Evolent Health, Inc. - Quarter Report: 2022 September (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 September 30, 2022

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

For the transition period from to

Commission File Number: 001-37415

_________________________

Evolent Health, Inc.

(Exact name of registrant as specified in its charter)

_________________________

Delaware

32-0454912

(State or other jurisdiction of
incorporation or organization)

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

800 N. Glebe Road

Suite 500

Arlington

Virginia

22203

(Address of principal executive offices)

(Zip Code)

(571) 389-6000

Registrant’s telephone number, including area code

_________________________

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


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

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

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

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

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

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

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

As of October 28, 2022, there were 101,190,965 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	39
3.	Quantitative and Qualitative Disclosures About Market Risk	53
4.	Controls and Procedures	54

	PART II
1	Legal Proceedings	55
1A.	Risk Factors	55
2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
3.	Defaults Upon Senior Securities	56
4.	Mine Safety Disclosures	56
5.	Other Information	56
6.	Exhibits	57

	Signatures	58

Explanatory Note

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

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE

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

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

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

•evolution in the market for value-based care;

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

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

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

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

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

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

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

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

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

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

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

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

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

•consolidation in the health care industry;

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

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

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

•risks related to our offshore operations;

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

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

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

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

•our ability to achieve profitability in the future;

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

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

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

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

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

•adequate protection of our intellectual property, including trademarks;

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

•our use of “open source” software;

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

•our reliance on third parties and licensed technologies;

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

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

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

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

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

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

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

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

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

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

•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, 2021 (the "2021 Form 10-K") and other documents filed with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	156,756	$	266,280
Restricted cash and restricted investments	25,057		75,685
Accounts receivable, net (1)	187,633		130,604
Prepaid expenses and other current assets (1)	24,328		51,391
Total current assets	393,774		523,960
Restricted cash and restricted investments	13,005		12,977
Investments in equity method investees	5,222		5,458
Property and equipment, net	94,645		81,365
Right-of-use assets - operating	50,696		50,203
Prepaid expenses and other noncurrent assets (1)	3,064		6,790
Contract cost assets	24,588		32,624
Intangible assets, net	451,398		279,784
Goodwill	722,790		426,297
Total assets	$	1,759,182	$	1,419,458
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Current liabilities:
Accounts payable (1)	$	61,863	$	96,084
Accrued liabilities (1)	132,238		107,241
Operating lease liability - current	7,053		7,069
Accrued compensation and employee benefits	37,646		51,861
Deferred revenue	7,524		11,944
Reserve for claims and performance - based arrangements (1)	135,698		171,294
Total current liabilities	382,022		445,493
Long-term debt, net	412,444		215,676
Other long-term liabilities	4,260		5,531
Tax receivable agreement liability	42,870		—
Operating lease liabilities - noncurrent	57,840		57,722
Deferred tax liabilities, net	3,608		1,403
Total liabilities	903,044		725,825
Commitments and Contingencies (See Note 11)
Shareholders' Equity
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 101,159,072 and 90,758,318 shares issued, respectively	1,012		908
Additional paid-in-capital	1,472,098		1,340,989
Accumulated other comprehensive loss	(1,044)		(362)
Retained earnings (accumulated deficit)	(594,805)		(626,779)
Treasury stock, at cost; 1,537,582 shares issued, respectively	(21,123)		(21,123)
Total shareholders' equity	856,138		693,633
Total liabilities and shareholders' equity	$	1,759,182	$	1,419,458

(1) See Note 18 for amounts attributable to related parties included in these line items.

See accompanying Notes to Consolidated Financial Statements.

EVOLENT HEALTH, INC.

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue(1)	$	352,585	$	222,471	$	969,581	$	659,599
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	266,617		163,126		736,061		493,071
Selling, general and administrative expenses (1)	68,521		51,292		186,408		152,582
Depreciation and amortization expenses	17,196		14,859		47,414		44,962
Change in fair value of contingent consideration	(12,700)		(225)		(5,822)		(819)
Total operating expenses	339,634		229,052		964,061		689,796
Operating income (loss)	12,951		(6,581)		5,520		(30,197)
Interest income	425		120		765		311
Interest expense	(4,754)		(6,367)		(9,143)		(18,978)
Gain from equity method investees	1,392		63		3,940		12,725
Gain on transfer of membership	—		—		—		22,969
Loss on extinguishment/repayment of debt	(10,192)		—		(10,192)		(19,158)
Change in tax receivable agreement liability	(42,870)		—		(42,870)		—
Other income (expense), net	(345)		(41)		130		(73)
Loss from continuing operations before income taxes	(43,393)		(12,806)		(51,850)		(32,401)
Provision for (benefit from) income taxes	(45,516)		234		(44,498)		936
Income (loss) from continuing operations	2,123		(13,040)		(7,352)		(33,337)
Income (loss) from discontinued operations, net of tax (2)	—		—		(463)		1,383
Net income (loss) attributable to common shareholders of Evolent Health, Inc.	$	2,123	$	(13,040)	$	(7,815)	$	(31,954)

