Evolent Health, Inc. - Quarter Report: 2021 June (Form 10-Q)


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, 2021

☐ 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 August 2, 2021, there were 87,267,772 shares of the registrant’s Class A common stock outstanding.

Evolent Health, Inc.

Table of Contents


Item		Page
	PART I
1.	Financial Statements (Unaudited)	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
3.	Quantitative and Qualitative Disclosures About Market Risk	59
4.	Controls and Procedures	60

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

	Signatures	64

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 future actions, trends in our businesses, prospective services, future performance or financial results and the closing of pending transactions and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

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

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

•evolution in the market for value-based care;

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

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

•risks related to completed and future acquisitions, investments, alliances and joint ventures, including the acquisitions of Valence Health Inc., excluding Cicerone Health Solutions, Inc., Aldera Holdings, Inc., New Century Health, and Passport, which may be difficult to integrate, divert management resources, or result in unanticipated costs or dilute our stockholders;

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

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

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

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

•the potential negative impact of the COVID-19 pandemic and other public health emergencies;

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

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

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

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

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

•consolidation in the health care industry;

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

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

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

•risks related to our offshore operations;

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

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

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

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

•our ability to achieve profitability in the future;

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

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

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

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

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

•adequate protection of our intellectual property, including trademarks;

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

•our use of “open source” software;

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

•our reliance on third parties and licensed technologies;

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

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

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

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

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

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

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

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

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

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

•the potential impact of our securities class action litigation;

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

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

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

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

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

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

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)


	June 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	207,273	$	319,002
Restricted cash and restricted investments	17,742		14,374
Accounts receivable, net (1)	242,505		124,064
Prepaid expenses and other current assets (1)	38,032		56,295
Current assets of discontinued operations	—		33,914
Total current assets	505,552		547,649
Restricted cash and restricted investments	13,395		6,654
Investments in and advances to equity method investees	9,788		6,498
Property and equipment, net	82,996		86,240
Right-of-use assets - operating	51,904		57,799
Prepaid expenses and other noncurrent assets (1)	6,311		5,773
Contract cost assets	22,367		26,687
Intangible assets, net	252,045		264,992
Goodwill	349,009		349,029
Non-current assets of discontinued operations	—		20,379
Total assets	$	1,293,367	$	1,371,700
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Current liabilities:
Accounts payable (1)	$	39,879	$	31,975
Accrued liabilities (1)	52,339		73,242
Short-term debt, net of discount	26,655		26,557
Operating lease liability - current	7,265		7,357
Accrued compensation and employee benefits	25,852		47,163
Deferred revenue	13,173		10,187
Reserve for claims and performance - based arrangements (1)	238,105		178,827
Current liabilities of discontinued operations	—		27,986
Total current liabilities	403,268		403,294
Long-term debt, net of discount	206,550		263,343
Other long-term liabilities	9,784		22,081
Operating lease liabilities - noncurrent	58,618		62,526
Deferred tax liabilities, net	957		679
Non-current liabilities from discontinued operations	—		177
Total liabilities	679,177		752,100
Commitments and Contingencies (See Note 11)
Shareholders' Equity
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 87,195,128 and 85,894,450 shares issued, respectively	872		859
Additional paid-in-capital	1,242,900		1,229,320
Accumulated other comprehensive income (loss)	(367)		(278)
Retained earnings (accumulated deficit)	(608,092)		(589,178)
Treasury stock, at cost; 1,537,582 shares issued, respectively	(21,123)		(21,123)
Total shareholders' equity	614,190		619,600
Total liabilities and shareholders' equity	$	1,293,367	$	1,371,700

(1) See Note 19 for amounts attributable to unconsolidated related parties included in these line items.

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,
	2021		2020		2021		2020
Revenue
Transformation services (1)	$	2,564	$	755	$	2,909	$	5,993
Platform and operations services (1)	219,493		216,544		434,219		432,538
Total revenue	222,057		217,299		437,128		438,531

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	172,113		164,358		329,945		339,987
Selling, general and administrative expenses (1)	42,699		47,296		101,290		99,383
Depreciation and amortization expenses	14,916		15,618		30,103		31,596
Loss on disposal of assets	—		—		—		6,447
Goodwill impairment	—		215,100		—		215,100
Change in fair value of contingent consideration and indemnification asset	—		756		(594)		(3,062)
Total operating expenses	229,728		443,128		460,744		689,451
Operating loss	(7,671)		(225,829)		(23,616)		(250,920)
Interest income	68		705		191		1,475
Interest expense	(6,274)		(6,290)		(12,611)		(12,571)
Impairment of equity method investments	—		—		—		(47,133)
Gain from equity method investees	4,879		25,143		12,662		24,731
Gain on transfer of membership	—		—		22,969		—
Loss on repayment of debt	—		—		(19,158)		—
Other income (expense), net	(18)		354		(32)		284
Loss from continuing operations before income taxes	(9,016)		(205,917)		(19,595)		(284,134)
Provision (benefit) for income taxes	91		(3,904)		702		(3,634)
Loss from continuing operations	(9,107)		(202,013)		(20,297)		(280,500)
Income (loss) from discontinued operations, net of tax (2)	—		(1,508)		1,383		(1,773)
Net loss	(9,107)		(203,521)		(18,914)		(282,273)
Net loss attributable to non-controlling interests	—		—		—		—
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(9,107)	$	(203,521)	$	(18,914)	$	(282,273)

Loss per common share
Basic and diluted
Continuing operations	$	(0.11)	$	(2.37)	$	(0.24)	$	(3.30)
Discontinued operations	—		(0.01)		0.02		(0.02)
Basic and diluted loss per share attributable to common shareholders of Evolent Health, Inc.	$	(0.11)	$	(2.38)	$	(0.22)	$	(3.32)

Weighted-average common shares outstanding
Basic and diluted	85,448		85,349		85,056		84,977

Comprehensive loss
Net loss	$	(9,107)	$	(203,521)	$	(18,914)	$	(282,273)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment	(58)		(4)		(89)		(157)
Total comprehensive loss	(9,165)		(203,525)		(19,003)		(282,430)
Total comprehensive loss attributable to non-controlling interests	—		—		—		—
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc.	$	(9,165)	$	(203,525)	$	(19,003)	$	(282,430)

————————

(1)See Note 19 for amounts attributable to unconsolidated related parties included in these line items.

(2)Includes $1.9 million gain on disposal of discontinued operations for the six months ended June 30, 2021.

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited, in thousands)


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

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

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


	For the Three Months Ended June 30, 2020
	Class A Common Stock			Additional Paid-In Capital		Accumulated Other Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders' Equity Attributable to Evolent Health, Inc.		Non-Controlling Interests		Total Equity
	Shares	Amount
Balance as of March 31, 2020	85,450	$	855	$	1,180,288	$	(387)	$	(333,684)	$	—	$	847,072	$	—	$	847,072

Stock-based compensation expense	—	—		3,703		—		—		—		3,703		—		3,703
Exercise of stock options	82	1		442		—		—		—		443		—		443
Restricted stock units vested, net of shares withheld for taxes	113	1		(145)		—		—		—		(144)		—		(144)
Share retirement	(188)	(2)		(683)		—		—		—		(685)		—		(685)
Foreign currency translation adjustment	—	—		—		(4)		—		—		(4)		—		(4)
Net loss	—	—		—		—		(203,521)		—		(203,521)		—		(203,521)

Balance as of June 30, 2020	85,457	$	855	$	1,183,605	$	(391)	$	(537,205)	$	—	$	646,864	$	—	$	646,864

See accompanying Notes to Consolidated Financial Statements


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

Stock-based compensation expense	—	—		7,359		—		—		—		7,359		—		7,359
Exercise of stock options	900	9		9,367		—		—		—		9,376		—		9,376
Restricted stock units vested, net of shares withheld for taxes	400	4		(3,146)		—		—		—		(3,142)		—		(3,142)
Foreign currency translation adjustment	—	—		—		(89)		—		—		(89)		—		(89)
Net loss	—	—		—		—		(18,914)		—		(18,914)		—		(18,914)

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


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

Cumulative-effect adjustment from adoption of ASU 2016-13	—	—		—		—		(2,970)		—		(2,970)		—		(2,970)
Stock-based compensation expense	—	—		7,211		—		—		—		7,211		—		7,211
Exercise of stock options	90	1		525		—		—		—		526		—		526
Restricted stock units vested, net of shares withheld for taxes	350	4		(1,335)		—		—		—		(1,331)		—		(1,331)
Share retirement	(188)	(2)		(683)		—		—		—		(685)		—		(685)
Class A common stock issued for payment of earn-outs	616	6		4,179		—		—		—		4,185		—		4,185
Disposal of assets	—	—		—		—		—		—		—		(6,689)		(6,689)
Foreign currency translation adjustment	—	—		—		(157)		—		—		(157)		—		(157)
Net loss	—	—		—		—		(282,273)		—		(282,273)		—		(282,273)

Balance as of June 30, 2020	85,457	$	855	$	1,183,605	$	(391)	$	(537,205)	$	—	$	646,864	$	—	$	646,864

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,
	2021		2020
Cash Flows Provided by (Used In) Operating Activities
Net loss	$	(18,914)	$	(282,273)
Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:
Change in fair value of contingent consideration and indemnification asset	(594)		(3,062)
(Gain) loss on disposal of assets	(1,904)		6,447
(Gain) loss from equity method investees	(12,662)		(24,731)
Depreciation and amortization expenses	30,263		31,916
Impairment of equity method investments	—		47,133
Stock-based compensation expense	7,359		7,211
Deferred tax (benefit) provision	(268)		(892)
Amortization of contract cost assets	8,311		10,272
Amortization of deferred financing costs	8,837		6,079
Interest from customer advance for regulatory capital requirements	—		(1,316)
Gain on transfer of membership	(22,969)		—
Goodwill impairment	—		215,100
Loss on repayment of debt	19,158		—
Other current operating cash outflows, net	(729)		224
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets	(120,066)		(23,946)
Prepaid expenses and other current and non-current assets	(3,439)		(3,912)
Contract cost assets	(3,991)		(5,503)
Accounts payable	9,904		11,690
Accrued liabilities	(17,725)		4,071
Accrued compensation and employee benefits	(21,505)		(10,118)
Deferred revenue	2,490		(6,400)
Reserve for claims and performance-based arrangements	62,614		33,259
Right-of-use operating assets	4,621		3,620
Operating lease liabilities	(2,719)		1,783
Other long-term liabilities	1,518		473
Net cash and restricted cash provided by (used in) operating activities	(72,410)		17,125
Cash Flows Provided by (Used In) Investing Activities
Cash paid for asset acquisitions	(1,472)		—
Proceeds from transfer of membership and release of Passport escrow	42,996		—
Disposal of non-strategic assets and divestiture of discontinued operations, net	3,490		(2,287)
Return of equity method investments	9,372		—
Purchases of investments	(2,994)		(1,447)
Maturities and sales of investments	500		3,099
Investments in internal-use software and purchases of property and equipment	(11,512)		(17,455)
Other investing activities	—		(292)
Net cash and restricted cash provided by (used in) investing activities	40,380		(18,382)
Cash Flows Provided by (Used In) Financing Activities
Changes in working capital balances related to claims processing on behalf of partners	2,399		26,715
Repayment and termination of Credit Agreement including settlement of warrants.	(98,420)		—
Proceeds from stock option exercises	9,376		526
Distributions to Sponsors	(1,300)		—

See accompanying Notes to Consolidated Financial Statements


	For the Six Months Ended June 30,
	2021		2020
Taxes withheld and paid for vesting of restricted stock units	(3,142)		(1,331)
Net cash and restricted cash provided by (used in) financing activities	(91,087)		25,910
Effect of exchange rate on cash and cash equivalents and restricted cash	(54)		26
Net increase (decrease) in cash and cash equivalents and restricted cash	(123,171)		24,679
Cash and cash equivalents and restricted cash as of beginning-of-period (1)	361,581		128,531
Cash and cash equivalents and restricted cash as of end-of-period (1)	$	238,410	$	153,210

————————

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

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization

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

The Company made organizational changes, including re-evaluating its reportable segments, as a result of the entry into the agreement to sell True Health on January 11, 2021. Effective during the first quarter of 2021, the Company bifurcated its previous Services segment into two segments. The Company’s Evolent Health Services segment (“EHS”) includes our administrative simplification solution and certain supporting population health infrastructure. Our Clinical Solutions segment includes our specialty management and physician-oriented total cost of care solutions, along with the New Century Health and Evolent Care Partners brands. Refer to Note 21 for a further discussion of our operating results by segment.

