	$	(626,779)	$	(21,123)	$	693,633

Cumulative-effect adjustment from adoption of ASC 2020-06	—	—		—	—		(106,172)		—		39,789		—		(66,383)
Stock-based compensation expense	—	—		—	—		12,358		—		—		—		12,358
Exercise of stock options	—	—		37	—		309		—		—		—		309
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	—	—		458	4		(11,236)		—		—		—		(11,232)
Foreign currency translation adjustment	—	—		—	—		—		(420)		—		—		(420)
Net loss attributable to common shareholders of Evolent Health, Inc.	—	—		—	—		—		—		(9,938)		—		(9,938)

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

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Six Months Ended June 30,
	2023		2022
Cash Flows Used In Operating Activities
Net loss before dividends declared and accretion of Series A preferred stock	$	(54,305)	$	(9,938)
Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:
Change in fair value of contingent consideration	747		6,878
Loss on discontinued operations	—		463
Gain from equity method investees	(578)		(2,548)
Depreciation and amortization expenses	61,409		30,218

Stock-based compensation expense	19,676		12,358
Deferred tax provision (benefit)	(71,019)		472
Amortization of contract cost assets	5,672		13,186
Amortization of deferred financing costs	1,915		1,079



Right-of-use asset impairment	24,065		—
Change in tax receivable agreement liability	66,184		—
Right-of-use operating assets	1,147		(669)
Operating lease liabilities	(338)		179
Other current operating cash outflows, net	20		692
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets	(63,137)		13,042
Prepaid expenses and other current and non-current assets	(21,142)		(8,453)
Contract cost assets	(2,859)		(3,284)
Accounts payable	(12,732)		(823)
Accrued liabilities	11,944		(24,826)
Accrued compensation and employee benefits	(20,643)		(22,379)
Deferred revenue	1,050		(3,233)
Reserve for claims and performance-based arrangements	46,081		(45,334)
Other long-term liabilities	(477)		(858)
Net cash and restricted cash used in operating activities	(7,320)		(43,778)
Cash Flows Provided by (Used In) Investing Activities
Cash paid for asset acquisitions and business combinations	(388,246)		(9,070)

Proceeds from transfer of membership and release of Passport escrow	—		22,969

Return of equity method investments	799		4,175



Investments in internal-use software and purchases of property and equipment	(15,900)		(17,744)

Net cash and restricted cash provided by (used in) investing activities	(403,347)		330
Cash Flows Provided by (Used In) Financing Activities
Changes in working capital balances related to claims processing on behalf of partners	33,122		360
Proceeds from stock option exercises	4,654		309
Proceeds from issuance of long-term debt, net of offering costs	256,063		—

Repayment of long-term debt	(37,500)		—
Distributions to Sponsors	—		(14,884)
Proceeds from issuance of preferred stock, net of offering costs	168,000		—
Payment of preferred dividends	(8,535)		—
Taxes withheld and paid for vesting of equity awards	(12,745)		(16,471)
Net cash and restricted cash provided by (used in) financing activities	403,059		(30,686)
Effect of exchange rate on cash and cash equivalents and restricted cash	49		(375)

See accompanying Notes to Consolidated Financial Statements


	For the Six Months Ended June 30,
	2023		2022
Net decrease in cash and cash equivalents and restricted cash	(7,559)		(74,509)
Cash and cash equivalents and restricted cash as of beginning-of-period	215,158		354,942
Cash and cash equivalents and restricted cash as of end-of-period	$	207,599	$	280,433

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware and through its subsidiaries supports healthcare entities to improve the quality of care delivered for people with complex conditions through proven solutions that make health care simpler and more affordable.

The Company made organizational changes, including re-evaluating its reportable segments, as a result of growth in our value-based specialty care business, both organically and through acquisitions. Effective during the three months ended March 31, 2023, the Company changed its reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. Specifically, the Company collapsed its previous Evolent Health Services and Clinical Solutions segments into one segment. The Company's historical disclosures have been recast to be consistent with the current presentation.

As of June 30, 2023, the Company had unrestricted cash and cash equivalents of $142.5 million. The Company believes it has sufficient liquidity for at least 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. 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 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 2022 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 2022 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 interim 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 interim 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 (in thousands) as follows:




	June 30, 2023		December 31, 2022
Collateral for letters of credit for facility leases (1)	$	2,132	$	2,269
Collateral with financial institutions (2)	16,038		10,912
Claims processing services (3)	46,899		13,777
Total restricted cash and restricted investments	$	65,069	$	26,958

Current restricted cash	$	47,477	$	14,492
Total current restricted cash and restricted investments	$	47,477	$	14,492

Non-current restricted cash	$	17,592	$	12,466
Total non-current restricted cash and restricted investments	$	17,592	$	12,466

————————

(1)Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note 11 for further discussion of our lease commitments.

(2)Represents collateral held with financial institutions for risk-sharing and other arrangements which are held in a FDIC participating bank account. See Note 17 for discussion of fair value measurement and Note 10 for discussion of our risk-sharing arrangements.

(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 (in thousands):


	June 30,
	2023		2022
Cash and cash equivalents	$	142,530	$	193,070
Restricted cash and restricted investments	65,069		87,363
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows	$	207,599	$	280,433

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 are recognized separately from the business combination and are expensed as incurred. See Note 4 for additional discussion regarding business combinations.

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 on October 31 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 8 for additional discussion regarding the goodwill impairment tests conducted during 2022.

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			2 - 20 years
Customer relationships			11 - 25 years
Technology			5 years
Provider network contracts			3 - 5 years

As part of the organizational changes as a result of growth in our value-based specialty care business, we will sunset several corporate trade names and replace them with Evolent signifying our adoption and launch of a unified brand. As a result, we re-evaluated the useful lives of our intangible assets and accelerated amortization such that all corporate trade names will be fully amortized by December 2024.

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 8 for additional discussion regarding our intangible assets.

Research 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 cost of revenue and selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss).

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 20 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 both June 30, 2023 and December 31, 2022, approximately 47% of gross accounts receivable has been netted against claims payable in lieu of cash receipt. Furthermore, as of June 30, 2023, approximately 24% 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.

The Company reviews long-lived assets, which include operating lease right-of-use asset assets, for impairment when facts or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. Fair values are determined based on quoted market values, discounted cash flows and external market data, as applicable.

During the three months ended June 30, 2023, the Company decommissioned its Chicago, IL lease and wrote off the associated right-of-use asset, recognizing an impairment charge of $24.1 million in right-of-use assets impairment on the consolidated statements of operations.

Refer to Note 11 for additional lease disclosures.

Revenue Recognition

Our revenue contracts are typically multi-year arrangements with customers to provide solutions designed to lower the medical expenses of our partners and include our total cost of care and specialty care management services, provide comprehensive health plan operations and claims processing services, and also include transition or run-out services to 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 5 for further discussion of our policies related to revenue recognition.

Series A Senior Convertible Preferred Shares

In accordance with ASC 480, Distinguishing Liabilities from Equity, the shares of Series A Senior Convertible Preferred Shares are classified within temporary equity, as events outside the Company’s control triggers such shares to become redeemable. Costs associated with the issuance of redeemable preferred stock are presented as discounts to the fair value of the redeemable preferred stock and are amortized using the effective interest method, over the term of the respective series of preferred shares. Refer to Note 12 - Series A Senior Convertible Preferred Shares for further discussion.

Note 3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

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.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. The Company adopted this standard starting in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

Note 4. Transactions

Business Combinations

National Imaging Associates Inc.

On January 20, 2023, the Company completed its acquisition of NIA, including all of the issued and outstanding shares of capital stock of NIA as well as certain assets held by Magellan Health, Inc. (“Magellan”) and certain of its subsidiaries that were used in the Magellan Specialty Health Division. NIA is a specialty benefit management organization that focuses on managing cost and quality in the areas of radiology, musculoskeletal, physical medicine and genetics. The transaction is expected to accelerate our strategy to become a leading provider of value-based specialty care solutions as well as diversify our revenue streams with a larger customer portfolio.

Total acquisition consideration, net of cash on hand and certain closing adjustments, was $715.7 million, based on the closing price of the Company’s Class A common stock on the NYSE on January 20, 2023. The acquisition consideration consisted of approximately $387.8 million of cash consideration (inclusive of certain post-closing adjustments), 8,474,576 shares of the Company’s Class A common stock, fair valued at $261.3 million as of January 20, 2023, and an earn-out consisting of additional consideration of up to $150.0 million payable in cash and, at the Company’s election, up to 50% in shares of the Company’s Class A common stock (the “Contingent Consideration”). As of January 20, 2023, the Contingent Consideration is fair valued at $66.6 million. See Note 17 for additional information regarding the fair value determination of the earn-out consideration.

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of January 20, 2023, as follows (in thousands):


Purchase consideration:
Cash	$	387,823
Fair value of Class A common stock issued	261,271
Fair value of contingent consideration	66,600
Total consideration	$	715,694

Tangible assets acquired:
Accounts receivable	$	28,065
Prepaid expenses and other current assets	675

Total tangible assets acquired	28,740

Identifiable intangible assets acquired:
Customer relationships	345,100
Technology	50,700
Corporate trade name	8,200
Total identifiable intangible assets acquired	404,000

Liabilities assumed:

Accrued liabilities	5,409
Accrued compensation and employee benefits	6,173
Deferred tax liabilities, net	100,486
Deferred revenue	142

Total liabilities assumed	112,210

Goodwill (1)	395,164
Net assets acquired	$	715,694

————————

(1)Goodwill acquired does not include $(0.4) million of measurement period adjustments. See Note 8 for additional information.

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and is expected to be collectible in full. Identifiable intangible assets associated with customer relationships, technology and the corporate trade name will be amortized on a straight-line basis over their preliminary estimated useful lives of 15 years, 5 years, and 2 years, respectively. The customer relationships are primarily attributable to existing contracts with current customers. The technology consists primarily of proprietary software that supports NIA’s core business applications and specialty business. The corporate trade name reflects the value that we believe the NIA 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 based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the 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 spend to lease a similar asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. The Company received carryover tax basis in the assets and liabilities acquired; accordingly, the Company recognized net deferred tax liabilities associated with the difference between the book basis and the tax basis for the assets and liabilities acquired. The goodwill is not deductible for tax purposes. Additionally, a discrete tax benefit of $56.1 million was recorded in the consolidated statements of operations and comprehensive income (loss) for the six months ended June 30, 2023, to account for the valuation allowance release primarily related to the acquired intangible assets, which resulted in a deferred tax liability that provided a source of income supporting realization of other deferred tax assets.

The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed. As of June 30, 2023, we had not finalized the determination of fair values allocated to the acquired intangible assets and deferred tax liability. Any necessary adjustments will be finalized within one year from the date of acquisition.