Income (loss) per common share
Basic:
Continuing operations	$	0.02	$	(0.15)	$	(0.08)	$	(0.39)
Discontinued operations	—		—		(0.01)		0.02
Basic income (loss) per share attributable to common shareholders of Evolent Health, Inc.	$	0.02	$	(0.15)	$	(0.09)	$	(0.37)
Diluted:
Continuing operations	$	0.02	$	(0.15)	$	(0.08)	$	(0.39)
Discontinued operations	—		—		(0.01)		0.02
Diluted income (loss) per share attributable to common shareholders of Evolent Health, Inc.	$	0.02	$	(0.15)	$	(0.09)	$	(0.37)

Weighted-average common shares outstanding
Basic	95,286		85,800		91,643		85,306
Diluted	99,308		85,800		91,643		85,306

Comprehensive income (loss)
Net income (loss)	$	2,123	$	(13,040)	$	(7,815)	$	(31,954)
Other comprehensive income (loss), net of taxes, related to:
Foreign currency translation adjustment	(262)		4		(682)		(85)
Total comprehensive income (loss) attributable to common shareholders of Evolent Health, Inc.	$	1,861	$	(13,036)	$	(8,497)	$	(32,039)

————————

(1)See Note 18 for amounts attributable to unconsolidated related parties included in these line items.

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

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 September 30, 2022
	Class A Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance as of June 30, 2022	91,657	$	916	$	1,231,005	$	(782)	$	(596,928)	$	(21,123)	$	613,088

Stock-based compensation expense	—	—		6,992		—		—		—		6,992
Exercise of stock options	317	4		2,967		—		—		—		2,971
Restricted stock units vested, net of shares withheld for taxes	50	1		(949)		—		—		—		(948)
Exchange of 2024 Notes	5,394	54		101,945		—		—		—		101,999
Shares issued for acquisition	3,742	37		130,138		—		—		—		130,175
Foreign currency translation adjustment	—	—		—		(262)		—		—		(262)
Net income	—	—		—		—		2,123		—		2,123

Balance as of September 30, 2022	101,160	$	1,012	$	1,472,098	$	(1,044)	$	(594,805)	$	(21,123)	$	856,138


	For the Three Months Ended September 30, 2021
	Class A Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders’ Equity
	Shares	Amount
Balance as of June 30, 2021	87,195	$	872	$	1,242,900	$	(367)	$	(608,092)	$	(21,123)	$	614,190

Stock-based compensation expense	—	—		4,395		—		—		—		4,395
Exercise of stock options	242	2		2,188		—		—		—		2,190
Restricted stock units vested, net of shares withheld for taxes	19	—		(255)		—		—		—		(255)
Foreign currency translation adjustment	—	—		—		4		—		—		4
Net loss	—	—		—		—		(13,040)		—		(13,040)

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

See accompanying Notes to Consolidated Financial Statements


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

Cumulative-effect adjustment from adoption of ASC 2020-06	—	—		(106,172)		—		39,789		—		(66,383)
Stock-based compensation expense	—	—		19,350		—		—		—		19,350
Exercise of stock options	354	3		3,277		—		—		—		3,280
Restricted stock units vested, net of shares withheld for taxes	452	5		(6,192)		—		—		—		(6,187)
Leveraged stock units vested, net of shares withheld for taxes	459	5		(11,237)		—		—		—		(11,232)
Exchange of 2024 Notes	5,394	54		101,945		—		—		—		101,999
Shares issued for acquisition	3,742	37		130,138		—		—		—		130,175
Foreign currency translation adjustment	—	—		—		(682)		—		—		(682)
Net loss	—	—		—		—		(7,815)		—		(7,815)

Balance as of September 30, 2022	101,160	$	1,012	$	1,472,098	$	(1,044)	$	(594,805)	$	(21,123)	$	856,138