Since its inception, the Company has incurred losses from operations. As of June 30, 2021, the Company had unrestricted cash and cash equivalents of $207.3 million. The Company believes it has sufficient liquidity for the next twelve months as of the date the financial statements were available to be issued.

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

Evolent Health LLC Governance

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

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

Basis of Presentation

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

Summary of Significant Accounting Policies

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

Accounting Estimates and Assumptions

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

prices for performance obligations in contracts with multiple performance obligations, reserves for claims and performance-based arrangements, credit losses, depreciable lives of assets, impairment of long-lived assets, stock-based compensation, deferred income taxes and valuation allowance, contingent liabilities, purchase price allocation in taxable stock transactions and useful lives of intangible assets.

Principles of Consolidation

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

Cash and Cash Equivalents

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

Restricted Cash and Restricted Investments

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


	June 30, 2021		December 31, 2020 (1)
Collateral for letters of credit for facility leases (2)	$	3,510	$	3,510
Collateral with financial institutions (3)	12,352		4,743
Claims processing services (4)	14,525		12,064
Other	750		1,327
Total restricted cash and restricted investments	$	31,137	$	21,644

Current restricted cash	17,742		14,374
Total current restricted cash and restricted investments	$	17,742	$	14,374

Non-current restricted cash	13,395		6,654
Total non-current restricted cash and restricted investments	$	13,395	$	6,654

————————

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

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

(3)Represents collateral held with financial institutions for risk-sharing and other arrangements. As of June 30, 2021 and December 31, 2020, approximately $12.4 million and $4.7 million, respectively, of the collateral amounts were held in a FDIC participating bank account. See Note 18 for discussion of fair value measurement and Note 11 for discussion of our risk-sharing arrangements.

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

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


	June 30,
	2021		2020
Cash and cash equivalents	$	207,273	$	98,272
Restricted cash and restricted investments	31,137		55,653
Restricted investments included in restricted cash and restricted investments	—		(715)
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows (1)	$	238,410	$	153,210

————————

Business Combinations

Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Critical estimates used to value certain identifiable assets include, but are not limited to, expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates.

The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. Goodwill is assigned to the reporting unit that benefits from the synergies arising from the business combination. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded on the Company's consolidated statements of operations and comprehensive income (loss).

For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value at each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as operating income or expense. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.

Goodwill

We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level. Following the sale of True Health, the Company has three reporting units and our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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

Intangible Assets, Net

Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used.

The following summarizes the estimated useful lives by asset classification:


Corporate trade name			10 - 20 years
Customer relationships			10 - 25 years
Technology			5 years
Provider network contracts			4 - 5 years

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

Reserves for Claims and Performance-based Arrangements

Reserves for performance-based arrangements and claims 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 22 for additional discussion regarding our reserves for claims and performance-based arrangements.

Leases

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

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

Refer to Note 12 for additional lease disclosures.

Revenue Recognition

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

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

• Identify the contract(s) with a customer

• Identify the performance obligations in the contract

• Determine the transaction price

• Allocate the transaction price to performance obligations

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

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

Foreign Currency

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

Note 3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost, including trade receivables, certain non-trade receivables, contract assets, held-to-maturity securities, customer advances and certain off-balance sheet credit exposures, by replacing the existing “incurred loss” framework with an expected credit loss recognition model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is effective for entities with fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). Results for reporting periods beginning January 1, 2020 reflect the adoption of ASU 2016-13, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting practices. In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based solely on specific identification. Under the new accounting standard, we maintain our specific identification process but utilize several factors to develop historical losses reserves, including aging schedules, customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. For held-to-maturity investment securities, we evaluate (i) historical information adjusted for current conditions and reasonable and supportable forecasts and (ii) qualitative factors to determine whether the zero-loss expectation exception applies. Refer to Note 7 for additional disclosures related to current expected credit losses.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU remove certain exceptions to the intraperiod tax allocation of losses and gains from different financial statement components and to the method of recognizing income taxes on interim period losses, and the recognition of deferred tax liabilities for outside basis differences. In addition, the new guidance simplifies aspects of the accounting for franchise taxes and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted this standard starting in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

Note 4. Transactions

Passport

On May 28, 2019, UHC, Passport Health Solutions, LLC (“PHS I”), the Company and EVH Passport entered into an Asset Purchase Agreement (the “Passport APA”), which provided for the sale of substantially all of the assets of UHC and PHS I, including UHC’s Kentucky Medicaid contract (the “Passport Medicaid Contract”), to EVH Passport for a purchase price of $70.0 million in cash and the issuance of a 30% interest in EVH Passport (the “Passport Purchase Price”) to The University of Louisville, the University of Louisville Physicians, University Medical Center, the Jewish Heritage Fund for Excellence, Norton Healthcare, Inc. and the Louisville/Jefferson County Primary Care Association (collectively, the “Sponsors”).

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

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

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. As a result, EVH Passport began to wind down its business. In connection with the Molina Closing, Molina deposited $20.0 million in cash in escrow, which was subsequently released to EVH Passport in January 2021. In addition, at the Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption of the financial risks by Molina of the D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare Advantage Organization and the D-SNP Business is transferred Molina. The Company and EVH Passport continued to administer the D-SNP Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business is officially transferred to Molina effective September 1, 2021.

Prior to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under the equity method of accounting. As a result of the transaction, the Company concluded that a reconsideration event occurred whereby EVH Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport; accordingly, the Company consolidated EVH Passport as of September 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the Company’s consolidated financials, on November 16, 2020, EVH Passport redeemed the Sponsors’ equity interests in EVH Passport for $20.0 million in cash in accordance with the terms of EVH Passport’s Stockholders’ Agreement, and, as a result, EVH Passport became a wholly owned subsidiary of the Company.

As part of the consolidation, the Company recorded assets primarily consisting of cash and cash equivalents and restricted cash and cash equivalents of $159.8 million, available for sale securities of $88.6 million, receivables related to unsettled sales of securities of $43.0 million and other assets of $50.2 million and total liabilities primarily comprised of reserve for claims and performance-based arrangements of $164.8 million and accrued liabilities of $50.0 million. Subsequent to winddown activities, any remaining capital will be distributed to the Company subject to regulatory approval from the Kentucky Department of Insurance. In addition, the Passport Note was eliminated upon consolidation, and as of December 31, 2020, the outstanding principal balance of the $40.0 million Passport Note was repaid in full by EVH Passport including approximately $3.6 million of accrued interest.

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

Note 5. Discontinued Operations

On January 11, 2021, Evolent Health LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered into a Stock Purchase Agreement (the “True Health SPA”) with Bright Health Management, Inc. (“Bright HealthCare”), pursuant to which EH Holdings agreed to sell all of its equity interests in True Health to Bright HealthCare. Closing of the transactions contemplated by the True Health SPA occurred on March 31, 2021 (the “True Health Closing”) and the Company will have no continuing involvement with True Health subsequent to the closing except an existing services agreement for claims processing and other health plan administrative functions.

As of the first quarter of 2021, the Company determined that True Health met the discontinued operations criteria under ASC 360, and as such, True Health assets and liabilities as of December 31, 2020, and the results of operations for all periods presented are classified as held for sale and are not included in continuing operations in the consolidated financial statements.

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Revenue
Platform and operations	—		39		38		279
Premiums	—		25,502		44,795		57,649
Total revenue	—		25,541		44,833		57,928

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	—		4,640		5,885		7,935
Claims expenses	—		18,144		33,954		41,811
Selling, general and administrative expenses (2)	—		4,236		5,764		9,911
Depreciation and amortization expenses	—		160		160		320
Total operating expenses	—		27,180		45,763		59,977
Operating loss	—		(1,639)		(930)		(2,049)
Interest income	—		137		112		286
Interest expense	—		(3)		(4)		(7)
Other loss	—		(3)		(25)		(3)
Loss before income taxes and non-controlling interests	—		(1,508)		(847)		(1,773)
Benefit for income taxes	—				(326)		—
Net loss	$	—	$	(1,508)	$	(521)	$	(1,773)

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(1)Cost of revenue includes intercompany expenses between the Company and True Health that are recorded in income from continuing operations on the consolidated statements of operations related an existing services agreement for claims processing and other health plan administrative functions of $3.2 million for the three months ended June 30, 2020 and $2.8 million and $6.3 million for the six months ended June 30, 2021 and 2020, respectively.

(2)Selling, general and administrative expenses includes intercompany expenses between the Company and True Health that are recorded in income from continuing operations on the consolidated statements of operations related an existing services agreement for claims processing and other health plan administrative functions of $1.0 million of for the three months ended June 30, 2020 and $1.1 million and $4.1 million for the six months ended June 30, 2021 and 2020, respectively.

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


	For the Six Months Ended June 30,
	2021		2020
Cash flows provided by (used in) operating activities	$	5,002	$	10,660
Cash flows provided by (used in) investing activities	(2,494)		382

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


	December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	21,488
Restricted cash and restricted investments	63
Accounts receivable, net	3,437


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

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

————————

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

Note 6. Revenue Recognition

We derive revenue from two sources: (1) transformation services and (2) platform and operations services.

Transformation Services Revenue

Transformation services consist of implementation services whereby we assist the customer in launching its population health or health plan programs. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.

Platform and Operations Services Revenue

Platform and operations services are typically multi-year arrangements with customers to provide various clinical and administrative solutions. In our Clinical Solutions segment, our solutions are designed to lower the medical expenses of our partners and include our total cost of care and specialty care management services. In our Evolent Health Services segment, our solutions are designed to provide comprehensive health plan operations and claims processing services, and also include transition or run-out services to customers receiving primarily third-party administration (“TPA”) services.

Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our customers and members. Generally, we will apply the series guidance to the performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically includes a monthly payment that is calculated based on a specified per member per month rate, multiplied by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums. Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from platform and operations

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

In our Clinical Solutions segment, we enter into capitation arrangements that may include performance-based arrangements and/or gainshare features. We recognize capitation revenue on a gross basis when we have established control over the services within our scope and recognize capitation revenue on a net basis when we do not have control over the services within our scope.