We have included the financial results of NIA in our consolidated financial statements from January 20, 2023. The consolidated statements of operations and comprehensive income (loss) include $107.4 million of revenues and $(2.8) million of net loss attributable to NIA for the six months ended June 30, 2023.

Implantable Provider Group

On August 1, 2022, the Company completed its acquisition of IPG, including 100% of the voting equity interests. IPG is a leader in providing surgical management solutions for musculoskeletal conditions. The transaction is expected to accelerate our strategy to become a leading provider of value-based specialty care solutions as well as diversify our revenue streams with a larger customer portfolio. The transaction is expected to deepen our capabilities, allowing us to cross-sell across customers and enhance our value proposition to partners.

Total acquisition consideration, net of cash on hand and certain closing adjustments, was $461.7 million, based on the closing price of the Company’s Class A common stock on the NYSE on August 1, 2022. The acquisition consideration consisted of $256.5 million of cash consideration, 3.7 million shares of Class A common stock, fair valued at $130.2 million as of August 1, 2022, and an earn-out of up to $87.0 million, fair valued at $75.0 million as of August 1, 2022 is payable in cash and/or shares of the Company’s Class A Common Stock, at the Company’s option. See Note 17 for additional information regarding the fair value determination of the earn-out consideration.

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of August 1, 2022, as follows (in thousands):


Purchase consideration:
Cash	$	256,488
Fair value of Class A common stock issued	130,175
Fair value of contingent consideration	75,000
Total consideration	$	461,663

Tangible assets acquired:
Accounts receivable	34,155
Prepaid expenses and other current assets	636
Other non-current assets	1,393
Total tangible assets acquired	36,184


Identifiable intangible assets acquired:
Customer relationships	154,000
Technology	23,900
Corporate trade name	17,800
Total identifiable intangible assets acquired	195,700

Liabilities assumed:
Accounts payable	7,997
Accrued liabilities	8,083
Accrued compensation and employee benefits	423
Deferred tax liabilities, net	48,671
Deferred revenue	321
Operating lease liabilities	1,323
Total liabilities assumed	66,818

Goodwill	296,597
Net assets acquired	$	461,663

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and is expected to be collectible in full. Identifiable intangible assets associated with customer relationships, technology and the corporate trade name will be amortized on a straight-line basis over their preliminary estimated useful lives of 20 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 customer relationship management and analytics platform that supports reporting to payors with respect to medical device pricing and associated analytics. The corporate trade name reflects the value that we believe the IPG 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 based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the 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 spend to lease a similar asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. The Company received carryover tax basis in the assets and liabilities acquired; accordingly, the Company recognized net deferred tax liabilities associated with the difference between the book basis and the tax basis for the assets and liabilities acquired. The goodwill is not deductible for tax purposes. Additionally, a discrete tax benefit of $46.8 million was recorded in the consolidated statements of operations and comprehensive income (loss) for the year December 31, 2022, to account for the valuation allowance release primarily related to the acquired intangible assets, which resulted in a deferred tax liability that provided a source of income supporting realization of other deferred tax assets.

The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed. As of June 30, 2023, we had not finalized the determination of fair values allocated to the deferred tax liability. Any necessary adjustments will be finalized within one year from the date of acquisition.

Pro forma financial information (unaudited)

The following unaudited condensed pro forma information presents combined financial information as if the acquisition of NIA had been effective as of January 1, 2022, the beginning of the 2022 fiscal year. The unaudited pro forma financial information includes adjustments to historical amounts including amortization of acquired intangible assets, depreciation of acquired property and equipment, interest expense for the financing of the transaction, alignment of NIA’s revenue recognition policy, and the associated income tax effects as if NIA had been included in the Company’s results of operations.

This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the transactions described above occurred in the specified prior periods. The pro forma adjustments are based on available information and assumptions that the Company believes are reasonable to reflect the impact of these transactions on the Company’s historical financial information on a pro forma basis (in thousands).


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenue	$	—	$	386,308	$	908,251	$	749,135

Net loss attributable to common shareholders of Evolent Health, Inc.	—		(28,371)		(59,268)		(27,207)

Pro forma financial information has not been presented for the IPG acquisition as the impact to the Company’s interim consolidated financial statements was not material.

Note 5. Revenue Recognition

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 over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.

Contracts with Multiple Performance Obligations

Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both implementation and on going 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. As we integrate goods and services provided by third parties into our overall service, we control the services provided to the customer prior to its delivery. As such, we are the principal and we will recognize revenue on a gross basis. In certain cases, we act as an agent and do not control the services from third parties before it is delivered to the customer, thereby recognizing revenue on a net basis.

Disaggregation of Revenue

The following table represents Evolent’s revenue disaggregated by end-market and product type:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Medicaid	$	209,318	$	141,502	$	392,352	$	279,303
Medicare	138,700		111,392		266,369		208,492
Commercial and other	121,118		67,045		238,105		129,201
Total	$	469,136	$	319,939	$	896,826	$	616,996

Performance Suite	$	276,576	$	208,085	$	516,449	$	379,249
Specialty Technology and Services Suite	77,052		12,874		142,368		26,454
Administrative Services	77,754		92,357		160,821		199,216
Cases	37,754		6,623		77,188		12,077
Total	$	469,136	$	319,939	$	896,826	$	616,996

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term greater than one year, we have allocated approximately $33.9 million of transaction price to performance obligations that are unsatisfied as of June 30, 2023. 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 revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately 62%, 91% and 100% of these remaining performance obligations by December 31, 2023, 2024 and 2025, respectively. 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 more or less than this estimate and the timing of recognition may not be as expected.

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 June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Short-term receivables (1)	$	344,781	$	246,209

Short-term deferred revenue	6,950		5,758
Long-term deferred revenue	1,853		2,533

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(1)Excludes pharmacy claims receivable and premiums receivable.

Changes in deferred revenue for the six months ended June 30, 2023, are as follows (in thousands):


Deferred revenue
Balance as of beginning-of-period	$	8,291
Reclassification to revenue, as a result of performance obligations satisfied	(4,722)
Cash received in advance of satisfaction of performance obligations	5,234
Balance as of end of period	$	8,803

The amount of revenue, excluding customer discounts of $1.4 million and $2.9 million for the three and six months ended June 30, 2023, respectively, recognized from performance obligations satisfied (or partially satisfied) in a previous period was $18.0 million and $22.8 million for the three and six months ended June 30, 2023, respectively, due primarily to net gain share as well as changes in other estimates.

The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in a previous period was $19.5 million and $46.1 million for the three and six months ended June 30, 2022, respectively.

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 June 30, 2023 and 2022, the Company had $3.0 million and $3.8 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 $0.4 million and $0.7 million for the three and six months ended June 30, 2023, respectively, and $0.3 million and $1.7 million for the three and six months ended June 30, 2022, respectively.

In our revenue contracts, 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 June 30, 2023 and 2022, the Company had $11.6 million and $18.9 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 amortization of contract costs for certain customers of $3.0 million and $5.0 million for the three and six months ended June 30, 2023, respectively, and $1.2 million and $11.5 million for the three and six months ended June 30, 2022, 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 6. Credit Losses

We are exposed to credit losses primarily through our accounts receivable from revenue transactions, investments held at amortized cost 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, current inflationary pressures on our customers’ and other third parties’ ability to pay, we did not observe notable increases in delinquencies during the three months ended June 30, 2023.

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. 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 as of June 30, 2023, 70% were current, 20% were past due less than 60 days, with 28% past due less than 120 days and at December 31, 2022, 67% was current, 21% was past due less than 60 days, with 29% past due less than 120 days. As of June 30, 2023 and December 31, 2022, in total we reported on the consolidated balance sheet $366.2 million and $269.1 million of accounts receivable, certain non-trade accounts receivable included in prepaid expenses and other current assets, net of allowances of $12.9 million and $10.2 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 (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Balance as of beginning of period	$	(10,180)	$	(3,374)
NIA acquisition	(240)		—
Provision for credit losses	(4,390)		322
Charge-offs	1,898		—
Balance as of end of period	$	(12,912)	$	(3,052)

Note 7. Property and Equipment, Net

The following summarizes our property and equipment (in thousands):


	June 30, 2023		December 31, 2022
Computer hardware	$	31,139	$	30,092
Furniture and equipment	3,968		4,214
Internal-use software development costs	203,817		189,119
Leasehold improvements	11,214		14,926
Total property and equipment	250,138		238,351
Accumulated depreciation and amortization expenses	(166,614)		(150,477)
Total property and equipment, net	$	83,524	$	87,874

The Company capitalized $5.7 million and $13.8 million for the three and six months ended June 30, 2023, respectively, and $7.1 million and $13.5 million for the three and six months ended June 30, 2022, respectively, of internal-use software development costs. The net book value of capitalized internal-use software development costs was $74.1 million and $73.7 million as of June 30, 2023 and December 31, 2022, respectively.

Depreciation expense related to property and equipment was $8.2 million and $16.3 million for the three and six months ended June 30, 2023, respectively, and $7.8 million and $15.4 million for the three and six months ended June 30, 2022, respectively, of which amortization expense related to capitalized internal-use software development costs was $6.8 million and $13.5 million for the three and six months ended June 30, 2023, respectively and $6.5 million and $13.2 million for the three and six months ended June 30, 2022, respectively.

Note 8. 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.

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 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.

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the six months ended June 30, 2023. We will perform our annual impairment test as of October 31, 2023.

2022 Goodwill Impairment Test

On October 31, 2022, the Company performed its annual goodwill impairment test for fiscal year 2022. As a result of BHG announcing its plan to exit its IFP line of business in 2023, thus negatively impacting the Company’s future revenues from such partner, the Company elected to forego the qualitative assessment and proceeded directly to the quantitative assessment of the goodwill impairment test for that specific reporting unit. In doing so, we estimated the fair value of the reporting unit by considering an 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. The quantitative analysis of the Evolent Health Services reporting unit showed that the fair value exceeded the carrying value. Contracts with our customers may be cancelled or renegotiated and future revenue growth is dependent on winning new contracts. Further, the impairment analysis is particularly sensitive to changes in the projected revenue growth rates and expenses and the discount rate. Changes in these key assumptions such as a significant unfavorable change to our forecasted cash flows due to being unsuccessful in winning certain contracts or certain of our contracts being cancelled or renegotiated by our customers, could result in a revision of management’s estimates and could result in impairment charges in the future, which could be material to our results of operations. We will continue to monitor for such changes in facts or circumstances, which may be indicators of potential impairment triggers.

For the remaining reporting units, after assessing the totality of events and circumstances including the results of our previous valuations, no events 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. For all reporting units, it was determined that as of October 31, 2022, no impairment of goodwill had occurred.