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

Stock-based compensation expense	—	—		11,754		—		—		—		11,754
Exercise of stock options	1,142	11		11,555		—		—		—		11,566
Restricted stock units vested, net of shares withheld for taxes	419	4		(3,401)		—		—		—		(3,397)
Foreign currency translation adjustment	—	—		—		(85)		—		—		(85)
Net loss	—	—		—		—		(31,954)		—		(31,954)

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

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Nine Months Ended September 30,
	2022		2021
Cash Flows Used In Operating Activities
Net loss	$	(7,815)	$	(31,954)
Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:
Change in fair value of contingent consideration	(5,822)		(819)
Loss (gain) on discontinued operations	463		(1,904)
Gain from equity method investees	(3,940)		(12,725)
Depreciation and amortization expenses	47,414		45,122
Stock-based compensation expense	19,350		11,754
Deferred tax benefit	(46,385)		(288)
Amortization of contract cost assets	14,768		9,928
Amortization of deferred financing costs	1,762		13,399
Gain on transfer of membership	—		(22,969)
Loss on extinguishment/repayment of debt, net	10,192		19,158
Change in tax receivable agreement liability	42,870		—
Other current operating cash inflows (outflows), net	2,163		472
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets	(34,796)		(52,878)
Prepaid expenses and other current and non-current assets	(2,409)		(140)
Contract cost assets	(6,732)		(8,439)
Accounts payable	5,936		8,164
Accrued liabilities	(27,903)		(13,893)
Accrued compensation and employee benefits	(14,451)		(12,811)
Deferred revenue	(4,741)		3,103
Reserve for claims and performance-based arrangements	(35,596)		16,784
Right-of-use operating assets	831		6,408
Operating lease liabilities	(1,223)		(4,589)
Other long-term liabilities	(1,184)		1,208
Net cash and restricted cash used in operating activities	(47,248)		(27,909)
Cash Flows Provided by (Used In) Investing Activities
Cash paid for asset acquisitions and business combinations	(245,021)		(1,889)
Proceeds from transfer of membership and release of Passport escrow	22,969		42,996
Disposal of non-strategic assets and divestiture of discontinued operations, net	(9,164)		3,490
Return of equity method investments	4,175		14,218
Purchases of investments	—		(2,994)
Maturities and sales of investments	—		500
Investments in internal-use software and purchases of property and equipment	(27,618)		(17,739)
Net cash and restricted cash provided by (used in) investing activities	(254,659)		38,582
Cash Flows Provided by (Used In) Financing Activities
Changes in working capital balances related to claims processing on behalf of partners	(48,322)		1,105
Repayment of Credit Agreement including settlement of warrants	—		(98,420)
Proceeds from stock option exercises	3,280		11,566
Proceeds from issuance of long term debt, net of offering costs	219,740		—
Distributions to Sponsors	(14,884)		(1,300)

See accompanying Notes to Consolidated Financial Statements


	For the Nine Months Ended September 30,
	2022		2021
Taxes withheld and paid for vesting of equity awards	(17,419)		(3,397)
Net cash and restricted cash provided by (used in) financing activities	142,395		(90,446)
Effect of exchange rate on cash and cash equivalents and restricted cash	(612)		(53)
Net decrease in cash and cash equivalents and restricted cash	(160,124)		(79,826)
Cash and cash equivalents and restricted cash as of beginning-of-period (1)	354,942		361,581
Cash and cash equivalents and restricted cash as of end-of-period (1)	$	194,818	$	281,755

————————

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

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization

Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware and through its subsidiaries supports leading health systems and physician organizations 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.

As of September 30, 2022, the Company had unrestricted cash and cash equivalents of $156.8 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. Evolent Health, Inc. is a holding company whose only business is to act as the sole managing member of Evolent Health LLC. As such, it controls Evolent Health LLC’s business and affairs and is responsible for the management of its business.

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

Basis of Presentation

In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state our financial position, results of operations and cash flows. The interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain footnote disclosures normally included in financial statements prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission (“SEC”). The disclosures provided herein should be read in conjunction with the audited financial statements and notes thereto included in our 2021 Form 10-K.

Summary of Significant Accounting Policies

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

Reclassification

Certain prior period amounts have been reclassified to conform to current period presentation specifically as it relates to the reclassification of assets, liabilities, operating results and cash flows.