Contracts with Multiple Performance Obligations

Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both transformation services and platform and operations services as these services are distinct from one another. When a contract has multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives when determining the standalone selling price.

Principal vs. Agent

We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the principal or agent in the arrangement, we review each third-party relationship on a contract by contract basis. We are an agent when our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before it is provided and recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.

Disaggregation of Revenue

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


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions				Evolent Health Services				Clinical Solutions
Medicaid	$	52,064	$	55,502	$	53,648	$	64,050	$	112,993	$	113,947	$	96,987	$	124,512
Medicare	6,346		14,061		90,761		64,206		14,684		29,246		176,544		126,560
Commercial and other	16,453		16,958		2,785		2,522		32,023		39,705		3,897		4,561
Total	$	74,863	$	86,521	$	147,194	$	130,778	$	159,700	$	182,898	$	277,428	$	255,633

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term greater than one year, we have allocated approximately $181.2 million of transaction price to performance obligations that are unsatisfied as of June 30, 2021. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that we expect will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately 18% and 51% of these remaining performance obligations by December 31, 2021 and December 31, 2022, respectively, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of revenue that we actually receive may be less or greater than this estimate and the timing of recognition may not be as expected.

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, 2021 and December 31, 2020 (in thousands):


	June 30, 2021		December 31, 2020 (1)
Short-term receivables (2)	$	240,060	$	124,064
Long-term receivables (2)	4,688		4,554
Short-term contract assets	—		329
Short-term deferred revenue	13,173		10,187
Long-term deferred revenue	4,932		3,593

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

(2)Excludes pharmacy claims receivable and premiums receivable

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


Deferred revenue
Balance as of beginning-of-period	$	13,780
Reclassification to revenue, as a result of performance obligations satisfied	(8,726)
Cash received in advance of satisfaction of performance obligations	13,051
Balance as of end of period	$	18,105

The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in previous period was $2.9 million and $16.1 million for the three and six months ended June 30, 2021, respectively, due primarily to net gain share as well as changes in other estimates.

Contract Cost Assets

Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as non-current assets and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss). As of June 30, 2021 and December 31, 2020, the Company had $3.6 million and $3.3 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 $0.6 million and $1.0 million for the three and six months ended June 30, 2021, respectively and $0.4 million and $0.9 million for the three and six months ended June 30, 2020, respectively.

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

comprehensive income (loss). As of June 30, 2021 and December 31, 2020, the Company had $18.8 million and $23.4 million, respectively, of contract fulfillment cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense of $4.6 million and $7.3 million for the three and six months ended June 30, 2021, respectively, $4.3 million and $9.4 million for the three and six months ended June 30, 2020, respectively.

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

Note 7. Credit Losses

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

Accounts Receivable from Revenue Transactions

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

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

Based on an aging analysis of our trade accounts receivable, non-trade accounts receivable and contract assets at June 30, 2021, 64% were current, 15% were past due less than 60 days, with 28% past due less than 120 days. At June 30, 2021, we reported $264.1 million of accounts receivable, certain non-trade accounts receivable included in prepaid expenses and other assets on the consolidated balance sheet and contract assets, net of allowances of $7.7 million. The following table summarizes the changes in allowance for credit losses on our accounts receivables, certain non-trade accounts receivable and contract assets for the six months ended June 30, 2021 and 2020 (in thousands):


	For the Six Months Ended June 30,
	2021		2020
Balance as of beginning of period	$	(7,056)	$	(41)
Cumulative transition adjustment	—		(2,815)
Provision for credit losses	(611)		(260)
Charge-offs	—		1,575
Balance as of end of period	$	(7,667)	$	(1,541)

Note 8. Property and Equipment, Net

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


	June 30, 2021		December 31, 2020
Computer hardware	$	19,931	$	18,866
Furniture and equipment	3,545		3,559
Internal-use software development costs	148,171		137,085
Leasehold improvements	15,553		15,586
Total property and equipment	187,200		175,096
Accumulated depreciation and amortization expenses	(104,204)		(88,856)
Total property and equipment, net	$	82,996	$	86,240

The Company capitalized $5.6 million and $11.1 million of internal-use software development costs for the three and six months ended June 30, 2021, respectively, and $6.4 million and $13.7 million for the three and six months ended June 30, 2020, respectively. The net book value of capitalized internal-use software development costs was $73.0 million and $75.3 million as of June 30, 2021 and December 31, 2020, respectively.

Depreciation expense related to property and equipment was $7.6 million and $15.4 million for the three and six months ended June 30, 2021, respectively, and $7.1 million and $13.9 million for the three and six months ended June 30, 2020, respectively, of which amortization expense related to capitalized internal-use software development costs was $6.6 million and $13.3 million for the three and six months ended June 30, 2021, respectively, and $6.0 million and $11.6 million for the three and six months ended June 30, 2020, respectively.

Note 9. Goodwill and Intangible Assets, Net

Goodwill

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

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

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

2021 Goodwill Impairment Test

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

2020 Goodwill Impairment Test

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

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

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

As of May 31, 2020, we determined that the reporting unit under review had an estimated fair value less than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $215.1 million on our consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2020. In addition, the Company reviewed its interim goodwill impairment analysis as of June 30, 2020 and did not identify any additional information or events that would contradict or change the conclusion reached by the Company as of May 31, 2020.

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

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

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

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

December 31, 2020. As of December 31, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge earlier in the year was $214.3 million.

The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the six months ended June 30, 2021 and 2020 (in thousands):


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


	EHS		Clinical Solutions		Consolidated
Balance as of December 31, 2019 (1)	$	431,684	$	134,675	$	566,359
Goodwill disposal (2)	(2,200)		—		(2,200)
Impairment	(215,100)		—		(215,100)
Foreign currency translation	(69)		—		(69)
Balance as of June 30, 2020	$	214,315	$	134,675	$	348,990

————————

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

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

Intangible Assets, Net

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


	June 30, 2021							December 31, 2020
	Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Corporate trade name	12.7	$	23,300	$	6,961	$	16,339	13.2	$	23,300	$	6,271	$	17,029
Customer relationships (1)	15.7	278,519		64,894		213,625		16.2	278,519		57,716		220,803
Technology	1.3	82,922		68,809		14,113		1.8	82,922		63,507		19,415
Below market lease, net	1.8	1,218		849		369		2.3	1,118		648		470
Provider network contracts (1)	2.5	13,947		6,348		7,599		2.9	12,175		4,900		7,275
Total intangible assets, net		$	399,906	$	147,861	$	252,045		$	398,034	$	133,042	$	264,992

————————

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

Amortization expense related to intangible assets for the three and six months ended June 30, 2021, was $7.2 million and $14.7 million, respectively. Amortization expense related to intangible assets for the three and six months ended June 30, 2020 was $8.4 million and $17.7 million, respectively, excluding $0.2 million and $0.3 million of amortization expense related to discontinued operations for the three and six months ended June 30, 2020.

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


2021	$	13,762
2022	24,629
2023	22,325
2024	16,441
2025	15,736
Thereafter	159,152
Total future amortization of intangible assets	$	252,045

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, 2021, that would require an impairment test for our intangible assets.

Note 10. Long-term Debt

2024 Notes

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

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

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. The debt component was determined to be $78.9 million, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $38.1 million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the aggregate principal amount of the debt and the fair value of the debt component. Issuance costs of $1.7 million and $1.3 million are allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $38.1 million, $1.7 million of issuance costs will be 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 2024 Notes. The equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. The Company recorded $2.0 million and $3.9 million of interest expense related to the amortization of the debt discount and the issuance costs allocated to the debt component for the three and six months ended June 30, 2021.

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

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

Credit Agreement

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

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

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

The Senior Credit Facilities contained customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company was required to comply at certain times with certain financial covenants comprised of a minimum net revenue test and a minimum liquidity test commencing upon closing of the Senior Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal quarter ending March 31, 2021. If an event of default had occurred, the lenders would be entitled to take enforcement action, including foreclosure on collateral and acceleration of amounts owed under the Senior Credit Facilities. We incurred $4.7 million of debt issuance costs in connection with this Credit Agreement, which was included in long-term debt, net of discount on our consolidated balance sheets and amortized into interest expense over the life of the agreement. The Company recorded $0.5 million and $1.1 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, 2020, respectively.

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

On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the Credit Agreement in connection with the prepayment was $98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. As a result of this transaction, the Company recorded loss on the repayment of debt of $19.2 million, representing the remaining unamortized debt issuance costs of $9.5 million, the make-whole premium and $35 thousand of legal expenses.

Warrant Agreement

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

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

2025 Notes

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

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

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

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

The option to settle the 2025 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2025 Notes into a debt component and an equity component. 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 equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. The Company recorded $2.4 million and $4.8 million for the three and six months ended June 30, 2021, respectively, and $2.1 million and $4.3 million for the three and six months ended June 30, 2020, respectively, in interest expense related to the amortization of the debt discount and the issuance costs allocated to the debt component.

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

2021 Notes

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

Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017, at a rate equal to 2.00% per annum. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require the Company to repurchase all or part of their 2021 Notes upon the occurrence of a fundamental change at a price equal to 100.00% of the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental repurchase date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $0.2 million and $0.3 million for the three and six months ended June 30, 2021, respectively, and $0.6 million and $1.2 million for the three and six months ended June 30, 2020 , respectively. We recorded non-cash interest expense related to the amortization of deferred financing costs of $49 thousand and $0.1 million for the three and six months ended June 30, 2021, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively.

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

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

In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. There was no cash consideration in these exchanges outside of an aggregate cash payment of $2.5 million paid to exchanging noteholders. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment of $2.5 million paid to exchanging noteholders.

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

Convertible Senior Notes Carrying Value

The 2025 Notes, 2024 Notes and 2021 Notes are recorded on our accompanying consolidated balance sheets at their net carrying values as of June 30, 2021. However, the 2025 Notes, 2024 Notes and 2021 Notes are privately traded by qualified institutional buyers (within the meaning of Rule 144A under the Securities Act) and their fair values are Level 2 inputs. The 2025 Notes, 2024 Notes and the 2021 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, 2021 and December 31, 2020 (in thousands):


	June 30, 2021		December 31, 2020
2024 Notes
Carrying value	$	85,320	$	81,462
Unamortized debt discount and issuance costs	31,731		35,589
Principal amount	$	117,051	$	117,051
Remaining amortization period (years)	3.4		3.9
Fair value	$	132,054	$	153,220

2025 Notes
Carrying value	$	121,230	$	116,349
Unamortized debt discount and issuance costs	51,270		56,151
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	4.3		4.8
Fair value	$	165,974	$	147,488

2021 Notes
Carrying value	$	26,655	$	26,557
Unamortized issuance costs	82		180
Principal amount	$	26,737	$	26,737
Remaining amortization period (years)	0.4		0.9
Fair value	$	29,279	$	26,470

Note 11. Commitments and Contingencies

Commitments

Letters of Credit

As of June 30, 2021 and December 31, 2020, the Company established irrevocable standby letters of credit with a bank for $15.0 million and $7.4 million for the benefit of a regulatory authorities, real estate and risk-sharing agreements and, as such, held $15.0 million and $7.4 million in restricted cash and restricted investments as collateral as of both June 30, 2021 and December 31, 2020, respectively. The letters of credit have current expiration dates between October 2021 and March 2032 and will automatically extend without amendment for an additional one-year period and will continue to automatically extend after each one-year term from the expiry date, unless the bank elects not to extend beyond the initial or any extended expiry date.