Change in Goodwill

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



Balance as of December 31, 2022(1)	$	722,774
Goodwill acquired(2)	395,164
Measurement period adjustment	(391)
Foreign currency translation	9
Balance as of June 30, 2023	$	1,117,556




Balance as of December 31, 2021(1)	$	426,297

Foreign currency translation	(69)
Balance as of June 30, 2022	$	426,228

————————

(1)Net of cumulative inception to date impairment of $575.5 million as of December 31, 2022 and 2021.

(2)Goodwill acquired from the addition of NIA in January 2023.

Intangible Assets, Net

Details of our intangible assets (in thousands, except weighted-average useful lives) are presented below:


	June 30, 2023							December 31, 2022
	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	1.5	$	51,965	$	23,665	$	28,300	12.7	$	43,600	$	11,726	$	31,874
Customer relationships	14.9	810,119		115,584		694,535		15.8	465,019		92,760		372,259
Technology	3.3	162,522		88,105		74,417		2.7	111,822		80,255		31,567
Below market lease, net	0.0	1,218		1,218		—		0.3	1,218		1,151		67
Provider network contracts	0.8	18,861		14,191		4,670		1.3	18,851		11,834		7,017
Total intangible assets, net		$	1,044,685	$	242,763	$	801,922		$	640,510	$	197,726	$	442,784

Amortization expense related to intangible assets was $24.0 million and $45.1 million for the three and six months ended June 30, 2023, respectively, and $7.3 million and $14.8 million for the three and six months ended June 30, 2022, respectively.

Future estimated amortization of intangible assets (in thousands) as of June 30, 2023, is as follows:


2023	$	46,010
2024	87,529
2025	63,641
2026	63,293
2027	60,552
Thereafter	480,897
Total future amortization of intangible assets	$	801,922

As part of the organizational changes as a result of growth in our value-based specialty care business, we will sunset several corporate trade names and replace them with Evolent signifying our adoption and launch of a unified brand. As a result, we accelerated amortization such that all corporate trade names will be fully amortized by December 2024.

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 six months ended June 30, 2023, that would require an impairment test for our intangible assets.

Note 9. Long-term Debt

Credit Agreement

On August 1, 2022 (the “IPG Closing Date”), 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, collateral agent and revolver agent (the “Existing Credit Agreement” and as modified by the Amendment (defined below), the “Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) initial term loans in an aggregate principal amount of $175.0 million (the “Initial Term Loan Facility”) and (ii) revolving credit commitments in an aggregate principal amount of $50.0 million (the “Initial Revolving Facility”), the availability of which shall be determined by reference to the lesser of $50.0 million and a borrowing base calculation. The Borrowers borrowed full amount under the Initial Term Loan Facility and the Initial Revolving Facility on the IPG Closing Date. A closing fee of (a) 2.00% of the aggregate amount of the commitments in respect of the Initial Term Loan Facility and (b) 2.00% of the aggregate amount of the commitments in respect of the Initial Revolving Facility was paid as of the IPG Closing Date.

On January 20, 2023, (“the NIA Closing Date”), the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) additional revolving commitments in an aggregate principal amount equal to $25.0 million (the “Incremental Revolving Facility” and together with the Initial Revolving Facility, the Revolving Facility”), and (ii) additional term loans in an aggregate principal amount equal to $240.0 million, (the “Incremental Term Loan Facility” and together with the Initial Term Loan Facility, the “Term Loan Facility”; the Revolving Facility and the Term Loan Facility are collectively referred to herein as the “Credit Facilities”). The Borrowers borrowed the full amount under the Incremental Term Loan Facility and the Incremental Revolving Facility on the NIA Closing Date to finance, together with the proceeds from the sale of the Series A Preferred Stock, the cash consideration payable in connection with the NIA acquisition on the NIA Closing Date and pay transaction fees and expenses. A closing fee of (a) 3.00% of the aggregate amount of the commitments in respect of the Incremental Term Loan Facility and (b) 3.00% of the aggregate amount of the commitments in respect of the Incremental Revolving Facility was paid as of the NIA Closing Date.

The Credit Facilities are guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain customary exceptions. The 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 customary exceptions.

All loans under the Credit Facilities will mature on the date that is the earliest of (a) the sixth anniversary of the NIA Closing Date, (b) the date on which the commitments are voluntarily terminated pursuant to the terms of the Credit Agreement, (c) the date on which all amounts outstanding under the Credit Agreement have been declared or have automatically become due and payable under the terms of the Credit Agreement and (d) the date that is ninety-one (91) days prior to the maturity date of any Junior Debt (as defined in the Existing Credit Agreement) unless certain liquidity conditions are satisfied.

The interest rate for the Loans is calculated, at the option of the Borrowers, (a) in the case of the Term Loan Facility, at either the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 6.00%, or the base rate plus 5.00% and (b) in the case of the Revolving Facility, at either the Adjusted Term SOFR Rate plus 4.00%, or the base rate plus 3.00%. A closing fee of (a) 2.00% of the aggregate amount of the commitments in respect of the Incremental Term Loan Facility and (b) 2.00% of the aggregate amount of the commitments in respect of the Incremental Revolving Facility was paid as of the NIA Closing Date. The Company recorded $12.6 million and $23.7 million in interest expense related to our Credit Agreement for the three and six months ended June 30, 2023, respectively.

Amounts outstanding under the Credit Facilities may be prepaid at the option of the Company, subject to the following prepayment premium (the “Prepayment Premium”): (1) 3.00% of the principal amount so prepaid after the NIA Closing Date but prior to the first anniversary of the NIA Closing Date; (2) 2.00% of the principal amount so prepaid after the first anniversary of the closing but prior to the second anniversary of the NIA Closing Date; (3) 1.00% of the principal amount so prepaid after the second anniversary of the NIA Closing Date but prior to the third anniversary of the NIA Closing Date; and (4) 0.00% of the principal amount so prepaid on or after the third anniversary of the NIA 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, in each case, subject to application of the Prepayment Premium.

The 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. 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 Loans. We incurred $14.4 million of debt issuance costs in connection with the Loans, 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 Credit Agreement. The Company recorded $0.7 million and $1.2 million in interest expense related to the amortization of the debt discount and the issuance costs for the three and six months ended June 30, 2023, respectively.

During the six months ended June 30, 2023, the Company repaid $37.5 million under the Revolving Facility. As of June 30, 2023, there is $415.0 million outstanding under the Term Loan Facility and $37.5 million outstanding under the Revolving Facility.

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, since this method was not materially different from the effective interest method. 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 $0.2 million and $0.4 million for the three and six months ended June 30, 2023, respectively and $1.0 million and $2.0 million for the three and six months ended June 30, 2022, 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 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. Issuance costs of $1.7 million and $1.3 million 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 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 which is included in the cumulative adjustment to the opening balance of accumulated deficit. The Company recorded interest expense related to the amortization of the issuance costs of $46.2 thousand and $0.1 million for the three and six months ended June 30, 2023, respectively and $0.2 million and $0.4 million for the three and six months ended June 30, 2022, 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.

On August 11, 2022, the Company entered into exchange agreements with certain holders of the 2024 Notes. Pursuant to the agreements, these holders exchanged $92.8 million in aggregate principal amount of such notes for shares of the Company’s Class A common stock. On August 17 and 18, 2022, the Company consummated the exchanges and issued an aggregate of 5,394,165 shares of Class A common stock to the holders.

The August 2022 exchanges of the 2024 Notes for Class A common stock resulted in a $10.2 million loss on extinguishment/repayment of debt, net, on the consolidated statements of operations and comprehensive income (loss).

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 2025 Notes will mature on October 15, 2025, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. The Company recorded interest expense of $0.7 million and $1.3 million for the three and six months ended June 30, 2023 and 2022, respectively.

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 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.

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 interest expense related to the amortization of the issuance costs of $0.3 million and $0.6 million for the three and six months ended June 30, 2023, and 2022, 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.

Convertible Senior Notes Carrying Value

The 2024 Notes and 2025 Notes are recorded on our accompanying consolidated balance sheets at their net carrying values as of June 30, 2023. However, the 2024 Notes and 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 2024 Notes and 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 June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
2024 Notes
Carrying value	$	24,018	$	23,925
Unamortized debt discount and issuance costs	263		356
Principal amount	$	24,281	$	24,281
Remaining amortization period (years)	1.4		1.9
Fair value(1)	$	38,000	$	38,000

2025 Notes
Carrying value	$	169,527	$	168,885
Unamortized debt discount and issuance costs	2,973		3,615
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	2.3		2.8
Fair value(1)	$	192,445	$	185,546

————————

(1)Fair values for notes are derived from available trading prices closest to the respective balance sheet date. The 2024 Notes have not been traded since December 31, 2022.

Note 10. Commitments and Contingencies

Commitments

Letters of Credit

As of both June 30, 2023 and December 31, 2022, the Company was party to irrevocable standby letters of credit with a bank for $18.2 million and $13.1 million, respectively, for the benefit of regulatory authorities, real estate and risk-sharing agreements. As such, we held $18.2 million and $13.1 million, respectively, in restricted cash and restricted investments as collateral as of June 30, 2023 and December 31, 2022, respectively. The letters of credit have current expiration dates between November 2023 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 interim 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.

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 six months ended June 30, 2023, 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 and 2022. 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 June 30, 2023, no amounts have been funded under this guarantee.

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.

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 reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the NIA acquisition, the Company has recorded the remaining TRA liability of $66.2 million for the six months ended June 30, 2023, resulting in a total TRA liability of $112.1 million as of June 30, 2023.

We will assess the realizability of the deferred tax assets at each reporting period, and a change in our estimate of our liability associated with the tax receivable agreement may result as additional information becomes available, including results of operations in future periods. The realizability of the deferred tax assets is evaluated based on all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

Contingencies

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 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 Evolent Health, Inc., v. Blackley, Williams, Scott, Holder, Farner, D’Amato, Duffy, Felt, Samet, Hobart, and Payson, and Evolent Health, 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. Defendants filed a motion to dismiss the amended complaint on December 17, 2021. Plaintiffs filed a motion to dismiss the case without prejudice, which was granted by the Delaware Chancery Court on January 5, 2023. On April 6, 2023, a shareholder of the Company sent a letter to the Company’s Board requesting that the Company’s Board, among other things, investigate alleged wrongdoing and commence litigation for breach of fiduciary duty against the individuals named as defendants in the Derivative Action. The Company’s Board has not arrived at a final determination of what action, if any, should be taken and cannot currently estimate the loss or the range of possible losses it may experience in connection with this request.

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 June 30, 2023, approximately 99.2% of our $207.6 million of cash and cash equivalents, restricted cash and restricted investments were held in either bank deposits with FDIC participating banks or overnight sweep accounts invested in money-market funds and approximately 0.8% 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 is closely monitoring ongoing events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally. The Company has not experienced any realized losses on cash and cash equivalents to date; however, no assurances can be provided.