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 (in thousands) as follows:


	September 30, 2022		December 31, 2021
Collateral for letters of credit for facility leases (1)	$	2,269	$	3,769
Collateral with financial institutions (2)	10,873		11,662
Claims processing services (3)	24,904		73,226
Other	16		5
Total restricted cash and restricted investments	$	38,062	$	88,662

Current restricted cash	25,057		75,685
Total current restricted cash and restricted investments	$	25,057	$	75,685

Non-current restricted cash	13,005		12,977
Total non-current restricted cash and restricted investments	$	13,005	$	12,977

————————

(1)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.

(2)Represents collateral held with financial institutions for risk-sharing and other arrangements which are held in a FDIC participating bank account. See Note 17 for discussion of fair value measurement and Note 11 for discussion of our risk-sharing arrangements.

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

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands):


	September 30,
	2022		2021
Cash and cash equivalents	$	156,756	$	252,496
Restricted cash and restricted investments	38,062		29,259
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows (1)	$	194,818	$	281,755

————————

Business Combinations

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

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

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

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).

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			3 - 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.

Research and Development Costs

Research and development costs consist primarily of personnel and related expenses (including stock-based compensation and employee taxes and benefits) for employees engaged in research and development activities as well as third-party fees. All such costs are expensed as incurred. We focus our research and development efforts on activities that support our technology infrastructure, clinical program development, data analytics and network development capabilities. Research and development costs are recorded within cost of revenue and selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss). Total research and development costs for the three and nine months ended September 30, 2022, was $3.8 million and $11.7 million, respectively, and, $4.2 million and $11.1 million for the three and nine months ended September 30, 2021, respectively.

Reserves for Claims and Performance-based Arrangements

Reserves for claims and performance-based arrangements reflect estimates of payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process) and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. The Company uses actuarial principles and assumptions that are consistently applied in each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

The process of estimating reserves involves a considerable degree of judgment by the Company and, as of any given date, is inherently uncertain. The methods for making such estimates and for establishing the resulting liability are continually reviewed and adjustments are reflected in current results of operations in the period in which they are identified as experience develops or new information becomes known. See Note 21 for additional discussion regarding our reserves for claims and performance-based arrangements.

Right of Offset

Certain customer arrangements give the Company the legal right to net payment for amounts due from customers and claims payable. As of September 30, 2022, and December 31, 2021, approximately 47% and 42%, respectively, of gross accounts receivable was netted against claims payable in lieu of cash receipt. Furthermore, as of September 30, 2022, approximately 11% of our accounts receivable, net could ultimately be settled on a net basis, once the criteria for netting have been met.

Leases

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

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

Refer to Note 12 for additional lease disclosures.

Revenue Recognition

We derive revenue from two 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.

Note 3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

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

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature and no longer permits the use of the treasury stock method from calculating earnings per share. As a result, after adopting the ASU’s guidance, we do not separately present in equity an embedded conversion feature of such debt. Instead, we account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The Company adopted the standard using a modified retrospective method on January 1, 2022, with adjustments which increased retained earnings by $39.8 million, reduced additional paid-in capital by $106.2 million and increased the net carrying amount of the 2024 and 2025 Notes by $25.1 million and $41.3 million, respectively.

Recent Accounting Pronouncements Not Yet Effective

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

Note 4. Transactions

Business Combinations

Implantable Provider Group

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

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

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


Purchase consideration:
Cash	$	256,488


Fair value of Class A common stock issued	130,175
Fair value of contingent consideration	75,000
Total consideration	$	461,663

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

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

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

Goodwill	296,597
Net assets acquired	$	461,663

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and is expected to be collectible in full. Identifiable intangible assets associated with customer relationships, technology and the corporate trade name will be amortized on a straight-line basis over their preliminary estimated useful lives of 20 years, 5 years, and 15 years, respectively. The customer relationships are primarily attributable to existing contracts with current customers. The technology consists primarily of a proprietary customer relationship management and analytics platform that supports reporting to payors with respect to medical device pricing and associated analytics. The corporate trade name reflects the value that we believe the IPG brand name carries in the market. The fair value of the intangible assets was determined using the income approach and the relief from royalty approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The relief from royalty approach estimates the fair value of an asset by calculating how much an entity would have to spend to lease a similar asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to cross-selling opportunities and the acquired assembled workforce and was all allocated to the Clinical Solutions segment. The Company received carryover tax basis in the assets and liabilities acquired; accordingly, the Company recognized net deferred tax liabilities associated with the difference between the book basis and the tax basis for the assets and liabilities acquired. The goodwill is not deductible for tax purposes. Additionally, a discrete tax benefit of $46.8 million was recorded in the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2022, to account for the valuation allowance release primarily related to the acquired intangible assets, which resulted in a deferred tax liability that provided a source of income supporting realization of other deferred tax assets.