Indemnifications

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

Pre-IPO Investor Registration Rights Agreement

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

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, 2021 and 2020, respectively.

Guarantees

In connection with the Molina Closing, the Company continued to provide administrative support services relating to the Passport Medicaid Contract to Molina through the end of 2020. Following the Molina Closing, EVH Passport began working with regulatory authorities including the Kentucky Department of Insurance (“KY DOI”) regarding the wind down of its operations throughout 2021. As part of that wind down process, the Company, as the parent of EVH Passport, entered into a guarantee for the benefit of the KY DOI to satisfy any EVH Passport liability or obligation in the event EVH Passport is not able to meet its wind down liabilities or obligations. As of June 30, 2021, no amounts have been funded under this guarantee.

Reinsurance Agreements

At the Passport Closing, $16.2 million of the cash Passport Purchase Price was held back until such time as PHS I delivers to EVH Passport certain owned real property and improvements free and clear of all encumbrances. In addition, at the Passport Closing, EVH Passport and UHC entered into an agreement that provided for the administration and assumption of the financial risks by EVH Passport of the D-SNP Business until such time as EVH Passport became certified as a Medicare Advantage Organization and the D-SNP Business could be transferred to EVH Passport. On October 1, 2020, the D-SNP Business was transferred from UHC to EVH Passport.

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

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


	For the Six Months Ended June 30,
	2021		2020
Reinsurance premiums assumed	$	17,576	$	—
Reinsurance premiums ceded	—		—
Claims assumed	16,863		—
Claims ceded	—		—
Claims-related administrative expenses	545		—
Increase in reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement	168		—
Reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement at the beginning of the period	4,002		—
Impact of consolidation on payable for claims and performance-based arrangements attributable to the Reinsurance Agreement	—		—
Reinsurance payments paid (received)	7,506		—
Receivable for claims and performance-based arrangements attributable to the Reinsurance Agreement at the end of the period	$	(3,336)	$	—

UPMC Reseller Agreement

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

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

Contingencies

Tax Receivables Agreement

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

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

Litigation Matters

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

On August 8, 2019, a shareholder of the Company filed a class action complaint against the Company, asserting claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, in the United States District Court, Eastern District of Virginia, Alexandria Division. An amended complaint was filed on January 10, 2020, and a second amended complaint was filed on June 8, 2020. The case, Plymouth County Retirement System v. Evolent Health, Inc., Frank Williams, Nicholas McGrane, Seth Blackley, Christie Spencer, and Steven Wigginton, alleges that the Company’s executives made false or misleading statements regarding its business with Passport. The Company filed a motion to dismiss the second amended complaint, and the Eastern District of Virginia granted in part and denied in part the motion on March 24, 2021. The Company and Plaintiffs then filed separate motions to reconsider that are pending. While the scope of the allegations that remain is still unclear pending the court’s further decision, the case will proceed to discovery. Based on the Company’s investigation so far, we believe the case has little legal or factual merit. However, the outcome of any litigation is uncertain, and at this stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.

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. Plaintiff, the Company, and the Director-Defendants have agreed on a schedule for a motion to dismiss and related briefing, which we expect to be completed in late November 2021. Based on the Company’s investigation so far, we believe the case has little legal or factual merit. However, the outcome of any litigation is uncertain, and at this stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.

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

Credit and Concentration Risk

The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of June 30, 2021, approximately 99.0% of our $238.4 million of cash and cash equivalents (including restricted cash) were held in bank deposits with FDIC participating banks and approximately 1.0% were held in international banks. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any realized losses on cash and cash equivalents to date.

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 trade accounts receivable as of June 30, 2021 and December 31, 2020:


	June 30, 2021		December 31, 2020
Cook County Health and Hospitals System	42.0	%	61.5	%
Florida Blue Medicare, Inc	22.1	%	*
Neighborhood Health Plan of Rhode Island	12.1	%	*

————————

* 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 and six months ended June 30, 2021 and 2020:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020 (1)		2021		2020 (1)
Cook County Health and Hospitals Systems	29.6	%	21.8	%	29.2	%	21.4	%
Florida Blue Medicare, Inc.	14.2	%	*		14.5	%	*
Passport	*		27.7	%	*		26.1	%

————————

(1)The denominator excludes $25.5 million and $57.6 million of True Health premium revenue reclassified to discontinued operations for the three and six months ended June 30, 2020, respectively.

* 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 12. Leases

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

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

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

In connection with various lease agreements, the Company is required to maintain $3.5 million in letters of credit. As of both June 30, 2021 and December 31, 2020, the Company held $3.5 million in restricted cash and restricted investments on the consolidated balance sheet as collateral for the letters of credit, respectively.

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


Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required
Arlington, VA	10.6	$	37,147	$	1,579
Riverside, IL	9.8	42,956		232
Pune, India	2.3	1,835		—
Brea, CA	0.9	1,015		—

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Operating lease cost	$	2,437	$	3,586	$	7,255	$	6,642
Amortization of right-of-use assets	—		150		—		299
Interest expense	—		1		—		3
Variable lease cost	1,192		1,465		2,513		2,517
Total lease cost	$	3,629	$	5,202	$	9,768	$	9,461

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


	Operating lease expense
2021	5,854
2022	9,832
2023	8,645
2024	8,378
2025	8,145
Thereafter	47,761
Total lease payments	88,615
Less:
Interest	22,732
Present value of lease liabilities	$	65,883

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


Weighted average discount rate	6.43	%
Weighted average remaining lease term	9.2

Note 13. Earnings (Loss) Per Common Share

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Income (loss) from continuing operations	$	(9,107)	$	(202,013)	$	(20,297)	$	(280,500)
Income (loss) from discontinued operations, net of tax	—		(1,508)		1,383		(1,773)
Net income (loss)	(9,107)		(203,521)		(18,914)		(282,273)
Less:
Net loss attributable to non-controlling interests	—		—		—		—
Net income (loss) available for common shareholders - basic and diluted	$	(9,107)	$	(203,521)	$	(18,914)	$	(282,273)

Weighted-average common shares outstanding - basic and diluted	85,448		85,349		85,056		84,977

Income (loss) per common share
Basic and diluted
Continuing operations	$	(0.11)	$	(2.37)	$	(0.24)	$	(3.30)
Discontinued operations	—		(0.01)		0.02		(0.02)
Basic and diluted income (loss) per share attributable to common shareholders of Evolent Health, Inc.	$	(0.11)	$	(2.38)	$	(0.22)	$	(3.32)

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


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2021	2020	2021	2020
Restricted stock units ("RSUs"), performance-based RSUs and leveraged stock units ("LSUs")	2,052	554	1,793	376
Stock options	1,801	711	1,833	841
Convertible senior notes	12,696	10,361	12,696	10,361
Total	16,549	11,626	16,322	11,578

Note 14. Stock-based Compensation

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Award Type
Stock options	$	267	$	638	$	671	$	1,388
Performance-based stock options	—		—		—		75
RSUs	2,427		2,006		4,401		3,862
LSUs	222		1,059		1,307		1,886
PSUs	737		—		980		—
Total compensation expense by award type	$	3,653	$	3,703	$	7,359	$	7,211

Line Item
Cost of revenue	$	892	$	526	$	1,487	$	918


Selling, general and administrative expenses	2,761		3,177		5,872		6,293
Total compensation expense by financial statement line item	$	3,653	$	3,703	$	7,359	$	7,211

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

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


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2021	2020	2021	2020
RSUs	89	164	1,028	1,140
PSUs	—	—	319	—
LSUs	—	140	—	520

Note 15. Income Taxes

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

An income tax expense (benefit) of $0.1 million and $0.7 million was recognized for the three and six months ended June 30, 2021, respectively, which resulted in effective tax rates of (1.0)% and (3.6)%, respectively. An income tax expense (benefit) of $(3.9) million and $(3.6) million was recognized for the three and six months ended June 30, 2020, respectively, which resulted in effective tax rates of 1.9% and 1.3%, respectively. The Company and its U.S. subsidiaries continue to record a valuation allowance against its net deferred tax assets, with the exception of indefinite lived components. The income tax expense recorded during the three and six months ended June 30, 2021 primarily relates to foreign taxes.

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

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the TRA with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs. See Note 11 above and “Part II - Item 8. Financial Statements and Supplementary Data - Note 14” in our 2020 Form 10-K for discussion of our TRA.

Note 16. Investments in and Advances to Equity Method Investees

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

As of June 30, 2021 and December 31, 2020, the Company’s economic interests in its equity method investments ranged between 4% and 39%, and 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) losses

from these investments was approximately $4.9 million and $12.7 million for the three and six months ended June 30, 2021, respectively, and $25.1 million and $24.7 million for the three and six months ended June 30, 2020, respectively.

The Company signed services agreements with certain of the aforementioned entities to provide certain management, operational and support services to help manage elements of their service offerings. Revenue related to these services agreements were $2.3 million and $8.6 million for the three and six months ended June 30, 2021, respectively, and $71.4 million and $131.3 million for the three and six months ended June 30, 2020 , respectively.

Note 17. Non-controlling Interests

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

2020

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

Changes in non-controlling interests (in thousands) for the six months ended June 30, 2020 was as follows:


Non-controlling interests balance as of beginning of period	$	6,889
Reclassification of non-controlling interests	(6,889)
Non-controlling interests balance as of end of period	$	—

Note 18. Fair Value Measurement

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

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

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

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

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

Recurring Fair Value Measurements

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


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

Liabilities
Warrants (2)	$	—	$	—	$	13,730	$	13,730
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	13,730	$	13,730

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

(2) Represents the fair value of 1,513,786 shares issuable under the warrant agreements discussed in Note 10.

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, 2021 and 2020, respectively.

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

In conjunction with the Credit Agreement discussed in Note 10, the Company entered into warrant agreements whereby it agreed to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock. The fair value of the warrants was estimated based on the Black-Scholes model which incorporates the constant price variation of the stock, the time value of money, the option's strike price, and the time to the option's expiry. The significant unobservable inputs used in the fair value measurement of the warrants are the stock price volatility and annual risk free rate. A significant increase in the stock price or discount rate in isolation would result in a significantly higher fair value of the contingent consideration.

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


	For the Six Months Ended June 30,
	2021		2020
Balance as of beginning of period	$	13,730	$	16,975
Settlements	(13,730)		(3,500)
Realized and unrealized gains (losses), net	—		(4,975)
Balance as of end of period	$	—	$	8,500

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

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Warrants

13,730

Black-Scholes

Stock price volatility

62.2

Annual risk free rate

0.2

Nonrecurring Fair Value Measurements

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

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

Other Fair Value Disclosures

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

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

Note 19. Related Parties

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

As discussed in Note 16, the Company had economic interests in several entities that were previously accounted for under the equity method of accounting, including EVH Passport (which has been consolidated into the Company’s financial results since September 1, 2020). 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 closely 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. We also conduct business with a company in which UPMC holds a significant equity interest.