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:


	June 30, 2023	December 31, 2022
Cook County Health and Hospitals System	35.4%	42.5%

Molina Healthcare	20.2%	12.0%
Bright Health Management, Inc.	*	11.3%

————————

* Represents less than 10.0% of the respective 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 Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023	2022
Cook County Health and Hospitals Systems	17.6%	24.1%	17.4%	24.0%
Centene Corporation	10.3%	*	*	*
Florida Blue Medicare, Inc.	11.1%	11.7%	11.5%	11.8%
Molina Healthcare	16.4%	*	14.9%	*
Blue Cross and Blue Shield of North Carolina	*	10.2%	*	*

————————

* Represents less than 10.0% of the respective 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 11. 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 2032. 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.

In connection with various lease agreements, the Company is required to maintain $2.1 million and $2.3 million in letters of credit as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023 and December 31, 2022, the Company held $2.1 million and $2.3 million in restricted cash and restricted investments on the consolidated balance sheet as collateral for the letters of credit, respectively.

Right-of-Use Asset Impairment

The following table summarizes our primary office leases as of June 30, 2023 (in thousands, other than term):


Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required
Arlington, VA	8.6	$	28,960	$	1,579

Edison, NJ	2.8	1,495		222
Makati City, Philippines	4.9	3,397		—
Alpharetta, GA	2.3	1,066		—
Pune, India	4.8	2,765		—
Brea, CA	3.9	3,777		—

The following table summarizes the components of our lease expense (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Operating lease cost	$	(1,727)	$	2,231	$	213	$	4,505


Variable lease cost	1,565		1,171		3,121		2,497
Total lease cost	$	(162)	$	3,402	$	3,334	$	7,002

Maturity of lease liabilities (in thousands) as of June 30, 2023, is as follows:


	Operating lease expense
2023	$	4,444
2024	11,610
2025	11,285
2026	10,291
2027	10,044
Thereafter	32,161
Total lease payments	79,835
Less:
Interest	17,041
Present value of lease liabilities	$	62,794

Our weighted-average discount rate and our weighted remaining lease terms (in years) are as follows:



	June 30, 2023
Weighted average discount rate	6.71	%
Weighted average remaining lease term	7.5

Note 12. Convertible Preferred Equity

In connection with the NIA closing, on January 20, 2023, the Company entered into a Securities Purchase Agreement (Series A Convertible Preferred Shares) with the Purchasers listed on Schedule I thereto (the “Securities Purchase Agreement”) pursuant to which the Company offered and sold to the Purchasers an aggregate 175,000 shares of the Company’s newly created Cumulative Series A Preferred Shares, par value $0.01 (the “Series A Preferred Stock”), at a purchase price of $960.00 per share, resulting in total gross proceeds to the Company of $168.0 million. The proceeds from the offer and sale of the Series A Preferred Stock were used, together with the proceeds from the Priority ABL Incremental Facility and Term Loan Incremental Facility, to finance the cash consideration payable at Closing and pay transaction fees and expenses.

The Series A Preferred Stock ranks senior with respect to dividend and liquidation rights to the Company’s Class A common stock, par value $0.01 per share and all future series of the Company’s preferred stock. Each share of Series A Preferred Stock has an initial liquidation preference of $1,000.00 per share.

Regular dividends on the Series A Preferred Stock will be paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designations (as defined below)) plus 6.00%. The liquidation preference of the Series A Preferred Stock will increase on the last day of each calendar quarter by the amount of any accrued and unpaid regular dividends that have not been paid in cash on the relevant dividend payment date. The regular dividend rate will also increase by 2.0% per annum upon the occurrence and during the continuance of certain triggering events, including a breach of the protective covenants contained in the Investor Rights Agreement or the Company’s failure to pay any regular dividends in cash. Holders of Series A Preferred Stock are also entitled to participate in and receive any dividends declared or paid on the Class A Common Stock on an as-converted basis.

Each holder of Series A Preferred Stock has the right, at its option, to convert its shares of Series A Preferred Stock into shares of Class A Common Stock at an initial conversion price per share of $40.00 of the then-current liquidation preference per share, subject to customary anti-dilution adjustments.

Holders of Series A Preferred Stock are not entitled to vote on any matters, except as required by law and for certain consent rights set forth in the Certificate of Designations.

The Company may not redeem the Series A Preferred Stock at its option prior to January 20, 2025. At any time on or after January 20, 2025, the Company may redeem any or all of the Series A Preferred Stock then outstanding for cash at a redemption price per share equal to 165.00% of the then-current liquidation preference of the Series A Preferred Stock, plus all accrued and unpaid dividends on the Series A Preferred Stock being redeemed.

If not earlier redeemed, at any time on or after January 20, 2030, at the request of the holders of a majority of the convertible preferred stock, the Company will redeem all shares of Series A Preferred Stock then outstanding for cash at a redemption price per share equal to 150.00% of the then-current liquidation preference per share of the Series A Preferred Stock, plus all accrued and unpaid dividends on the Series A Preferred Stock being redeemed.

Upon the occurrence of a refinancing or replacement of the entirety of the indebtedness under the Credit Agreement prior to its maturity that is provided solely by lenders who are not affiliates or approved funds of Ares, the Company will be required to redeem all shares of Series A Preferred Stock then outstanding for cash at a redemption price per share equal to 165.00% of the then-current liquidation preference of the Series A Preferred Stock, plus all accrued and unpaid dividends on the Series A Preferred Stock being redeemed, plus, solely in the event such refinancing or replacement is consummated prior to January 20, 2025, the aggregate amount of dividends per share which would have otherwise been payable on the Series A Preferred Stock from the date of redemption until January 20, 2025.

If the Company undergoes a Change of Control (as defined in the Existing Credit Agreement), the Company will be required to redeem all shares of Series A Preferred Stock then outstanding for cash at a price per share equal to the greater of (x) 150.00% of the then-current liquidation preference per share of the Series A Preferred Stock, if such redemption occurs prior to January 20, 2025, and 135.00% of the then-current liquidation preference per share of the Series A Preferred Stock, if such redemption occurs on or after January 20, 2025, and (y) the value of the Class A Common Stock issuable upon conversion of a share of Series A Preferred Stock, which value shall be determined based on the value attributed to the Class A Common Stock in connection with such Change of Control.

In connection with the NIA closing, the Company entered into an Investors Rights Agreement with the Purchasers named in Schedule I thereto (the “Investors Rights Agreement”). The Investors Rights Agreement contains certain restrictions on the transfer of the Series A Preferred Stock and certain protective covenants in favor of the Purchasers. These covenants include, among other things, covenants limiting the incurrence of Funded Debt (as defined in the Investors Rights Agreement), the ability to make restricted payments and the ability to issue additional indebtedness senior to the Series A Preferred Stock. Each of these covenants is subject to certain exceptions set forth in the Investors Rights Agreement.

In connection with the NIA closing, on January 20, 2023, the Company entered into a Registration Rights Agreement with the Stockholders named in Schedule I thereto, which granted certain registration rights to Ares in respect of the shares of the Company’s Class A Common Stock issuable upon conversion of the Series A Preferred Stock.

During the three and six months ended June 30, 2023, the Company paid dividends of $4.9 million, or $27.91 per share of Series A Preferred Stock and $8.5 million, or $48.77 per share of Series A Preferred Stock. The Company accreted $2.2 million and $4.8 million of deferred issuance costs in additional paid-in-capital on the consolidated balance sheets for the three and six months ended June 30, 2023, respectively.

Note 13. Loss Per Common Share

The following table sets forth the computation of basic and diluted earnings per share available for common stockholders (in thousands, except per share data):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(41,411)	$	(4,588)	$	(67,669)	$	(9,938)

Weighted-average common shares outstanding - basic and diluted	111,278		90,071		109,540		89,792





Loss per common share

Basic and diluted	$	(0.37)	$	(0.05)	$	(0.62)	$	(0.11)

Basic net loss per common share is calculated using the weighted average number of common shares outstanding during the period. Diluted net earnings per common share, if any, gives effect to diluted stock options (calculated based on the treasury stock method), shares issuable upon debt conversion (calculated using an as-if converted method).

Anti-dilutive shares excluded from the calculation of weighted-average common shares presented above are presented below (in thousands):


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023	2022
Restricted stock units ("RSUs"), performance-based RSUs (“PSUs”) and leveraged stock units ("LSUs")	1,073	1,642	1,505	1,817
Stock options	976	1,852	1,106	1,807
Series A Preferred Stock	4,375	—	4,375	—
Convertible senior notes	6,188	11,582	6,188	11,582
Total	12,612	15,076	13,174	15,206

Note 14. Stock-based Compensation

Total compensation expense by award type and line item in our interim consolidated financial statements was as follows (in thousands):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
Award Type
Stock options	$	14	$	91	$	74	$	253
RSUs	6,903		4,647		14,392		7,948
LSUs	77		382		361		1,157
PSUs	1,972		1,892		4,849		3,000
Total compensation expense by award type	$	8,966	$	7,012	$	19,676	$	12,358

Line Item
Cost of revenue	$	42	$	1,162	$	1,582	$	1,962
Selling, general and administrative expenses	8,924		5,850		18,094		10,396
Total compensation expense by financial statement line item	$	8,966	$	7,012	$	19,676	$	12,358

No stock-based compensation was capitalized as software development costs during the three and six months ended June 30, 2023 and 2022, respectively.

Stock-based awards were granted as follows (in thousands):


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023	2022
RSUs	57	63	1,053	980
PSUs	8	—	432	479

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, adjusted for discrete items recognized during the interim period. Discrete items (e.g., significant or unusual items) are separately recognized in the quarter during which they occur and can cause the effective tax rate to vary from quarter to quarter.

An income tax provision (benefit) of $(1.0) million and $(69.2) million was recognized for the three and six months ended June 30, 2023, respectively, which resulted in effective tax rates of 2.7% and 56.0%, respectively. An income tax provision (benefit) of $(0.2) million and $1.0 million for the three and six months ended June 30, 2022, respectively, which resulted in effective tax rates of 3.9% and (11.4)%, respectively. The income tax benefit recorded during the six months ended June 30, 2023, primarily relates to the $56.1 million reduction in the valuation allowance resulting from deferred tax liabilities established as part of the NIA acquisition accounting. The income tax expense recorded during the three and six months ended June 30, 2022, primarily related to state and foreign taxes.

As of June 30, 2023, the Company had unrecognized tax benefits of $1.6 million that, if recognized, would affect the overall effective tax rate. 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 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 10 above for discussion of our TRA.

Note 16. Investments in 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 June 30, 2023 and December 31, 2022, the Company’s economic interests in its equity method investments ranged between 4% and 38%, 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 from these investments was approximately $0.2 million and $0.6 million for the three and six months ended June 30, 2023, respectively, and $2.0 million and $2.5 million for the three and six months ended June 30, 2022, 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 $4.6 million and $9.4 million for the three and six months ended June 30, 2023, respectively, and $3.9 million and $7.5 million for the three and six months ended June 30, 2022, respectively.