The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed. Any necessary adjustments are expected to be finalized by the end of the third quarter of 2023.

Vital Decisions

On October 1, 2021, the Company completed its acquisition of Vital Decisions, including 100% of the voting equity interests. Vital Decisions is a leading provider of technology-enabled advance care planning services, ensuring that the care of individuals with serious illness aligns with their values and changing preferences throughout their health journey and, in particular, as they approach end-of-life decisions. The transaction is expected to deepen our capabilities, allowing us to cross-sell across customers and enhance our value proposition to partners.

Total merger consideration, net of cash on hand and certain closing adjustments, was $117.7 million, based on the closing price of the Company’s Class A common stock on the NYSE on October 1, 2021. The merger consideration consisted of $46.5 million of cash consideration, 1.8 million shares of Class A common stock, fair valued at $56.6 million as of October 1, 2021, and an earn-out of up to $45.0 million, fair valued at $14.6 million as of October 1, 2021 is payable in cash and/or shares of the Company’s Class A Common Stock, at the Company’s option. See Note 17 for additional information regarding the fair value determination of the earn-out consideration.

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of October 1, 2021, as follows (in thousands):


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

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

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

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

Goodwill	77,288
Net assets acquired	$	117,726

The fair value of the receivables acquired, as shown in the table above, approximates the gross contractual amounts and is expected to be collectible in full. Identifiable intangible assets associated with customer relationships, technology and corporate trade names will be amortized on a straight-line basis over their preliminary estimated useful lives of 13 years, 5 years, and 15 years, respectively. The customer relationships are primarily attributable to existing contracts with current customers. The technology consists primarily of a proprietary advance care planning documentation portal where patients can input information, and doctor/patient conversations are populated for later reference. The corporate trade name reflects the value that we believe the Vital Decisions brand name carries in the market. The fair value of the intangible assets was determined using the income approach and the relief from royalty approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The relief from royalty approach estimates the fair value of an asset by calculating how much an entity would have to spend to lease a similar asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. The goodwill is attributable primarily to cross-selling opportunities and the acquired assembled workforce and was all allocated to the Clinical Solutions segment. Goodwill is considered to be an indefinite lived asset. $69.6 million of the goodwill recorded on the transaction is deductible for tax purposes.

Note 5. Discontinued Operations

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

As of the first quarter of 2021, the Company determined that True Health met the discontinued operations criteria under ASC 205, and as such, True Health assets and liabilities as of December 31, 2020, and the results of operations for all periods presented are classified as discontinued operations and are not included in continuing operations in the consolidated financial statements.

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


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

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


Provision for income taxes	—		(326)
Net loss	$	—	$	(521)

————————

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

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

The consolidated statements of cash flows for all periods have not been adjusted to separately disclose cash flows related to discontinued operations. Cash flows related to the True Health business during the nine months ended September 30, 2021:


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

Note 6. Revenue Recognition

We derive revenue primarily from platform and operations services.

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.

In our Clinical Solutions segment, we enter into performance-based arrangements that may include capitation 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.

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.

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. As we integrate goods and services provided by third parties into our overall service, we control the goods and services provided to the customer prior to its delivery. As such, we are the principal and we will recognize revenue on a gross basis. In certain cases, we act as an agent and do not control the services from third parties before it is delivered to the customer thereby recognizing revenue on a net basis.

Disaggregation of Revenue

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


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Evolent Health Services				Clinical Solutions
Medicaid	$	60,054	$	41,857	$	79,664	$	51,829	$	183,542	$	154,850	$	226,684	$	148,816
Medicare	6,335		4,816		111,632		105,219		21,031		19,500		315,334		281,763
Commercial and other	40,939		16,184		53,961		2,566		101,948		48,207		121,042		6,463
Total	$	107,328	$	62,857	$	245,257	$	159,614	$	306,521	$	222,557	$	663,060	$	437,042

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term greater than one year, we have allocated approximately $69.1 million of transaction price to performance obligations that are unsatisfied as of September 30, 2022. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that we expect will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately 37%, 85% and 98% of these remaining performance obligations by December 31, 2022, 2023 and 2024, respectively, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of revenue that we actually receive may be less or greater than this estimate and the timing of recognition may not be as expected.