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


	June 30, 2021		December 31, 2020
Assets
Accounts receivable, net	$	4,450	$	9,474
Prepaid expenses and other current assets	17		51
Prepaid expenses and other noncurrent assets	4,688		4,554

Liabilities
Accounts payable	$	1,923	$	2,509
Accrued liabilities	1,220		1,520
Reserve for claims and performance-based arrangements	149		435

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Revenue
Transformation services	$	—	$	—	$	—	$	1,700
Platform and operations services	10,368		73,885		25,943		141,833

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses)	606		(2,171)		1,099		1,076
Selling, general and administrative expenses	81		27		112		97

Note 20. Repositioning and Other Changes

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

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

The Company recorded approximately $0.7 million and $6.0 million of repositioning costs in selling, general and administrative expenses for the three and six months ended June 30, 2021 in connection with the Repositioning Plan. The following table provides a summary of our total costs associated with the Repositioning Plan for the three and six months ended June 30, 2021, by major type of cost (in thousands):


	Incurred For the Three Months Ended June 30, 2021		Incurred for the Six Months Ended June 30, 2021		Total Amount Expected to be Incurred in the Repositioning Plan		Cumulative Amount Incurred through June 30, 2021
Severance and termination benefits	$	76	$	185	$	185	$	185
Office space consolidation	—		2,071		2,071		2,071
Professional services	587		3,787		5,162		5,062
Total	$	663	$	6,043	$	7,418	$	7,318

Note 21. Segment Reporting

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

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

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

In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.

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

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

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

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

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


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated
Revenue
For the Three Months Ended June 30, 2021
Transformation services	$	2,564	$	—	$	—	$	2,564	$	—	$	2,564
Platform and operations services	72,759		147,194		(460)		219,493		—		219,493
Total revenue	$	75,323	$	147,194	$	(460)	$	222,057	$	—	$	222,057

For the Three Months Ended June 30, 2020
Transformation services	$	755	$	—	$	—	$	755	$	—	$	755
Platform and operations services	86,432		130,780		(668)		216,544		—		216,544
Total revenue	$	87,187	$	130,780	$	(668)	$	217,299	$	—	$	217,299


	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Segments Total
For the Three Months Ended June 30, 2021
Adjusted EBITDA	$	6,531	$	13,597	$	20,128	$	(6,782)	$	13,346

For the Three Months Ended June 30, 2020
Adjusted EBITDA	$	6,948	$	12,200	$	19,148	$	(8,629)	$	10,519


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated
Revenue
For the Six Months Ended June 30, 2021
Transformation services	$	2,909	$	—	$	—	$	2,909	$	—	$	2,909
Platform and operations services	157,700		277,417		(898)		434,219		—		434,219
Total revenue	$	160,609	$	277,417	$	(898)	$	437,128	$	—	$	437,128

For the Six Months Ended June 30, 2020
Transformation services	$	5,993	$	—	$	—	$	5,993	$	—	$	5,993
Platform and operations services	178,222		255,652		(1,336)		432,538		—		432,538
Total revenue	$	184,215	$	255,652	$	(1,336)	$	438,531	$	—	$	438,531


	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Segments Total
For the Six Months Ended June 30, 2021
Adjusted EBITDA	$	12,473	$	29,573	$	42,046	$	(13,793)	$	28,253

For the Six Months Ended June 30, 2020
Adjusted EBITDA	$	11,716	$	19,243	$	30,959	$	(16,564)	$	14,395

————————

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

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(9,107)	$	(203,521)	$	(18,914)	$	(282,273)
Less:
Interest income	68		705		191		1,475
Interest expense	(6,274)		(6,290)		(12,611)		(12,571)
(Provision) benefit for income taxes	(91)		3,904		(702)		3,634
Depreciation and amortization expenses	(14,916)		(15,618)		(30,103)		(31,596)
Equity method investment impairment	—		—		—		(47,133)
Gain on transfer of membership	—		—		22,969		—
Loss on repayment of debt, net	—		—		(19,158)		—
Goodwill impairment	—		(215,100)		—		(215,100)
Gain from equity method investees	4,879		25,143		12,662		24,731
Loss on disposal of assets	—		—		—		(6,447)
Change in fair value of contingent consideration and indemnification asset	—		(756)		594		3,062
Other expense, net	(18)		354		(32)		284
Repositioning costs	(663)		—		(6,043)		—
Stock-based compensation expense	(3,653)		(3,703)		(7,359)		(7,211)
Severance costs	—		(30)		(52)		(6,133)
Amortization of contract cost assets	(196)		(767)		(323)		(1,207)
Strategy and shareholder advisory expenses	(1,513)		—		(6,513)		—
Acquisition costs	(76)		(374)		(2,070)		(683)
Gain (loss) from discontinued operations (1)	—		(1,508)		1,383		(1,773)
Adjusted EBITDA	$	13,346	$	10,519	$	28,253	$	14,395

————————

(1)Includes $1.9 million gain on disposal of discontinued operations for the six months ended June 30, 2021.

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

Note 22. Reserve for Claims and Performance-Based Arrangements

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

Reserves for claims and performance-based arrangements for our EHS and Clinical Solutions segments reflect actual payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed under the reinsurance agreements, as discussed further in Note 11.

The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

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

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

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

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

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


	For the Six Months Ended June 30,
	2021								2020
	EHS (1)		Clinical Solutions (1)		True Health		Total		EHS (1)		Clinical Solutions (1)		True Health		Total
Beginning balance	$	56,295	$	122,532	$	9,859	$	188,686	$	4,265	$	50,245	$	6,640	$	61,150

Incurred costs related to current year	8,669		219,343		34,228		262,240		2,135		201,977		41,584		245,696
Incurred costs related to prior year	6,293		215		(241)		6,267		(498)		(23)		1,351		830
Paid costs related to current year	20,801		73,379		23,274		117,454		4,020		163,431		33,538		200,989
Paid costs related to prior year	20,673		71,392		7,378		99,443		2,530		7,499		6,975		17,004
Change during the year	(26,512)		74,787		3,335		51,610		(4,913)		31,024		2,422		28,533

Disposal of discontinued operations	—		—		(13,194)		(13,194)		—		—		—		—
Other adjustments (2)	3,721		7,282		—		11,003		—		4,726		—		4,726
Ending balance	$	33,504	$	204,601	$	—	$	238,105	$	(648)	$	85,995	$	9,062	$	94,409

————————

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

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

Note 23. Supplemental Cash Flow Information

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


	For the Six Months Ended June 30,
	2021	2020
Supplemental Disclosure of Non-cash Investing and Financing Activities
Increase/decrease to goodwill from measurement period adjustments/business combinations	—	2,200
Class A common stock issued for payment of Passport/Global earn-out	—	4,185
Accrued property and equipment purchases	668	(26)
Effects of Leases
Operating cash flows from operating leases	6,622	6,853
Leased assets obtained in exchange for operating lease liabilities	(2,157)	(1,354)

Note 24. Subsequent Events

Agreement for the Acquisition of Vital Decision

On August 2, 2021, Evolent Health LLC and EV Thunder Merger Sub, LLC, each wholly owned subsidiaries of the Company, entered into a definitive agreement for Evolent to acquire Windrose Health Investors III, L.P. portfolio company Vital Decisions for $85 million, with an additional earn out of up to $45 million. Vital Decisions will report into Evolent’s specialty management offering, New Century Health, and will be consolidated into the Company’s Clinical Solutions segment. Closing of the transaction is subject to customary closing conditions and is expected to occur in the second half of 2021.

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

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

INTRODUCTION

Background

Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC, and its only business is to act as sole managing member of Evolent Health LLC. Substantially all of our operations are conducted through Evolent Health LLC and its consolidated subsidiaries. The financial results of Evolent Health LLC are consolidated in the financial statements of Evolent Health, Inc.

Business Overview

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

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

Today we manage our operations and allocate resources across two reportable segments: Clinical Solutions and Evolent Health Services. Our Clinical Solutions segment addresses a broad spectrum of clinical needs, with tailored solutions for Specialty Care Management in Oncology and Cardiology and holistic Total Cost of Care improvement. Our economic opportunity in the Clinical Solutions segment, which we believe to be significant, is largely based on (a) the total amount of medical expenses under management, and (b) the amount of savings we are able to generate relative to a benchmark or target. These partnerships, which we refer to as performance-based arrangements, include both capitation and shared savings arrangements. We also generate Clinical Solutions revenue by providing our technology and services platform on a fee basis. We go to market for our Specialty Care Management under the brand name New Century Health, and for our Total Cost of Care solution under the brand name Evolent Care Partners.

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

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

We have incurred operating losses since our inception, as we have invested heavily in resources to support our growth. We intend to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities. We also expect

to continue to incur operating losses for the foreseeable future and if we are unable to achieve our revenue growth and cost management objectives, we may not be able to achieve profitability.

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

Recent Events

Evolent Health’s Response to COVID-19

On March 11, 2020, the World Health Organization (the “WHO”) declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. While response to the COVID-19 outbreak, including the emergence of variant strains of the virus, continues to rapidly evolve, it has led to aggressive actions to reduce the spread of the disease that have seriously disrupted activities in large segments of the economy. We are continuing to monitor the COVID-19 outbreak and its impact on our business.

Because of the nature of the services we provide, market dynamics in our end markets and with our significant customers, to date the COVID-19 pandemic has not materially impacted our financial condition or results of operations or our outlook. As of June 30, 2021, we had cash and cash equivalents of $207.3 million and as of the date the financial statements were available to be issued we believe our current cash balance is sufficient to meet our liquidity needs for the next twelve months. The COVID-19 crisis has also adversely impacted global access to capital and caused significant volatility in financial markets. Significant deterioration of the U.S. and global economies could have a significant adverse impact on our investment income, the value of our investments, or future liquidity needs. Although the impact of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of the pandemic on our partners and the global economy is uncertain and will depend on various factors, including the scope, severity and duration of the pandemic, including resurgence of COVID-19 cases due to more contagious variants. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our partners which could, in turn, adversely impact our business, financial condition and results of operations.

Evolent’s focus throughout this pandemic has been the health and safety of its employees and their families, as well as ensuring that we continue to furnish high quality service to our partners. Evolent has deployed a multi-faceted response to COVID-19, overseen by its Emergency Preparedness Team, led by the General Counsel and Chief Compliance Officer, that focuses on maintaining its workforce in a manner that does not disrupt service delivery or operations. Evolent is closely monitoring and overseeing any issues of noncompliance or deficiencies with client operational service level agreements and continuing to review contractual business requirements in light of state and federal mandates, emergency laws and orders, and available financial support opportunities. Evolent is also mindful of the impact COVID-19 has on its vendors and subcontractors, and we will continue to work with them regarding our collective obligations to Evolent’s customers. We require a COVID-19 Business Continuity Attestation from subcontractors and vendors, confirming that operational and financial obligations will be met and aiming to ensure that privacy and security risks or incidents can be mitigated and disclosed in a timely manner.

Summary of Impact of COVID-19

In evaluating the impact of COVID-19 on our business, we considered, among other factors, the nature of the services we provide, end market trends and outlook and customer-specific trends. In evaluating our health plan businesses, we focused on possible changes in membership and medical utilization trends.

Our two most significant service offerings in terms of revenue are specialty care management and administrative health services. Because both of these services offerings provide critical services to our clients and their members and have relatively long lead times to implement such services, we currently do not anticipate any material near-term disruption to the relevant contracts as a result of the pandemic.