Note 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. These items are recorded in accrued liabilities on our consolidated balance sheets.

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 (in thousands):


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration(1)	$	—	$	—	$	113,300	$	113,300
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	113,300	$	113,300


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration	$	—	$	—	$	78,000	$	78,000
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	78,000	$	78,000

————————

(1) Represents the fair value of earn-out consideration related to the IPG and NIA transactions as described in Note 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 six months ended June 30, 2023, and 2022, 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.

The acquisitions of NIA and IPG include a provision for additional equity consideration, at the Company’s option, contingent upon the Company obtaining certain performance metrics. The earnout period for the NIA contingent consideration is the year ending December 31, 2023, and the earnout period for IPG is the nine months ended September 30, 2023. The fair value of the contingent equity considerations was estimated based on the real options approach, a form of the income approach, which estimated the probability of the Company achieving future revenues under the agreement. The significant unobservable inputs used in the fair value measurements of the NIA and IPG contingent considerations are the risk-neutral (probability weighted) earnout consideration and the applicable discount rate. A significant increase in the 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 are as follows (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Balance as of beginning of period	$	78,000	$	28,700
Additions	66,600		—
Settlements	(32,047)		—
Total (gain) loss, net	747		4,700
Balance as of end of period	$	113,300	$	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 the periods presented:

June 30, 2023

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

113,300

Real options approach

Risk-neutral expected earnout consideration

113,300

Weighted average discount rate

8.50% - 13.98%

December 31, 2022

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

78,000

Real options approach

Risk-neutral expected earnout consideration

77,946

Weighted average discount rate

9.85% - 10.01%

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 9 for information regarding the fair value of the 2024 Notes and 2025 Notes.

Note 18. Related Parties

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

As discussed in Note 16, the Company had economic interests in several entities that are accounted for under the equity method of 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 (in thousands):




	June 30, 2023		December 31, 2022
Assets
Accounts receivable, net	$	7,326	$	8,787
Prepaid expenses and other current assets	43		—


Liabilities
Accounts payable	$	—	$	27
Accrued liabilities	—		192

The following table presents revenues and expenses attributable to our related parties (in thousands):


	For the Three Months Ended June 30, 2023				For the Six Months Ended June 30,
	2023		2022		2023		2022
Revenue	$	39,486	$	42,810	$	94,207	$	74,874

Expenses
Cost of revenue	32,076		36,684		79,582		63,145
Selling, general and administrative expenses	997		236		1,239		302

Note 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.

During the second quarter of 2023, the Company implemented a broad set of repositioning initiatives designed to further align the Company’s assets and talent towards the value-based specialty care opportunity, with the intent of streamlining its operations and supporting the goal of realizing long-term sustainable earnings growth. These initiatives include making organizational changes across the business that resulted in severance, terminated benefits and related payroll taxes and dedicated employee costs associated with recent acquisitions as well as third-party professional fees. Dedicated employee costs primarily include project management and technology staff costs needed to migrate acquired businesses to Evolent’s integrated technology platform and costs related to the consolidation of brands, internal operations, strategies, processes and platforms. Dedicated employee costs are limited to employees that will have no role in ongoing operations and have no planned role at Evolent once the repositioning activities are completed. Professional services costs primarily relate to services provided by 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.

The Company anticipates total repositioning charges of approximately $25.3 million which will be recorded in selling, general and administrative expenses on the consolidated statement of operations. The repositioning program is anticipated to be substantially complete by the first half of 2024.

The following table provides a summary of our total costs associated with the Repositioning Plan for the three and six months ended June 30, 2023, by major type of cost (in thousands):


	Incurred				Total Amount Expected to be Incurred in the Repositioning Plan
	For the Three Months Ended June 30, 2023		For the Six Months Ended June 30, 2023
Severance and termination benefits	$	4,737	$	4,737	$	7,300
Dedicated employee costs	1,737		1,737		7,725
Professional services	4,787		4,787		10,300
Total	$	11,261	$	11,261	$	25,325

Note 20. 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 reflect actual payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities.

The Company uses actuarial principles and assumptions that are consistently applied 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 based on authorizations per thousand members basis and assigning an average cost per authorization. This is also adjusted for the impact of copays, deductibles, unit cost and historic discontinuation rates for treatment are considered.

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 was as follows (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Balance, beginning of period	$	199,730	$	171,294
Incurred health care costs:
Current year to date period	385,459		246,955
Prior year to date period	(26,474)		22,438
Total claims incurred	358,985		269,393
Claims paid related to:
Current year to date period	(179,472)		(201,508)
Prior year to date period	(133,432)		(101,145)
Total claims paid	(312,904)		(302,653)
Other adjustments (1)	—		(12,074)
Balance, end of period	$	245,811	$	125,960

————————

(1) 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.

Note 21. Supplemental Cash Flow Information

The following represents supplemental cash flow information (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Supplemental Disclosure of Non-cash Investing and Financing Activities
Accrued property and equipment purchases	$	24	$	1,118
Increase/decrease to goodwill from measurement period adjustments/business combinations	(391)		—



Class A common stock issued in connection with business combinations	261,271		—



Effects of Leases
Operating cash flows from operating leases	6,532		7,010
Leased assets disposed of (obtained in) exchange for operating lease liabilities	1,941		4,153

Note 22. Subsequent Events

The Company issued a notice of redemption to the holders of its outstanding 2024 Notes on August 2, 2023, pursuant to which it will redeem the outstanding Notes for cash at a price of 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, on October 13, 2023 (the “Redemption Date”). Prior to the Redemption Date, the holders of the 2024 Notes are entitled to convert to shares of the Company’s Class A Common Stock, par value $0.01 per share (the “Common Stock”) at a rate of 54.8667 shares per $1,000 principal amount of 2024 Notes. In the event any holder delivers a conversion notice as provided in that certain Indenture dated as of August 19, 2020 (the “Indenture”) related to the 2024 Notes, the Company intends to satisfy its conversion obligation with respect to each $1,000 principal amount of 2024 Notes tendered by Physical Settlement (as defined in the Indenture). In the event such conversion would result in a fractional share of Common Stock, an amount in lieu of the fractional share based on the Daily VWAP (as defined in the Indenture) of the Common Stock on the conversion date will be paid in cash by the Company as provided in the Indenture. As of August 2, 2023, $24.3 million aggregate principal amount of the 2024 Notes is outstanding. The Company intends to fund the aggregate redemption price using cash on hand.

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 interim consolidated financial statements and the accompanying notes to our interim consolidated financial statements presented in “Part I – Item 1. Financial Statements” of this Form 10-Q; our 2022 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 2023.

INTRODUCTION

Business Overview

We are a market leader in the new era of value-based care, in which the delivery of health care is increasingly funded by at-risk payment models. We provide integrated solutions to both health care providers, including independent physicians and health systems, as well as payers, including health plans and other risk-bearing organizations, with a common end: to improve health care quality and outcomes while reducing cost. We consider value-based care to be the necessary convergence of health care payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS health care, a market environment that is incentivizing value-based care models, growth in consumer-focused insurance programs, such as Medicare Advantage and managed Medicaid, and innovation in data and technology.

We were an early innovator in value-based care, founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board Company.

Segment Update

Between 2020 and 2022, we significantly grew our value-based specialty care business, both organically and through acquisitions. Given the pace of our growth, what we believe to be our high level of competitive differentiation, and the size of potential opportunities in the specialty care market, we began a process in 2023 of revising the way we manage the business, evaluate performance and allocate resources, resulting in an updated segment structure comprised of one segment. We now provide a broad spectrum of specialty care management services in oncology, cardiology, musculoskeletal markets and holistic total cost of care improvement along with an integrated platform for health plan administration and value-based business infrastructure under one go to market package. We began reporting under this new segment structure as of January 1, 2023. Prior year information has been adjusted to reflect the change in segment reporting.

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

Recent Events

Impact of Inflation

We experience pricing pressures in the form of competitive prices in addition to rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits and facility leases. We do not believe these impacts were material to our revenues or net income during the six months ended June 30, 2023. However, significant sustained inflation driven by the macroeconomic environment or other factors could negatively impact our margins, profitability and results of operations in future periods.

Customers

The following table summarizes those partners who represented at least 10.0% of our consolidated revenue:


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023	2022
Cook County Health and Hospitals Systems	17.6%	24.1%	17.4%	24.0%
Centene Corporation	10.3%	*	*	*
Florida Blue Medicare, Inc.	11.1%	11.7%	11.5%	11.8%
Molina Healthcare	16.4%	*	14.9%	*
Blue Cross and Blue Shield of North Carolina	*	10.2%	*	*

————————

* Represents less than 10.0% of the respective balance

Transactions

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

Acquisition of NIA

On November 17, 2022, Evolent Health LLC, a wholly owned subsidiary of the Company, and the Company entered into a definitive agreement for the Company to acquire NIA. On January 20, 2023, we consummated the acquisition of NIA for $387.8 million in cash, $265.0 million in debt financing provided by Ares Capital Corporation and the issuance of 8.5 million shares of Class A common stock. NIA reports into Evolent’s specialty care management offering, New Century Health. Refer to “Part I - Item 1. Financial Statements - Note 4” for additional discussion regarding the NIA acquisition.

Credit Agreement Amendment

On January 20, 2023, (“the NIA Closing Date”), the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders agreed to extend credit to the Borrower in the form (i) additional revolving commitments in an aggregate principal amount equal to $25.0 million (the “Incremental Revolving Facility” and together with the Initial Revolving Facility, the “Revolving Facility”), and (ii) additional term loans in an aggregate principal amount equal to $240.0 million (the “Incremental Term Loan Facility” and together with the Initial Term Loan Facility, the “Term Loan Facility”; the Revolving Facility and the Term Loan Facility are collectively referred to herein as the “Credit Facilities”). The Borrowers borrowed full amount under the Incremental Term Loan Facility and the Incremental Revolving Facility on the NIA Closing Date to finance, together with the proceeds from the sale of the Series A Preferred Stock, the cash consideration payable in connection with the NIA acquisition on the NIA Closing Date and pay transaction fees and expenses. A closing fee of (a) 3.00% of the aggregate amount of the commitments in respect of the Incremental Term Loan Facility and (b) 3.00% of the aggregate amount of the commitments in respect of the Incremental Revolving Facility was paid as of the NIA Closing Date. Refer to “Part I - Item 1. Financial Statements - Note 9” for additional discussion regarding the amendment to the Credit Agreement.