Contract Balances

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

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

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


	September 30, 2022		December 31, 2021
Short-term receivables (1)	$	185,590	$	129,012
Long-term receivables (1)	884		4,877
Short-term deferred revenue	7,524		11,944
Long-term deferred revenue	3,185		4,437

————————

(1)Excludes pharmacy claims receivable and premiums receivable.

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


Deferred revenue
Balance as of beginning-of-period	$	16,381
Reclassification to revenue, as a result of performance obligations satisfied	(11,445)
Cash received in advance of satisfaction of performance obligations	5,773
Balance as of end of period	$	10,709

The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in a previous period was $10.4 million and $56.4 million for the three and nine months ended September 30, 2022, due primarily to net gain share as well as changes in other estimates.

Contract Cost Assets

Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as non-current assets and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss). As of September 30, 2022 and December 31, 2021, the Company had $3.6 million and $5.2 million, respectively, of contract acquisition cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense of $0.3 million and $2.0 million for the three and nine months ended September 30, 2022, respectively, and $0.3 million and $1.3 million for the three and nine months ended September 30, 2021, respectively.

In our platform and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract. Our contract fulfillment costs primarily include our employee labor costs and third-party vendor costs. The capitalized contract fulfillment costs are classified as non-current and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within cost of revenue on the accompanying consolidated statements of operations and comprehensive income (loss). As of September 30, 2022 and December 31, 2021, the Company had $21.0 million and $27.4 million, respectively, of contract fulfillment cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense including the acceleration of amortization of contract costs for certain customers of $1.3 million and $12.8 million for the three and nine months ended September 30, 2022, respectively, and $1.3 million and $8.6 million for the three and nine months ended September 30, 2021, respectively.

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

Note 7. Credit Losses

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

Accounts Receivable from Revenue Transactions

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

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms, due dates and business strategy. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ legal counsel to pursue recovery of defaulted receivables. In addition, the Company will establish a general reserve based on delinquency rates. Historical loss rates are determined for each delinquency bucket in 30-day past-due intervals and then applied to the composition

of the reporting date balance based on delinquency. The allowance implied from application of the historical loss rates is then adjusted, as necessary, for current conditions and reasonable and supportable forecasts.

Based on an aging analysis of our trade accounts receivable, non-trade accounts receivable and contract assets as of September 30, 2022, 83% were current, 9% were past due less than 60 days, with 11% past due less than 120 days and at December 31, 2021, 90% was current, 2% was past due less than 60 days, with 3% past due less than 120 days. As of September 30, 2022 and December 31, 2021, in total we reported on the consolidated balance sheet $201.5 million and $171.5 million of accounts receivable, certain non-trade accounts receivable included in prepaid expenses and other assets, net of allowances of $9.4 million and $3.4 million, respectively. The following table summarizes the changes in allowance for credit losses on our accounts receivables, certain non-trade accounts receivable and contract assets (in thousands):


	For the Nine Months Ended September 30,
	2022		2021
Balance as of beginning of period	$	(3,374)	$	(7,056)
IPG acquisition	(5,269)		—
Provision for credit losses	(1,134)		(1,949)
Charge-offs(1)	422		5,076
Balance as of end of period	$	(9,355)	$	(3,929)

————————

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

Note 8. Property and Equipment, Net

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


	September 30, 2022		December 31, 2021
Computer hardware	$	27,988	$	21,970
Furniture and equipment	4,141		3,581
Internal-use software development costs	181,063		159,587
Leasehold improvements	23,160		15,325
Total property and equipment	236,352		200,463
Accumulated depreciation and amortization expenses	(141,707)		(119,098)
Total property and equipment, net	$	94,645	$	81,365

The Company capitalized $8.0 million and $21.5 million for the three and nine months ended September 30, 2022, respectively, and $5.4 million and $16.5 million for the three and nine months ended September 30, 2021, respectively, of internal-use software development costs. The net book value of capitalized internal-use software development costs was $73.0 million and $71.2 million as of September 30, 2022 and December 31, 2021, respectively.

Depreciation expense related to property and equipment was $7.7 million and $23.1 million for the three and nine months ended September 30, 2022, respectively, and $7.4 million and $22.8 million for the three and nine months ended September 30, 2021, respectively, of which amortization expense related to capitalized internal-use software development costs was $6.4 million and $19.6 million for the three and nine months ended September 30, 2022, respectively, and $6.7 million and $20.0 million for the three and nine months ended September 30, 2021, respectively.