The three key end-markets we serve are Medicaid, Medicare and Commercial.

Across 2020 and into the first half of 2021, we saw changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The pandemic has resulted in a significant increase in unemployment in the United States. Historically, Medicaid enrollment has increased during periods of rising unemployment as individuals lose access to employer sponsored health care and turn to government sponsored health care. In addition, with respect to Medicaid, many states (including Florida, Kentucky and Illinois) put in place new rules during the pandemic eliminating the ability of Medicaid health plans to dis-enroll non-paying members, as well as waiving certain eligibility requirements, which together we expect will result in higher membership during the period of the pandemic. It is possible that we may see an opposite trend in the commercial market, where employees who are made redundant lose access to employer sponsored health care. We do not expect to see meaningful changes in membership in the Medicare market as a result of COVID-19. In aggregate, as more than 50% of the lives on our platform are currently in Medicaid and we

generally earn revenue with respect to those lives based on a per member per month model, we expect to see a net benefit in our business from increased membership in that market in the near-term. We cannot predict the magnitude of this potential benefit, or how long it will last.

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

Our largest customers in terms of revenue, Cook County Health and Hospitals Systems and Florida Blue Medicare, Inc., together accounted for approximately 43.7% of revenue for the six months ended June 30, 2021, and Cook County Health and Hospitals Systems accounted for approximately 21.4% of revenue for the six months ended June 30, 2020. Florida Blue Medicare, Inc. utilizes our specialty management solutions provided by New Century Health.

Overall, we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources. We are actively monitoring the ongoing situation and may take further actions that change our operations if required by law or that we determine are in the best interests of our employees or partners.

Customers

Cook County Health and Hospital Systems utilizes both our administrative simplification solutions provided by Evolent Health Services which accounts for 9.5% and 9.2% of our consolidated revenue for the three and six months ended June 30, 2021 and our specialty management solutions provided by New Century Health which accounts for 20.1% and 20.0% of our consolidated revenue for the three and six months ended June 30, 2021.

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.

Agreement for the Acquisition of Vital Decision

Agreement for the Sale of True Health New Mexico

On January 11, 2021, Evolent LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered into the SPA with Bright HealthCare, pursuant to which EH Holdings agreed to sell all of its equity interest in True Health to Bright HealthCare for a purchase price of $22.0 million plus excess risk based capital, subject to satisfaction of customary closing conditions, including regulatory approvals. The purchase price is subject to a customary purchase price adjustment following the True Health Closing based in part on actual medical claims experience. The True Health Closing occurred on March 31, 2021 and the Company will have no continuing involvement with True Health subsequent to the Closing except an existing services agreement for claims processing and other health plan administrative functions. Refer to “Part I - Item 1. Financial Statements - Note 5” for additional discussion regarding the True Health sale.

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

Passport

On December 30, 2019, UHC, Passport Health Solutions, LLC (“PHS I”), the Company and EVH Passport, closed a transaction whereby EVH Passport acquired substantially all of the assets and assumed substantially all of the liabilities of UHC, including the Passport Medicaid Contract. The purchase price paid by EVH Passport consisted of $70.0 million in cash and a 30% equity interest in EVH Passport issued to the Sponsors; however, $16.2 million of the foregoing cash purchase price was held back until such time as PHS I delivers to EVH Passport certain owned real property and improvements.

On September 1, 2020, EVH Passport and Molina completed the Molina Closing and the Passport Medicaid Contract was novated to Molina. As a result, EVH Passport began to wind down its business. In connection with the Molina Closing, Molina deposited $20.0 million in cash in escrow, which was subsequently released to EVH Passport in January 2021. Prior to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under the equity method of accounting. As a result of the Molina Closing, the Company concluded that a reconsideration event occurred whereby EVH Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport; accordingly, the Company consolidated EVH Passport as of September 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the Company’s consolidated financials, EVH Passport redeemed the Sponsors’ equity interests in EVH Passport in accordance with the terms of EVH Passport's Stockholders' Agreement , and, as a result, EVH Passport became a wholly owned subsidiary of the Company. The Company expects a return of capital from EVH Passport, expected to be between $130 million and $170 million in total, which is subject to regulatory approval from the Kentucky Department of Insurance. Refer to “Part I - Item 1. Financial Statements - Note 4” for additional discussion regarding the Passport transactions.

Repayment and Termination of Existing Credit Agreement

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

Repositioning Plan

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


	Incurred For the Three Months Ended June 30, 2021		Incurred for the Six Months Ended June 30, 2021		Total Amount Expected to be Incurred in the Repositioning Plan		Cumulative Amount Incurred through June 30, 2021
Severance and termination benefits	$	76	$	185	$	185	$	185
Office space consolidation	—		2,071		2,071		2,071
Professional services	587		3,787		5,162		5,062
Total	$	663	$	6,043	$	7,418	$	7,318

Critical Accounting Policies and Estimates

The MD&A included in our 2020 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates since our 2020 Form 10-K. See “Item 1. Financial Statements - Note 2” in this Form 10-Q for a summary of our significant accounting policies and see “Item 1. Financial Statements - Note 3” in this Form 10-Q for information regarding the Company’s adoption of new accounting standards.

Summary of Significant Accounting Policies

Goodwill

We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level. The Company has three reporting units and our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more likely than not reduce the fair value of a reporting unit below its carrying amount.

A description of our 2020 goodwill impairment test follows below.

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

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

In performing our October 31, 2020 impairment test for one of the specific reporting unit reference above, we estimated the fair value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates. As of

October 31, 2020, we determined that the specific reporting unit had an estimated fair value greater than its carrying value and as a result, goodwill is not impaired.

As of December 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting units was less than the reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2020. The Company determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as of December 31, 2020. As of December 31, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge earlier in the year was $214.3 million.

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost, including trade receivables, certain non-trade receivables, customer advances and certain off-balance sheet credit exposures, by replacing the existing “incurred loss” framework with an expected credit loss recognition model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is effective for entities with fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based on specific identification. Under the new accounting standard, we utilize several factors to develop historical losses, including aging schedules, customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. Refer to Note 7 for additional disclosures related to current expected credit losses.

RESULTS OF OPERATIONS

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

Key Components of our Results of Operations

Revenue

We derive revenue primarily from transformation services and platform and operations services.

Transformation Services Revenue

Platform and Operations Services Revenue

Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from platform and operations services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.

Contracts with Multiple Performance Obligations

Cost of Revenue (exclusive of depreciation and amortization)

Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments to providers and payments for pharmaceutical treatments and other health care expenditures through performance-based arrangements. Subsequent to the consolidation of EVH Passport on September 1, 2020, our cost of revenue includes the consolidated impact of the runout of EVH Passport’s operations, consisting principally of updates to EVH Passport’s claims reserve based on actual claims payments.

Selling, General and Administrative Expenses

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

Depreciation and amortization expense

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

Evolent Health, Inc. Consolidated Results


(in thousands, except percentages)	For the Three Months Ended June 30,						Change Over Prior Period			For the Six Months Ended June 30,						Change Over Prior Period
	2021			2020			$		%	2021			2020			$		%
Revenue
Transformation services	$	2,564		$	755		$	1,809	239.6%	$	2,909		$	5,993		$	(3,084)	(51.5)%
Platform and operations services	219,493			216,544			2,949		1.4%	434,219			432,538			1,681		0.4%
Total revenue	222,057			217,299			4,758		2.2%	437,128			438,531			(1,403)		(0.3)%

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	172,113			164,358			7,755		4.7%	329,945			339,987			(10,042)		(3.0)%
Selling, general and administrative expenses	42,699			47,296			(4,597)		(9.7)%	101,290			99,383			1,907		1.9%
Depreciation and amortization expenses	14,916			15,618			(702)		(4.5)%	30,103			31,596			(1,493)		(4.7)%
Loss on disposal of assets and consolidation	—			—			—		—%	—			6,447			(6,447)		(100.0)%
Goodwill impairment	—			215,100			(215,100)		(100.0)%	—			215,100			(215,100)		(100.0)%
Change in fair value of contingent consideration and indemnification asset	—			756			(756)		(100.0)%	(594)			(3,062)			2,468		80.6%
Total operating expenses	229,728			443,128			(213,400)		(48.2)%	460,744			689,451			(228,707)		(33.2)%
Operating loss	$	(7,671)		$	(225,829)		$	218,158	96.6%	$	(23,616)		$	(250,920)		$	227,304	90.6%

Transformation services revenue as a % of total revenue	1.2		%	0.3		%				0.7		%	1.4		%
Platform and operations services revenue as a % of total revenue	98.8		%	99.7		%				99.3		%	98.6		%
Cost of revenue as a % of revenue	77.5		%	75.6		%				75.5		%	77.5		%
Selling, general and administrative expenses as a % of total revenue	19.2		%	21.8		%				23.2		%	22.7		%

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

Revenue

Total revenue increased by $4.8 million, or 2.2%, to $222.1 million for the three months ended June 30, 2021, as compared to 2020.

Transformation services revenue increased by $1.8 million, or 239.6%, to $2.6 million for the three months ended June 30, 2021, as compared to 2020, due primarily to the timing of implementation activities. Transformation services revenue accounted for 1.2% and 0.3% of our total revenue for the three months ended June 30, 2021 and 2020, respectively.

Platform and operations services revenue increased by $2.9 million, or 1.4%, to $219.5 million for the three months ended June 30, 2021, as compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact of new customer additions, offset, in part by the wind-down of EVH Passport’s operations compared to 2020. Platform and operations services revenue accounted for 98.8% and 99.7% of our total revenue for the three months ended June 30, 2021 and 2020, respectively.

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


	For the Three Months Ended June 30,
	2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions
Medicaid	$	52,064	$	55,502	$	53,648	$	64,050
Medicare	6,346		14,061		90,761		64,206
Commercial and other	16,453		16,958		2,785		2,522
Total	$	74,863	$	86,521	$	147,194	$	130,778

Revenue from our Evolent Health Services segment decreased by $11.7 million for the three months ended June 30, 2021 as compared to 2020 due to the runout of services for EVH Passport, partially offset by new partner additions. Revenue from our Clinical Solutions segment increased by $16.4 million for the three months ended June 30, 2021 as compared to 2020 due to new partner additions as well as expansion into new markets within current New Century Technology & Services Suite partners.

We had 12.2 million lives on our platform as of June 30, 2021, comprised of 1.5 million lives in our Evolent Health Services segment and 10.7 million lives in our Clinical Solutions segment. The Clinical Solutions lives include 1.5 million lives in our Performance Suite and 9.2 million lives in the New Century Technology & Services Suite. Lives on platform are calculated by summing members on our value-based care and comprehensive health plan administrative platform, as well as members covered for oncology specialty care services and members covered for cardiology specialty care services. Lives on New Century Technology & Services Suite are calculated by summing members covered for oncology specialty care services and members covered for cardiology specialty care services for contracts under ASO arrangements. Members covered for more than one category are counted in each category.