Series A Preferred Stock

In connection with the consummation of the acquisition of NIA, on January 20, 2023, we entered into a Securities Purchase Agreement pursuant to which the Company offered and sold an aggregate 175,000 shares of Series A Preferred Stock, at a purchase price of $960.00 per share, resulting in total gross proceeds to us of $168.0 million. The proceeds from the offer and sale of the Series A Preferred Stock were used, together with the proceeds from the Priority ABL Incremental Facility and Term Loan Incremental Facility, to finance the cash consideration payable for the acquisition of NIA and pay transaction fees and expenses. Refer to “Part II - Item 8. Financial Statements - Note 12” for additional discussion regarding the sale of Series A Preferred Stock.

Repositioning Costs

consolidation of brands, internal operations, strategies, processes and platforms. Dedicated employee costs are limited to employees that will have no role in ongoing operations and have no planned role at Evolent once the repositioning activities are completed. Professional services costs primarily relate to services provided by 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.

The Company anticipates total charges of approximately $25.3 million which will be recorded in selling, general and administrative expenses on the consolidated statement of operations. The repositioning program is anticipated to be substantially complete by the first half of 2024.

The following table provides a summary of our total costs associated with the Repositioning Plan for the three and six months ended June 30, 2023, by major type of cost (in thousands):


	Incurred				Total Amount Expected to be Incurred in the Repositioning Plan
	For the Three Months Ended June 30, 2023		For the Six Months Ended June 30, 2023
Severance and termination benefits	$	4,737	$	4,737	$	7,300
Integration costs	1,737		1,737		7,725
Third party professional services	4,787		4,787		10,300
Total	$	11,261	$	11,261	$	25,325

Critical Accounting Policies and Estimates

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. 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.

2022 Goodwill Impairment Test

On October 31, 2022, the Company performed its annual goodwill impairment test for fiscal year 2022. As a result of BHG announcing its plan to exit its IFP line of business in 2023, thus negatively impacting the Company’s future revenues from such partner, 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. In doing so, 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 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. The quantitative analysis of the reporting unit showed that the fair value exceeded the carrying value. Contracts with our customers may be cancelled or renegotiated and future revenue growth is dependent on winning new contracts. Further, the impairment analysis is particularly sensitive to changes in the projected revenue growth rates and expenses and the discount rate. Changes in these key assumptions such as a significant unfavorable change to our forecasted cash flows due to being unsuccessful in winning certain contracts or certain of our contracts being cancelled or renegotiated by our customers, could result in a revision of management’s estimates and could result in impairment charges in the future, which could be material to our results of operations. We will continue to monitor for such changes in facts or circumstances, which may be indicators of potential impairment triggers.

Adoption of New Accounting Standards

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 enter into capitation arrangements that may include performance-based arrangements and/or gainshare features. 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. As we integrate goods and services provided by third parties into our overall service, we control the services provided to the customer prior to its delivery. As such, we are the principal and we will recognize revenue on a gross basis. In certain cases, we act as an agent and do not control the services from third parties before it is delivered to the customer, thereby recognizing revenue on a net basis.

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 services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.

Contracts with Multiple Performance Obligations

Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both implementation and ongoing 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.

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 customers. Costs consist primarily of claims expense, 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.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of employee-related expenses (including compensation, benefits and stock-based compensation) for selling and marketing, corporate development, finance, legal, human resources, corporate information technology, professional fees and other corporate expenses associated with these functional areas. Selling, general and administrative expenses also include costs associated with our centralized infrastructure and research and development activities to support our network development capabilities, claims processing services, including PBM administration, technology infrastructure, clinical program development and data analytics.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value 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

Performance Suite Lives on Platform are calculated by summing monthly members covered for specialty care services for contracts not under ASO arrangements, plus members managed by Evolent Care Partners in risk arrangements and divided by the number of months in the period. Specialty Technology and Services Suite Lives on Platform are calculated by summing monthly members covered for oncology, cardiology, musculoskeletal, advanced imaging and other diagnostics specialty care services for contracts under ASO arrangements divided by the number of months in the period. Administrative Services Lives on Platform are calculated by summing monthly members covered for administrative services implementation and core performance services divided by the number of months in the period. Cases are calculated by summing the number of individuals receiving services through our surgery management and advanced care planning programs in a given period. Members covered for more than one category are counted in each category.

Performance Suite Average PMPM fee is defined as revenue pertaining to our Performance Suite during the period reported divided by Performance Suite Lives on Platform for the period divided by the number of months in the period. Specialty Technology and Services Suite Average PMPM fee is defined as revenue pertaining to the Specialty Technology and Services Suite during the period reported divided by Specialty Technology and Services Suite Lives on Platform for the period divided by the number of months in the period. Administrative Services Average PMPM fee is defined as revenue pertaining to the Administrative Services during the period reported divided by the Administrative Services Lives on Platform for the period divided by the number of months in the period. Revenue per Case is calculated by the revenue pertaining to surgery management and advanced care planning programs divided by the number of cases for a given period.

Average Unique Members are calculated by summing members covered by our Performance Suite, Specialty Technology and Services Suite and Administrative Services. In cases where clients cross between multiple products, we only capture members from the product with the maximum number of members.

Management uses Lives on Platform, PMPM fees, Cases, Revenue per Case and Average Unique Members 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.

Due to our change in segments during the first quarter of 2023, the Company changed its presentation of Lives on Platform to reflect the membership that corresponds to quarterly revenue. The Company recast periods prior to the first quarter of 2023 to reflect the current presentation of Lives on Platform, PMPM fees, Cases and Revenue per Case. The current Performance Suite maps to the prior disclosure of the Clinical Solutions Performance Suite. The current Specialty Technology and Services Suite maps to the prior disclosure of the Clinical Solutions New Century Health Technology and Services Suite. The current Administrative Services maps to the prior disclosure of Evolent Health Services segment. There has been no change in the presentation of Cases from prior period.

Evolent Health, Inc. Consolidated Results


(in thousands, except percentages)	For the Three Months Ended June 30, 2023						Change Over Prior Period			For the Six Months Ended June 30,						Change Over Prior Period
	2023			2022			$		%	2023			2022			$		%
Revenue	$	469,136		$	319,939		$	149,197	46.6%	$	896,826		$	616,996		$	279,830	45.4%

Expenses
Cost of revenue	351,938			249,705			102,233		40.9%	662,413			469,444			192,969		41.1%
Selling, general and administrative expenses	90,389			58,955			31,434		53.3%	180,115			117,887			62,228		52.8%
Depreciation and amortization expenses	32,134			15,112			17,022		112.6%	61,409			30,218			31,191		103.2%
Right-of-use assets impairment	24,065			—			24,065		—%	24,065			—			24,065		—%


Change in fair value of contingent consideration	(7,822)			800			(8,622)		(1,077.8)%	747			6,878			(6,131)		(89.1)%
Total operating expenses	490,704			324,572			166,132		51.2%	928,749			624,427			304,322		48.7%
Operating loss	$	(21,568)		$	(4,633)		$	(16,935)	(365.5)%	$	(31,923)		$	(7,431)		$	(24,492)	(329.6)%

Cost of revenue as a % of revenue	75.0		%	78.0		%				73.9		%	76.1		%
Selling, general and administrative expenses as a % of revenue	19.3		%	18.4		%				20.1		%	19.1		%

Comparison of the Results for Three Months Ended June 30, 2023 to 2022

Revenue

Total revenue increased by $149.2 million, or 46.6%, to $469.1 million for the three months ended June 30, 2023, as compared to 2022. This increase is primarily due to $90.6 million from our acquisitions of and launches of new integrated products with NIA and IPG and $58.6 million from the addition of new partners and expansion with existing partners.

The following table represents Evolent’s revenue disaggregated by end-market (in thousands):


	For the Three Months Ended June 30,
	2023		2022
Medicaid	$	209,318	$	141,502
Medicare	138,700		111,392
Commercial and other	121,118		67,045
Total	$	469,136	$	319,939

The following table represents the Company’s Lives on Platform, Cases, PMPM fees and revenue per case for the three months ended June 30, 2023 and 2022 (Lives on Platform in thousands):


	Average Lives on Platform/ Cases		Average PMPM Fees / Revenue per Case
	For the Three Months Ended June 30,		For the Three Months Ended June 30,
	2023	2022	2023		2022
Performance Suite	3,810	2,132	$	24.20	$	32.53
Specialty Technology and Services Suite	72,954	15,134	0.35		0.28
Administrative Services	1,822	2,097	14.22		14.68
Cases	15	6	2,505		1,164

Average Unique Members	41,794	16,285

Cost of Revenue

Cost of revenue increased by $102.2 million, or 40.9%, to $351.9 million for the three months ended June 30, 2023, as compared to 2022, principally as a result of the growth in our revenue. The increase included approximately $52.4 million from higher claims cost from acquisitions and transition from ASO to risk based contracts for certain customers, $30.4 million of higher personnel costs due to increased headcount from the acquisition of NIA and IPG, employee benefit, bonus accruals for employees and severance payments to former employees and $23.3 million of surgical management costs at IPG. These increases were offset in part by a decrease of $7.6 million in professional fees due primarily to lower costs incurred for contracts that went live during the quarter and third-party service fees for existing customers and third party staffing fees.

Approximately $42.0 thousand and $1.2 million of total personnel costs in costs of revenue was attributable to stock-based compensation expense for the three months ended June 30, 2023, and 2022, respectively. Cost of revenue represented 75.0% and 78.0% of total revenue for the three months ended June 30, 2023, and 2022, respectively. We expect our cost of revenue to decrease as a percentage of total revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by $31.4 million, or 53.3%, to $90.4 million for the three months ended June 30, 2023, as compared to 2022, principally as a result of the IPG and NIA acquisitions and employee costs across all business units. The increase was primarily driven by fees due under the NIA transfer services administration agreement of $22.2 million, $8.3 million of higher personnel costs due to increased headcount, employee benefit, bonus accruals for employees and severance payments to former employees, higher stock compensation of $3.1 million due to the achievement and change in projected achievement of certain performance measurements, severance costs and acquisition costs of $0.4 million, offset, in part by lower bad debt expense of $3.3 million.

Approximately $8.9 million and $5.9 million of total personnel costs were attributable to stock-based compensation expense for the three months ended June 30, 2023, and 2022, respectively. Acquisition and severance costs accounted for approximately $0.4 million and $3.4 million of total selling, general and administrative expenses for the three months ended June 30, 2023, and 2022, respectively. Selling, general and administrative expenses represented 19.3% and 18.4% of total revenue for the three months ended June 30, 2023, as compared to 2022, respectively. While our selling, general and administrative expenses are expected to grow as we integrate NIA operations and implement our repositioning plan, we expect them to decrease as a percentage of our total revenue over the long-term due to cost saving initiatives.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $17.0 million, or 112.6%, to $32.1 million for the three months ended June 30, 2023, as compared to 2022 due primarily to $14.6 million of amortization of intangible assets acquired through our acquisitions and $1.9 million of accelerated amortization of trade name intangibles due to our consolidation of trade names under Evolent. 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.