Note 9. Goodwill and Intangible Assets, Net

Goodwill

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

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 on October 31 of each fiscal year. We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners, or litigation.

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

2021 Goodwill Impairment Test

On October 31, 2021, the Company performed its annual goodwill impairment review for fiscal year 2021. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of any of our three reporting units was below their respective carrying values. As a result, a quantitative goodwill impairment analysis was not required.

Change in Goodwill

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


	EHS		Clinical Solutions		Consolidated
Balance as of December 31, 2021(1)	$	214,334	$	211,963	$	426,297
Goodwill acquired(2)	—		296,597		296,597
Foreign currency translation	(104)		—		(104)
Balance as of September 30, 2022	$	214,230	$	508,560	$	722,790

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

————————

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

(2)Goodwill acquired from the addition of IPG in the third quarter of 2022.

Intangible Assets, Net

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


	September 30, 2022							December 31, 2021
	Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Corporate trade name	13.0	$	43,600	$	9,847	$	33,753	12.4	$	25,800	$	7,693	$	18,107
Customer relationships	16.0	465,019		86,623		378,396		14.9	311,019		72,697		238,322
Technology	2.9	111,822		78,648		33,174		2.0	87,922		73,378		14,544
Below market lease, net	0.6	1,218		1,100		118		1.3	1,218		950		268
Provider network contracts (1)	1.5	16,553		10,596		5,957		2.2	16,417		7,874		8,543
Total intangible assets, net		$	638,212	$	186,814	$	451,398		$	442,376	$	162,592	$	279,784

Amortization expense related to intangible assets was $9.5 million and $24.3 million for the three and nine months ended September 30, 2022, respectively, and $7.4 million and $22.1 million for the three and nine months ended September 30, 2021, respectively.

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


2022	$	10,620
2023	40,487
2024	34,603
2025	33,057
2026	32,880
Thereafter	299,751
Total future amortization of intangible assets	$	451,398

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

Note 10. Long-term Debt

2022 Credit Agreement

On August 1, 2022 (“IPG Closing Date”), the Company entered into a credit agreement, by and among the Company, Evolent Health LLC, as the borrower (the “Borrower”), certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent and collateral agent and revolver agent, together with the Company (the “2022 Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) an initial term loan in the aggregate principal amount of $175.0 million (the “Initial Term Loan Facility”) and (ii) a revolving credit facility in the aggregate principal amount of up to $50.0 million, to be determined by reference to the lesser of $50.0 million and a borrowing base (the “Revolving Facility” and, together with the Initial Term Loan Facility, the “Credit Facilities”), subject to the satisfaction of specified conditions. The Borrowers borrowed the loan under the Initial Term Loan Facility on August 1, 2022 (the “Initial Term Loan”), and also borrowed $50.0 million under the Revolving Facility on the IPG Closing Date. The Credit Facilities are guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain exceptions. The Credit Facilities are secured by a first priority security interest in all of the capital stock of each borrower and guarantor (other than the Company) and substantially all of the assets of each borrower and guarantor, subject to certain exceptions. The Initial Term Loan and loans under the Revolving Facility will mature on the date that is the earliest of (a) August 1, 2027, (b) the date on which all amounts outstanding under the 2022 Credit Agreement have been declared or have automatically become due and payable under the terms of the Credit Agreement and (c) the date that is ninety-one (91) days prior to the maturity date of any Junior Debt (as defined in the 2022 Credit Agreement) unless certain liquidity conditions are satisfied.

The proceeds of the Initial Term Loan and Revolving Facility were used to finance the IPG transaction and fund fees and expenses incurred in connection therewith and thereafter may be used to fund acquisitions, ongoing working capital needs and other growth capital investments and to pay fees and expenses in connection therewith. The interest rate for each loan under the Credit Facilities is calculated, at the option of the Borrowers, (a) in the case of a Term Loan, at either the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 5.50%, or the base rate plus 4.50% and (b) in the case of a Revolving Loan, at either the Adjusted Term SOFR Rate plus 3.50%, or the base rate plus 2.50%. A commitment fee of (a) 2.00% of the aggregate amount of the commitments in respect of the Term Loan Facility as of the closing and (b) 2.00% of the aggregate amount of the commitments in respect of the Revolving Facility was paid as of the closing. The Company recorded $2.9 million in interest expense related to our 2022 Credit Agreement for the three and nine months ended September 30, 2022, respectively.