Our average per member per month fees for our Performance Suite were $22.05 and $21.41 and for our New Century Technology and Services Suite were $0.37 and $0.40 for the three months ended June 30, 2021 and 2020, respectively. Evolent Health Services PMPM fee is defined as platform and operations revenue pertaining to the Evolent Health Services segment in the quarter divided by the average of the beginning and ending Evolent Health Services segment membership during quarter divided by the number of months in the period. Clinical Solutions PMPM fee is defined as platform and operations services revenue pertaining to our Performance Suite in the quarter divided by the average of the beginning and ending Performance Suite membership during quarter divided by the number of months in the period. New Century Technology & Services Suite PMPM fee is defined as platform and operations revenue pertaining to the New Century Technology & Services Suite in the quarter divided by the average of the beginning and ending New Century Technology & Services Suite membership during quarter divided by the number of months in the period.

Management uses Lives on our Platform and PMPM fees because we believe that they provide insight into the unit economics of our services. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance. We had 41 and 34 operating partners as of June 30, 2021 and 2020, respectively.

Cost of Revenue

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


	For the Three Months Ended June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	49,256	$	54,361	$	122,355	$	108,531	$	502	$	1,466	$	172,113	$	164,358

Cost of revenue increased by $7.8 million, or 4.7%, to $172.1 million for the three months ended June 30, 2021, as compared to 2020. Cost of revenue increased by approximately $15.1 million period over period as a result of higher growth of our revenue generating services, offset, in part by lower capitation expenses, an increase of $2.0 million in our technology services, TPA fees and other costs offset by a decrease of $2.6 million in professional fees due to the nature and timing of our projects and a decrease of $6.8 million in our personnel costs. The principal driver of these decreases was the wind-down of EVH Passport relative to 2020. Cost of revenue for three months ended June 30, 2021 includes approximately $3.6 million associated with the wind-down of EVH Passport, inclusive of a reduction in Passport’s claims reserve. Approximately $0.9 million and $0.5 million of total personnel costs was attributable to stock-based compensation expense for the three months ended June 30, 2021 and 2020, respectively. Cost of revenue represented 77.5% and

75.6% of total services revenue for the three months ended June 30, 2021 and 2020, respectively. Our cost of revenue increased as a percentage of our total services revenue due to a change in the mix of our service offerings towards higher gross margin services with divestiture of our health plans combined with our Repositioning Plan. We expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

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


	For the Three Months Ended June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	18,763	$	20,306	$	9,592	$	6,174	$	14,344	$	20,816	$	42,699	$	47,296

Selling, general, and administrative expenses decreased by $4.6 million, or 9.7%, to $42.7 million for the three months ended June 30, 2021, as compared to 2020. During three months ended June 30, 2021, personnel costs decreased by $1.1 million period over period due to a reduction in employee headcount. Approximately $2.8 million and $3.2 million of total personnel costs were attributable to stock-based compensation expense for both three months ended June 30, 2021 and 2020, respectively. Professional fees increased by $1.2 million for the three months ended June 30, 2021, as compared to 2020, respectively, primarily due to the Repositioning Plan and shareholder advisory services. Acquisition and severance costs accounted for approximately $76 thousand and $0.4 million of total selling, general and administrative expenses for the three months ended June 30, 2021 and 2020, respectively. Selling, general and administrative expenses represented 19.2% and 21.8% of total revenue for the three months ended June 30, 2021, as compared to 2020, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to decrease as a percentage of our total revenue over the long term due to cost saving initiatives introduced in the fourth quarter of 2020.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased $0.7 million, or (4.5)%, to $14.9 million for the three months ended June 30, 2021, as compared to 2020. The decrease was due primarily to lower amortization on existing technology intangibles, offset, in part by, an increase in amortization expense for internal-use software. 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.

Goodwill Impairment

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

Change in Fair Value of Contingent Consideration and Indemnification Asset

We recorded a loss on change in fair value of contingent consideration and indemnification asset of $0.8 million for the three months ended June 30, 2020. This variance is the result of changes in the fair values of contingent liabilities incurred from entering in the warrant agreements compared to the liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018, 2019 and 2020.

Comparison of the Results for the Six Months Ended June 30, 2021 to 2020

Revenue

Total revenue decreased by $1.4 million, or 0.3%, to $437.1 million for the six months ended June 30, 2021, as compared to 2020.

Transformation services revenue decreased by $3.1 million, or 51.5%, to $2.9 million for the six months ended June 30, 2021, as compared to 2020, due primarily to the timing of implementation activities. Transformation services revenue accounted for 0.7% and 1.4% of our total revenue for the six months ended June 30, 2021 and 2020, respectively.

Platform and operations services revenue increased by $1.7 million, or 0.4%, to $434.2 million for the six months ended June 30, 2021, as compared to 2020. We expect our platform and operations growth rate in 2021 to increase as a result of the impact of new customer additions, including Florida Blue Medicare, Inc., offset, in part by the wind-down of EVH Passport’s operations compared to 2020. Platform and operations services revenue accounted for 99.3% and 98.6% of our total revenue for the six months ended June 30, 2021 and 2020, respectively.

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


	For the Six Months Ended June 30,
	2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions
Medicaid	$	112,993	$	113,947	$	96,987	$	124,512
Medicare	14,684		29,246		176,544		126,560
Commercial and other	32,023		39,705		3,897		4,561
Total	$	159,700	$	182,898	$	277,428	$	255,633

Revenue from our Evolent Health Services segment decreased by $23.2 million for the six months ended June 30, 2021 as compared to 2020 due to the runout of services for EVH Passport, partially offset by new partner additions. Revenue from our Clinical Solutions segment increased by $21.8 million for the six months ended June 30, 2021 as compared to 2020 due to new partner additions including Florida Blue Medicare, Inc., as well as expansion into new markets within current New Century Technology & Services Suite partners.

Our average per member per month fees for our Performance Suite were $21.25 and $20.57 and for our New Century Technology and Services Suite were $0.41 and $0.40 for the six months ended June 30, 2021 and 2020, respectively. Evolent Health Services PMPM fee is defined as platform and operations revenue pertaining to the Evolent Health Services segment in the quarter divided by the average of the beginning and ending Evolent Health Services segment membership during quarter divided by the number of months in the period. Clinical Solutions PMPM fee is defined as platform and operations services revenue pertaining to our Performance Suite in the quarter divided by the average of the beginning and ending Performance Suite membership during quarter divided by the number of months in the period. New Century Technology & Services Suite PMPM fee is defined as platform and operations revenue pertaining to the New Century Technology & Services Suite in the quarter divided by the average of the beginning and ending New Century Technology & Services Suite membership during quarter divided by the number of months in the period.

Cost of Revenue

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


	For the Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	102,703	$	119,379	$	225,980	$	217,422	$	1,262	$	3,186	$	329,945	$	339,987

Cost of revenue decreased by $10.0 million, or 3.0%, to $329.9 million for the six months ended June 30, 2021, as compared to 2020. Cost of revenue decreased by approximately $15.9 million due to lower personnel costs, $3.8 million in lower professional fees and 0.2 million in our technology services, TPA fees and other costs combined with a $12.8 million increase from growth of our revenue generating services offset by lower capitation expenses. The principal driver of these decreases was the wind-down of EVH Passport relative to 2020. Cost of revenue for the six months ended June 30, 2021 includes approximately $5.8 million associated with the wind-down of EVH Passport, inclusive of a reduction in Passport’s claims reserve. Approximately $1.5 million and $0.9 million of total personnel costs was attributable to stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively. Cost of revenue represented 75.5% and 77.5% of total services revenue for the six months ended June 30, 2021 and 2020, respectively. Our cost of revenue decreased as a percentage of our total services revenue due to a change in the mix of our service offerings towards higher gross margin services with divestiture of our health plans combined with our Repositioning Plan. We expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

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


	For the Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	42,729	$	50,147	$	16,772	$	11,642	$	41,789	$	37,594	$	101,290	$	99,383

Selling, general, and administrative expenses increased by $1.9 million, or 1.9%, to $101.3 million for the six months ended June 30, 2021, as compared to 2020. Professional fees increased by $9.8 million for the six months ended June 30, 2021, as compared to 2020, respectively, primarily due to the Repositioning Plan and shareholder advisory services. During the six months ended June 30, 2021, personnel costs decreased by $3.7 million period over period due to a reduction in employee headcount. Approximately $5.9 million of total personnel costs were attributable to stock-based compensation expense for both the six months ended June 30, 2021 and 2020, respectively. Acquisition and severance costs accounted for approximately $2.1 million and $6.8 million of total selling, general and administrative expenses for the six months ended June 30, 2021 and 2020, respectively. Selling, general and administrative expenses represented 23.2% and 22.7% of total revenue for the six months ended June 30, 2021, as compared to 2020, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to decrease as a percentage of our total revenue over the long term due to cost saving initiatives introduced in the fourth quarter of 2020.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased $1.5 million, or (4.7)%, to $30.1 million for the six months ended June 30, 2021, as compared to 2020. The decrease was due primarily to lower amortization on existing technology intangibles, offset, in part by, an increase in amortization expense for internal-use software. 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.

Gain (Loss) on Disposal of Assets and Consolidation

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

Goodwill Impairment

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

Change in Fair Value of Contingent Consideration and Indemnification Asset

We recorded a gain on change in fair value of contingent consideration and indemnification asset of $0.6 million and $3.1 million for the six months ended June 30, 2021 and 2020, respectively. This variance is the result of changes in the fair values of contingent liabilities incurred from entering in the warrant agreements compared to the liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018, 2019 and 2020.

Discussion of Non-Operating Results

Interest Income

Interest income consists of interest from investing cash in money market funds and interest from both our short-term and long-term investments, interest earned on the capital-only reinsurance agreement with NMHC and interest from the implementation loan and amounts contributed to UHC in the form of an advance for regulatory capital requirements under an agreement with UHC. We recorded interest income of $0.1 million and $0.2 million and for the three and six months ended June 30, 2021, respectively, and $0.7 million and $1.5 million for the three and six months ended June 30, 2020, respectively. Interest income decreased during 2021 as a result of the repayment of the $40.0 million Passport Note on November 24, 2020.

Interest Expense

Our interest expense is primarily attributable to our 2021 Notes, 2024 Notes, 2025 Notes and Credit Agreement with Ares Capital Corporation.

The Company issued its 2021 Notes in December 2016. Holders of the 2021 Notes are entitled to cash interest payments at a rate equal to 2.00% per annum. In addition, we incurred $4.6 million of debt issuance costs in connection with the 2021 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes.

The Company issued its 2024 Notes in August 2020. As part of the issuance of the 2024 Notes, the Company consummated an exchange offer pursuant to which it issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. Holders of the 2024 Notes are entitled to cash interest payments at a rate equal to 3.50% per annum. In addition, the 2024 Notes contain a cash conversion option, which resulted in a debt discount of $38.1 million, allocated to equity. The amount allocated to equity, along with $3.0 million of debt issuance costs in connection with the 2024 Notes, will be amortized to non-cash interest expense using the effective interest method over the contractual term of the 2024 Notes.

The Company issued its 2025 Notes in October 2018. Holders of the 2025 Notes are entitled to cash interest payments at a rate equal to 1.50% per annum. The 2025 Notes contain a cash conversion option, which resulted in a debt discount of $71.8 million, allocated to equity. The amount allocated to equity, along with $3.4 million of issuance costs, will be amortized to non-cash interest expense using the effective interest method over the contractual term of the 2025 Notes.