Right-of-Use Asset Impairment

Change in Fair Value of Contingent Consideration

We recorded a gain on change in fair value of contingent consideration of $(7.8) million for the three months ended June 30, 2023, related to the liabilities acquired as a result of the acquisitions of NIA in January 2023 and IPG in August 2022, and $0.8 million for the three months ended June 30, 2022, related to liabilities acquired as a result of the acquisition of Vital Decisions. See “Part I - Item 1. Financial Statements - Note 17” in this Form 10-Q for more information related to changes in the fair value of contingent consideration.

Comparison of the Results for Six Months Ended June 30, 2023 to 2022

Revenue

Total revenue increased by $279.8 million, or 45.4%, to $896.8 million for the six months ended June 30, 2023, as compared to 2022. This increase is primarily due to $172.6 million from our acquisitions of and launches of new integrated products with NIA and IPG and $107.2 million from the addition of new partners and expansion with existing partners.

The following table represents Evolent’s revenue disaggregated by end-market (in thousands):


	For the Six Months Ended June 30,
	2023		2022
Medicaid	$	392,352	$	279,303
Medicare	266,369		208,492
Commercial and other	238,105		129,201
Total	$	896,826	$	616,996

The following table represents the Company’s Lives on Platform, Cases, PMPM fees and revenue per case for the six months ended June 30, 2023 and 2022 (Lives on Platform in thousands):


	Average Lives on Platform/ Cases		Average PMPM Fees / Revenue per Case
	For the Six Months Ended June 30,		For the Six Months Ended June 30,
	2023	2022	2023		2022
Performance Suite	3,526	1,813	$	24.41	$	34.86
Specialty Technology and Services Suite	66,728	14,720	0.36		0.30
Administrative Services	1,840	2,075	14.57		16.00
Cases	30	11	2,530		1,111

Average Unique Members	41,531	15,704

Cost of Revenue

Cost of revenue increased by $193.0 million, or 41.1%, to $662.4 million for the six months ended June 30, 2023, as compared to 2022, principally as a result of the growth in our revenue. The increase included approximately $110.5 million from higher claims cost from acquisitions and transition from ASO to risk based contracts for certain customers, $56.2 million of higher personnel costs due to increased headcount from our NIA and IPG acquisitions, employee benefit, bonus accruals for employees and severance payments to former employees and $48.8 million of surgical management costs at IPG. These increases were offset in part by a decrease of $15.6 million in professional fees due primarily to changes in gainshare/earnouts as well as the termination of external staffing contracts and a decrease of $6.5 million for the acceleration of amortization of contract costs for certain customers. Approximately $1.6 million and $2.0 million of total personnel costs in costs of revenue was attributable to stock-based compensation expense for the six months ended June 30, 2023, and 2022, respectively. Cost of revenue represented 73.9% and 76.1% of total revenue for the six months ended June 30, 2023, and 2022, respectively. We expect our cost of revenue to decrease as a percentage of total revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by $62.2 million, or 52.8%, to $180.1 million for the six months ended June 30, 2023, as compared to 2022, principally as a result of the IPG and NIA acquisitions and employee costs across all business units. The increase was primarily driven by the NIA TSA fee of $16.1 million, higher personnel fees due to increased headcount from the acquisition of NIA and expected benefit accruals to employees of $10.6 million, higher stock compensation of $7.7 million due to the achievement and change in projected achievement of certain performance measurements, higher bad debt expense of $1.2 million due to collection timing from our customers, technology services due to higher headcount of $1.6 million, $1.0 million of severance costs and acquisition costs of $11.7 million, offset, in part by lower leases and rental expenses from cost savings initiatives of $4.0 million.

Approximately $18.1 million and $10.4 million of total personnel costs were attributable to stock-based compensation expense for the six months ended June 30, 2023, and 2022, respectively. Acquisition and severance costs accounted for approximately $12.7 million and $3.9 million of total selling, general and administrative expenses for the six months ended June 30, 2023, and 2022, respectively. Selling, general and administrative expenses represented 20.1% and 19.1% of total revenue for the six months ended June 30, 2023, as compared to 2022, respectively. While our selling, general and administrative expenses are expected to grow as we integrate NIA operations and implement our repositioning plan, we expect them to decrease as a percentage of our total revenue over the long-term due to cost saving initiatives.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $31.2 million, or 103.2%, to $61.4 million for the six months ended June 30, 2023, as compared to 2022 due primarily to $27.6 million of amortization of intangible assets acquired through our acquisitions and $2.6 million of accelerated amortization of trade name intangibles due to our consolidation of trade names under Evolent. 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.

Right-of-Use Asset Impairment

During the six months ended June 30, 2023, the Company decommissioned its Chicago, IL lease and wrote off the associated right-of-use asset, recognizing an impairment charge of $24.1 million in right-of-use assets impairment on the consolidated statements of operations.

Change in Fair Value of Contingent Consideration

We recorded a loss on change in fair value of contingent consideration of $0.7 million for the six months ended June 30, 2023, related to the liabilities acquired as a result of the acquisitions of NIA in January 2023 and IPG in August 2022, and $6.9 million for the six months ended June 30, 2022, related to liabilities acquired as a result of the acquisition of Vital Decisions. See “Part I - Item 1. Financial Statements - Note 17” in this Form 10-Q for more information related to changes in the fair value of contingent consideration.

Discussion of Non-Operating Results

Interest Expense

Our interest expense is primarily attributable to our Credit Agreement with Ares Capital Corporation as well as the 2024 Notes and 2025 Convertible Notes. We recorded interest expense (including amortization of deferred financing costs) of approximately $14.5 million and $27.4 million for the three and six months ended June 30, 2023, respectively, and $2.1 million and $4.4 million for the three and six months ended June 30, 2022, respectively. The increase in interest expense is driven primarily by the interest expense incurred on our Loans, offset by a $1.6 million decrease on our 2024 Notes due to the exchange of notes in August 2022. We expect interest expense to increase during 2023, however, we are focused on deleveraging the balance sheet in the long-term thereby

decreasing interest expense. See “Part I - Item 1. Financial Statements - Note 9” in this Form 10-Q for more information related to interest expense.

Change in Tax Receivable Agreement Liability

Provision for (Benefit from) Income Taxes

REVIEW OF CONSOLIDATED FINANCIAL CONDITION

Liquidity and Capital Resources

The Company reported operating losses of $(31.9) million and $(7.4) million for the six months ended June 30, 2023, and 2022, respectively. Net cash and restricted cash used in operating activities was $(7.3) million and $(43.8) million for the six months ended June 30, 2023, and 2022, respectively.

As of June 30, 2023, the Company had $142.5 million of cash and cash equivalents and $65.1 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 at least 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, which may require us to seek sources of financing.

Cash Flows

The following summary of cash flows (in thousands) has been derived from our financial statements included in “Part I - Item 1. Financial Statements - Consolidated Statements of Cash Flows:”


	For the Six Months Ended June 30,
	2023		2022
Net cash and restricted cash used in operating activities	$	(7,320)	$	(43,778)
Net cash and restricted cash provided by (used in) investing activities	(403,347)		330
Net cash and restricted cash provided by (used in) financing activities	403,059		(30,686)

Operating Activities

Cash flows used in operating activities of $7.3 million for the six months ended June 30, 2023 were primarily due to our net loss of $54.3 million, non-cash items including depreciation and amortization expenses of $61.4 million, stock-based compensation expense of $19.7 million, deferred tax benefit of $(71.0) million, impairment of the right-of-use asset connected to our Chicago, IL office lease of $24.1 million and change in our tax receivable liability of $66.2 million. Our operating cash outflows were affected by the timing of our customer and vendor payments primarily driven by lower cash receipts from certain customers of approximately $53.1 million and additional increases in accounts receivable from our acquisition of NIA of $40.4 million combined with a reduction of our accrued compensation and employee benefits due to end of year bonus payments and severance of $(20.6) million, offset in part by higher restricted cash held for claims processing services of $33.1 million.

Cash flows used in operating activities of $43.8 million for the six months ended 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.

Investing Activities

Cash flows used in investing activities of $403.3 million in the three months ended June 30, 2023 were primarily attributable to $388.2 million paid for acquisitions and $15.9 million of investments in internal-use software and purchases of property and equipment.

Cash flows provided by investing activities of $0.3 million in the six months ended 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.

Financing Activities

Cash flows provided by financing activities of $403.1 million in the three months ended June 30, 2023, were primarily related to $256.1 million received from our Acquisition Facilities in connection with our Credit Agreement and $168.0 million from the issuance of preferred equity, offset in part, by $37.5 million of cash outflows related to the payment on our Revolving Facility, $8.5 million of preferred dividends paid on our Series A Preferred Stock and $12.7 million from withholding taxes paid in respect of vested restricted stock units that were net settled.

Cash flows used in financing activities of $30.7 million in the six months ended June 30, 2022 were primarily related to $16.5 million from withholding taxes paid in respect restricted stock units that were net settled.

Contractual and Other 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 2023. Our estimated contractual obligations (in thousands) as of June 30, 2023, were as follows:


	2023		2024-2025		2026-2027		2028+		Total
Operating leases for facilities	$	4,444	$	22,895	$	20,335	$	32,161	$	79,835
Purchase obligations related to vendor contracts	5,342		5,700		1,466		—		12,508
Convertible notes interest payments	1,606		5,175		—		—		6,781
Convertible notes principal repayment	24,281		172,500		—		—		196,781
Contingent consideration	43,300		70,000		—		—		113,300
Total contractual obligations	$	78,973	$	276,270	$	21,801	$	32,161	$	409,205

As of June 30, 2023, we had $415.0 million of aggregate principal amount in a secured term loan, $37.5 million of aggregate principal amount in a secured revolving credit facility. All Loans under the Credit Agreement will mature in 2029. The interest rate for all Loans will be 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 Credit Agreement) plus 6.00%, or the base rate plus 5.00% and (b) in the case of a revolving loan, at either the Adjusted Term SOFR Rate plus 4.00%, or the base rate plus 3.00%.

Also, as of June 30, 2023, we had 175,000 shares of the Company’s newly created Cumulative Series A Convertible Preferred Shares. Regular dividends on the Series A Preferred Stock will be paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designations) plus 6.00%. The regular dividend rate will also increase by 2.0% per annum upon the occurrence and during the continuance of certain triggering events.

Accounts Receivable, net

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the six months ended June 30, 2023, accounts receivable, net, increased due primarily to the timing of cash receipts from certain customers combined with $28.1 million of receivables acquired as part of the NIA acquisition.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments of $65.1 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $46.9 million, collateral for letters of credit required as security deposits for facility leases of $2.1 million, amounts held with financial institutions for risk-sharing arrangements of $16.0 million as of June 30, 2023. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are carried at cost and includes prepaid expenses and non-trade accounts receivable. During the three and six months ended June 30, 2023, prepaid insurance increased as a result of higher premiums and acquisition of NIA.