The Company entered into the Credit Agreement in December 2019 with Ares Credit Corporation in connection with the Company’s acquisition of certain assets of UHC. Ares Capital Corporation was entitled to cash interest payments. The interest rate for each loan under the Senior Credit Facilities was calculated, at the option of the Borrower, at either the Eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum was payable by the Borrower quarterly in arrears on the unused portion of the DDTL Facility. As of December 31, 2020, the Company had $75.0 million outstanding under its Credit Agreement. On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation.

We recorded interest expense (including amortization of deferred financing costs) of approximately $6.3 million and $12.6 million for both the three and six months ended June 30, 2021 and 2020, respectively. See “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for further details.

Impairment of Equity Method Investments

As of June 30, 2020, the Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response to the COVID-19 pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 15, 2020. It would otherwise be placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13, 2020. As a result of this transaction, we have recorded a non-cash impairment charge of approximately $47.1 million, representing the

total value of our investment, in impairment of equity method investments on the consolidated statements of operations for the six months ended June 30, 2020.

Gain (Loss) from Equity Method Investees

The Company has acquired economic interests in several entities that are accounted for under the equity method of accounting. The Company allocated its proportional share of the investees’ earnings and losses each reporting period. The Company’s proportional share of the gains from these investments was approximately $4.9 million and $12.7 million for the three and six months ended June 30, 2021, respectively and $25.1 million and $24.7 million for the three and six months ended June 30, 2020, respectively. The change in gain from equity method investees for the three months ended June 30, 2021 compared to 2020 is driven primarily by the Company’s investment in Passport. The change in gain from equity method investees for the six months ended June 30, 2021 compared to 2020 is driven primarily by the Company’s investment in Passport during 2020 combined with gains on the sale of our Florida equity investee’s membership during 2021.

Gain from Transfer of Membership

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

Loss On Repayment of Debt

On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Corporation under the Credit Agreement in connection with the prepayment was $98.6 million, which included $9.7 million for the make-whole premium, $13.7 million for the settlement of outstanding warrants as well as $0.2 million in accrued interest. As a result of this transaction, the Company recorded loss on the repayment of debt of $19.2 million, representing the remaining unamortized debt issuance costs of $9.5 million, the make-whole premium and $35 thousand of legal expenses.

Provision for Income Taxes

The Company recorded $0.1 million and $0.7 million in income tax expense (benefit) for the three and six months ended June 30, 2021, respectively, which resulted in effective tax rates of (1.0)% and (3.6)%, respectively, and $(3.9) million and $(3.6) million for the three and six months ended June 30, 2020, respectively, which resulted in effective tax rates of 1.9% and 1.3%, respectively. The difference between our effective tax rate and our statutory rate is due primarily to the fact that the Company maintains a full valuation allowance recorded against its net deferred tax assets, with the exception of certain indefinite-lived components.

Loss from Discontinued Operations, Net of Tax

As of June 30, 2021, the Company determined that True Health met the held for sale criteria under ASC 360, and as such, True Health assets and liabilities as of December 31, 2020, and the results of operations for all periods presented are classified as held for sale and are not included in continuing operations in the consolidated financial statements. The True Health Closing occurred on March 31, 2021.

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


	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2021	2020	2021	2020
Revenue
Platform and operations	—	39	38	279
Premiums	—	25,502	44,795	57,649
Total revenue	—	25,541	44,833	57,928

Expenses


Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	—		4,640		5,885		7,935
Claims expenses	—		18,144		33,954		41,811
Selling, general and administrative expenses (2)	—		4,236		5,764		9,911
Depreciation and amortization expenses	—		160		160		320
Total operating expenses	—		27,180		45,763		59,977
Operating loss	—		(1,639)		(930)		(2,049)
Interest income	—		137		112		286
Interest expense	—		(3)		(4)		(7)
Other loss	—		(3)		(25)		(3)
Loss before income taxes and non-controlling interests	—		(1,508)		(847)		(1,773)
Benefit for income taxes	—				(326)		—
Net loss	$	—	$	(1,508)	$	(521)	$	(1,773)

————————

REVIEW OF CONSOLIDATED FINANCIAL CONDITION

Liquidity and Capital Resources

Since its inception, the Company has incurred operating losses and net cash outflows from operations. The Company incurred operating losses of $23.6 million and $250.9 million for the six months ended June 30, 2021 and 2020, respectively. Net cash and restricted cash from (used in) operating activities was $(72.4) million and $17.1 million for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, the Company had $207.3 million of cash and cash equivalents and $31.1 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 the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies.

Cash Flows

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


	For the Six Months Ended June 30,
	2021		2020
Net cash and restricted cash provided by (used in) operating activities	$	(72,410)	$	17,125
Net cash and restricted cash provided by (used in) investing activities	40,380		(18,382)
Net cash and restricted cash provided by (used in) financing activities	(91,087)		25,910

Operating Activities

Cash flows used in operating activities of $72.4 million for the six months ended June 30, 2021 were primarily due to our net loss of $18.9 million, a loss on the repayment and termination of our Credit Agreement of $19.2 million, a gain on the disposal of assets of $1.9 million, gain on the transfer of memberships of $23.0 million and non cash items including depreciation and amortization expenses of $30.3 million and stock-based compensation expense of $7.4 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts receivables and contract cost assets and reductions in accrued liabilities and accrued compensation and employee benefits contributed approximately $163.3 million to our cash outflows. Those cash outflows were offset, in part by increased reserves for claims and performance-based arrangements of approximately $62.6 million.

Cash flows from operating activities of $17.1 million in the six months ended June 30, 2020 were due primarily to our net loss of $282.3 million, partially offset by non-cash items, including an impairment of goodwill of $215.1 million, an impairment of an equity method investment of $47.1 million, depreciation and amortization expenses of $31.9 million, stock-based compensation expense of $7.2 million and a loss on the disposal of assets of $6.4 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts payable, accrued liabilities and claims reserves contributed approximately $49.0 million to our cash inflows. Those cash inflows were partially offset by an increase in accounts receivable and contract assets and contract costs assets and a decrease in accrued compensation and employee benefits contributed of approximately $39.6 million.

Investing Activities

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

Cash flows used in investing activities of $18.4 million in the six months ended June 30, 2020 were primarily attributable to investments in internal-use software and purchases of property and equipment of $17.5 million, disposal of non-strategic assets of $2.3 million and purchases of investments of $1.4 million, offset in part by maturities of investments of $3.1 million.

Financing Activities

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

Cash flows from financing activities of $25.9 million in the six months ended June 30, 2020 were primarily related to a $26.7 million increase in working capital balances held on behalf of our partners for claims processing services. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed. These cash inflows from claims processing services were, offset, in part by $1.3 million of taxes withheld and paid for vests of restricted stock units.

Cash flows from Discontinued Operations

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


	For the Six Months Ended June 30,
	2021		2020
Cash flows provided by (used in) operating activities	$	5,002	$	10,660
Cash flows provided by (used in) investing activities	(2,494)		382

Contractual Obligations

Our estimated contractual obligations (in thousands) as of June 30, 2021, were as follows:


	2021		2022-2023		2024-2025		2026+		Total
Operating leases for facilities	$	5,854	$	18,477	$	16,523	$	47,760	$	88,614
Purchase obligations related to vendor contracts	8,779		7,431		87		—		16,297
Debt interest and termination payments	3,613		13,369		9,279		—		26,261
Debt principal repayment (1)	26,737		—		289,551		—		316,288
Total contractual obligations	$	44,983	$	39,277	$	315,440	$	47,760	$	447,460

————————

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

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

Accounts Receivable, net

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the six months ended June 30, 2021, accounts receivable, net increased due to the impact of new customers of $70.5 million and the timing of cash receipts from existing customers.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments of $31.1 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $14.5 million, collateral for letters of credit required as security deposits for facility leases of $3.5 million, amounts held with financial institutions for risk-sharing arrangements of $12.4 million and other restricted balances of $0.8 million as of June 30, 2021. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.

Uses of Capital

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

OTHER MATTERS

Off-balance Sheet Arrangements

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

Related Party Transactions

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

Other Factors Affecting Our Business

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

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, 2021, the Company had cash and cash equivalents and restricted cash and restricted investments of $238.4 million, which consisted of bank deposits with FDIC participating banks of $235.9 million, bank deposits in international banks of $2.5 million. In addition, we have unrestricted investments of $0.1 million, which are classified as held-to-maturity investments and are recorded in prepaid expenses and other current assets on the consolidated balance sheets.

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

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

Foreign Currency Exchange Risk

Beginning in 2018, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee. In general, we are a net payor of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating results as expressed in U.S. dollars. At this time, we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized foreign currency translation loss of $58 thousand and $89 thousand for the three and six months ended June 30, 2021.

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, 2021 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

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

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

Inherent Limitations of Internal Controls

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

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or contract with a significant partner, or multiple partners in the aggregate, could negatively impact our results.

Historically, we have relied on a limited number of partners for a substantial portion of our total revenue and accounts receivable. Our largest partner in terms of both revenue and accounts receivable, Cook County Health and Hospitals System, comprised 29.6% and 29.2% of our revenue for the three and six months ended June 30, 2021 and 42.0% and 61.5% of our accounts receivable as of June 30, 2021 and December 31, 2020, respectively. The loss of Cook County Health and Hospitals System or any other significant partner, pursuant to a reprocurement process or otherwise, or the non-renewal or renegotiation of any of our significant partner contracts, could adversely affect our results. In May 2020, Passport, our largest partner at the time, was not awarded a Kentucky managed Medicaid contract for the next contract period, which adversely affected our results. We cannot assure you that similar facts will not occur with a different partner in the future as often our customers who are county or municipal run bodies have requirements to run public procurement processes for renewals.

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

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

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

year-to-year renewal provisions, we cannot assure that any or all of these contracts will be renewed in any particular year. We expect that future contracts will contain similar provisions to those described in this paragraph.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EVOLENT HEALTH, INC.

Exhibit Index


2.1*						Agreement and Plan of Merger, dated July 12, 2016, by and among Evolent Health, Inc., Electra Merger Sub, LLC, Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their capacity as the Securityholders’ Representative, filed as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on July 14, 2016, and incorporated herein by reference

2.2*						First Amendment to Agreement and Plan of Merger, dated October 3, 2016, by and among Evolent Health, Inc., Electra Merger Sub, LLC, Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their capacity as securityholders’ representative, filed as Exhibit 2.2 to the Company’s Report on Form 8-K filed with the SEC on October 3, 2016, and incorporated herein by reference

2.3*						Agreement and Plan of Merger, dated September 7, 2018, by and among Evolent Health, Inc., Evolent Health LLC, Element Merger Sub, Inc., NCIS Holdings, Inc. and New Century Investment, LLC, in the capacity set forth therein, filed as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on September 12, 2018, and incorporated herein by reference

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

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

3.1*						Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Evolent Health, Inc., dated June 10, 2021, filed as Exhibit 3.1 to the Company’s report on Form 8-K filed with the SEC on June 10, 2021 and incorporated herein by reference

10.1+						Evolent Health, Inc. Amended and Restated 2015 Omnibus Equity Incentive Plan, filed as Appendix D to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 30, 2021, and incorporated herein by reference

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

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

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

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

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

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

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

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

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

SIGNATURES

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


EVOLENT HEALTH, INC.
Registrant

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

By:			/s/ Aammaad Shams
Name:			Aammaad Shams
Title:			Controller

Dated: August 4, 2021