Goodwill 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. As part of our acquisition of NIA in January 2023 we added $404.0 million of intangible assets and $395.2 million of goodwill. As part of our acquisition of IPG in August 2022, we added $195.7 million of intangible assets and $296.6 million of goodwill. See “Part I - Item 1. Financial Statements - Note 4” for further details of the Company’s restricted cash balances.

Tax Receivables Agreement

In connection with the Offering Reorganization, we entered into the TRA with the holders of Class B common units. The agreement requires us to pay to such holders 85% of the cash savings, if any, in U.S. federal, state and local, and foreign income tax (as applicable) we realize as a result of any deductions attributable to the increase in tax basis following the Class B Exchanges or deductions attributable to imputed interest or future increases in tax basis following payments made under the TRA. Additionally, pursuant to the same agreement we will pay the former stockholders of Evolent Health Holdings 85% of the amount of the cash savings, if any, in U.S. federal, state and local, and foreign income tax that we realize as a result of the utilization of the NOLs of Evolent Health Holdings (and the affiliate of TPG) attributable to periods prior to the Offering Reorganization, approximately $79.3 million, as well as deductions attributable to imputed interest on any payments made under the agreement. Payments under the TRA are due within 100 days of filing the Company’s annual U.S. Federal income tax return. The Company has recorded a TRA liability of $112.1 million as of June 30, 2023. See “Part I - Item 1. Financial Statements - Note 15” for further details of the Company’s TRA.

Uses of Capital

Our principal uses of cash are in the operation and expansion of our business, payment of interest on our convertible debt and secured borrowings and payment of preferred dividends. The Company does not anticipate paying a cash dividend on our Class A common stock in the foreseeable future.

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 June 30, 2023, the Company had cash and cash equivalents and restricted cash and restricted investments of $207.6 million, which consisted of bank deposits with FDIC participating banks of $205.9 million and bank deposits in international banks of $1.7 million.

Changes in interest rates affect the interest earned on our cash and cash equivalents (including restricted cash). 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 June 30, 2023, we had $196.8 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. In addition, as of June 30, 2023, we had $415.0 million of aggregate principal amount in a secured term loan, $37.5 million of aggregate principal amount in a secured revolving credit facility and $175.0 million of Series A Preferred Stock outstanding, all of which are floating rate instruments based on the SOFR and subject to fluctuations in interest rates. In the case of (a) the term loan, interest is calculated at either the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 6.00%, or the base rate plus 5.00%, (b) in the case of a revolving loan, interest is calculated at either the Adjusted Term SOFR Rate plus 4.00%, or the base rate plus 3.00% and (c) in the case of the Series A Preferred Stock, dividends are to be paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. For every 1% increase in SOFR, the Company would record additional interest expense of $4.5 million per annum and preferred dividends of $1.8 million per annum.

Refer to the discussion in “Part I - Item 1. Financial Statements - Note 9” for additional information on our long-term debt.

Foreign Currency Exchange Risk

We have foreign currency risks related to our operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee and the Philippine Peso. 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 income (loss) of $8.0 thousand and $0.1 million for the three and six months ended June 30, 2023, respectively, and $(0.3) million and $(0.4) million for the three and six months ended June 30, 2022, respectively.

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 June 30, 2023, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

In addition, based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022.

Changes in Internal Control over Financial Reporting

On August 1, 2022 and January 20, 2023, we completed the acquisitions of IPG and NIA, respectively. Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal controls over financial reporting during the first year of an acquisition while integrating the acquired company. In conducting our evaluation of the effectiveness of our internal controls over financial reporting, we excluded IPG and NIA from our evaluation for the period ended June 30, 2023. We are in the process of integrating IPG and NIA into our system of internal controls over financial reporting.

Other than the foregoing, there have been no changes in our internal control over financial reporting that occurred in the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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 controls 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. Although inherent limitations of internal controls will continue to be present, proper SOD controls and a whistle blower hotline are in place across the organization to minimize these limitations.

PART II

Item 1. Legal Proceedings

The discussion of legal proceedings included within “Part I – Item 1. Financial Statements - Note 10 - Commitments and Contingencies - Litigation Matters” is incorporated by reference into this 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, 2022 (the “2022 Form 10-K”). These risk factors are supplemented for the items 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.

Our business is subject to online security risks, and if we are unable to safeguard the security and privacy of confidential data, we may face significant liabilities and our reputation and business will be harmed.

Our services involve the collection, storage and analysis of confidential information, including intellectual property and personal information of employees, health providers and others, as well as protected health information of our partners’ patients. Because of the extreme sensitivity of this information, the security and privacy features of our computer, network, and communications systems infrastructure are very important. In certain cases, we provide such information to third parties, for example, to the service providers who provide hosting services for our technology platform, and we may be unable to control the use of such information or the security and privacy protections employed by such third parties. We may be required to expend significant capital and other resources to protect against security breaches and/or privacy incidents or to alleviate problems caused by security breaches and/or privacy incidents. Despite our implementation of security and privacy measures designed to help ensure data security and compliance with applicable laws and rules, our facilities and systems, and those of our third-party providers, are vulnerable to threats. Furthermore, our increased use of mobile and cloud technologies, including as a result of the shift to work-from-home arrangements as a result of the COVID-19 pandemic, has heightened these cybersecurity and privacy risks, including risks from cyber-attacks such as phishing, spam emails, hacking, social engineering, and malicious software including harmful malware and ransomware. Threat actors regularly attempt to gain access to our information and infrastructure through various techniques. These threats include cyber-attacks, the use of harmful malware or ransomware, security breaches, acts of vandalism or theft (including by employees), computer viruses, misplaced or lost data, programming and/or human errors, power outages, protected health information leakage from implementing third-party technology to process and share data, hardware failures or other similar events. To date we have not experienced a cybersecurity incident that has resulted in any material impact on our business, operations or financial results or on our ability to service our partners or run our business. However, past and future incidents, including if we are unable to effectively resolve breaches in a timely manner, could result in damage to the market perception of the effectiveness of our security and privacy measures and we could lose sales and partners, which could have a material adverse effect on our business, operations, and financial results. A cyber-attack that bypasses our, or our third-party providers’, security systems successfully could require us to expend significant resources to remediate any damage, and prevent future occurrences, interrupt our operations, damage our reputation and our relationship with our partners, expose us or other third parties to a risk of loss or misuse of confidential information, reduce demand for our products and services or subject us to significant liability through litigation as well as regulatory action.

Cyber-attacks continue to evolve in sophistication and volume and may remain undetected for an extended period. In addition, techniques used to obtain unauthorized access to information or to sabotage information technology systems change frequently. We have seen, and will continue to see, industry-wide vulnerabilities, such as the Log4j vulnerability reported in December 2021, which have and could in the future affect our or other parties’ systems. We expect to continue to experience such vulnerabilities in the future.

The costs of attempting to protect against cybersecurity risks and the costs of responding to cyber-attacks are significant. This could require us to expend significant resources to continue to modify or enhance our protective measures and to remediate any damage. While we maintain insurance covering certain security and privacy damages and claim expenses, we may not carry insurance or maintain coverage sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

New data security and privacy laws and regulations are being implemented rapidly and are evolving, and we may not be able to timely comply with such requirements, and such requirements may not be compatible with our current processes. For example, regulators in the United States and globally are also inquiring more about and imposing greater monetary fines for privacy violations. In the last year, the FTC has announced that it will begin enforcing the Health Breach Notification Rule, and entered into a consent order with a $1.5 million fine. The FTC and many states (including California, Utah, Colorado, Virginia and Connecticut) have specific

requirements for collecting and processing certain data including data minimization, data de-identification, opt out rights, deletion and sharing. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could subject us to liability for non-compliance.

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.

The Federal Deposit Insurance Corporation only insures amounts up to $250,000 per depositor. It is likely that we will have cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. Recently, we have seen the abrupt failure of more than one regional bank. Although we did not experience any loss related to these failures, if any of the banking institutions in which we deposit funds ultimately fails, we may lose any amounts of our deposits over federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest and could result in a decline in our value.

Failure to accurately underwrite performance-based contracts could result in a reduction in profitability for our specialty care management solution.

Our specialty care management solutions derive a portion of their revenue from arrangements under which they assume responsibility for a portion of the total cost of treatments (for oncology, cardiology, radiology, musculoskeletal, physical medicine, and genetics patients) in exchange for a fixed fee. These are typically referred to as “performance-based contracts”. If the Company is unable to accurately underwrite the health care cost risk for New Century Health and NIA and control associated costs, for example due to changes in the delivery system; changes in utilization patterns, including post-pandemic as we may experience increased utilization due to higher demand for elective procedures that were not performed during the pandemic; changes in the number of members seeking treatment; unforeseen fluctuations in claims backlogs; unforeseen increases in the costs of the services; the occurrence of catastrophes; regulatory changes; and changes in benefit plan design, the Company’s profitability could decline. Moreover, costs of providing oncology, cardiology, radiology, musculoskeletal, physical medicine, genetics and other specialties are very hard to predict, in part as a result of rapidly changing utilization of new and existing drugs and changing diagnostic and therapeutic protocols. When generic drugs are not available or there are shortages, this has increased and in the future may increase our costs, and has impacted and in the future may impact our profitability. Further, the competitive environment for our performance-based products, and customer demands or expectations as to margin levels could result in pricing pressures which could cause us to reduce our rates. A reduction in performance-based contract rates which are not accompanied by a reduction in covered services or expected underlying care trend could result in a decrease of our profitability and operating margins.

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

On May 11, 2023, we issued 27,522 shares of our Class A common stock in connection with a contingent consideration earn-out provision pursuant to the terms of an agreement between the Company and The Accountable Care Organization, Ltd. The issuance was exempt from registration under the Securities Act in reliance upon Section 4(a)(2) and Rule 506(b) of the Securities Act as a transaction by an issuer not involving a public offering. We determined that the purchasers of shares of Class A common stock in the transaction were accredited investors. The Company did not engage in a general solicitation or advertising with regard to the issuance and contribution of the Class A common stock issued in connection with the transaction.

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*						Amendment No. 1 to Stock and Asset Purchase Agreement dated January 20, 2023, by and among Evolent Health, Inc., Evolent Health LLC, and Magellan Health, Inc. which was filed as Exhibit 2.6 to the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2023, and incorporated herein by reference.

2.2*						Amendment No. 2 to Stock and Asset Purchase Agreement dated February 17, 2023, by and among Evolent Health, Inc., Evolent Health LLC, and Magellan Health, Inc. which was filed as Exhibit 2.7 to the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2023, and incorporated herein by reference.
























































































































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 Annual Report on Form 10-K, formatted as Inline XBRL

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* 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.

+ Constitutes a management contract or other compensatory plan or arrangement.

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: August 2, 2023

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Evolent Health (EVH) 10-Q2023 Q2 Quarterly report

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