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

The Credit Facilities contain customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company is required to comply at certain times with certain financial covenants comprised of a minimum liquidity test commencing upon closing of the Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal quarter ending September 30, 2022. If an event of default occurs, the lenders would be entitled to take enforcement action, including foreclosure on collateral and acceleration of amounts owed under the Credit Facilities. We incurred $5.3 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 $0.2 million in interest expense related to the amortization of the debt discount and the issuance costs for the three and nine months ended September 30, 2022, respectively.

2024 Notes

In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and certain new investors. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2024 Notes, since this method was not materially different from the effective interest method. The closing of the private placement of the 2024 Notes occurred on August 19, 2020.

Holders of the 2024 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020, at a rate equal to 3.50% per annum. The 2024 Notes will mature on December 1, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $0.5 million and $2.5 million for the three and nine months ended September 30, 2022, respectively, and $1.0 million and $3.0 million for the three and nine months ended September 30, 2021, respectively.

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

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

On January 1, 2022, we adopted ASU 2020-06 using the retrospective transition method. As a result, prior period financial information and disclosures are not adjusted and continue to be reported under the accounting standards that were in effect prior to the adoption of ASU 2020-06. The adoption of ASU 2020-06 resulted in the combination of the debt and equity components of the 2024 Notes into a single debt instrument recorded in long term debt, net on the consolidated balance sheet. This resulted in a $38.1 million decrease in additional paid-in capital and a $1.3 million increase in additional paid-in capital from the previously bifurcated equity component from deferred financing fees, respectively, and an $11.7 million decrease to the January 1, 2022 accumulated deficit, representing the cumulative non-cash interest expense recognized related to the amortization of the debt discount associated with the bifurcated equity component of the 2024 Notes. These adjustments resulted in an increase of $25.1 million to the debt component of the 2024 Notes. Additionally, the allocation of the issuance costs to the equity component and all issuance costs related to the 2024 Notes are being amortized to interest expense using the effective interest method over the contractual term of the 2024 Notes which is included in the cumulative adjustment to the opening balance of accumulated deficit. The Company recorded interest expense related to the amortization of the issuance costs of $0.1 million and $0.5 million for the three and nine months ended September 30, 2022, respectively, and $2.0 million and $5.9 million for the three and nine months ended September 30, 2021, respectively.

Holders of the 2024 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2024 Notes prior to March 1, 2023. The Company may redeem for cash all or any portion of the 2024 Notes, at its option, on or after March 1, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

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

2019 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 “2019 Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) an initial secured term loan in the aggregate principal amount of $75.0 million (the “Initial Term Loan Facility”) and (ii) a delayed draw secured term loan facility in the aggregate principal amount of up to $50.0 million (the “DDTL Facility” and, together with the Initial Term Loan Facility, the “Senior Credit Facilities”), subject to the satisfaction of specified conditions. The Borrower borrowed the loan under the Initial Term Loan Facility on December 30, 2019. The proceeds of the Initial Term Loan were used to finance the transactions contemplated by the Passport Asset Purchase Agreement and pay fees and expenses incurred in connection therewith.

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

On January 8, 2021, the Company repaid all outstanding amounts owed under and terminated the 2019 Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the 2019 Credit Agreement in connection with the prepayment was $98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. As a result of this transaction, the Company recorded a loss on the repayment of debt of $19.2 million, representing the remaining unamortized debt issuance costs of $9.5 million, the make-whole premium and $35 thousand of legal expenses.

Warrant Agreement

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

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

2025 Notes

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

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

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

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

conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.

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

On January 1, 2022, we adopted ASU 2020-06 using the retrospective transition method. As a result, prior period financial information and disclosures are not adjusted and continue to be reported under the accounting standards that were in effect prior to the adoption of ASU 2020-06. The adoption of ASU 2020-06 resulted in the combination of the debt and equity components of the 2024 Notes into a single debt instrument recorded in long term debt, net on the consolidated balance sheet. This resulted in a $71.8 million decrease in additional paid-in capital and a $2.5 million increase in additional paid-in capital from the previously bifurcated equity component from deferred financing fees, respectively, and a $28.1 million decrease to the January 1, 2022 accumulated deficit, representing the cumulative non-cash interest expense recognized related to the amortization of the debt discount associated with the bifurcated equity component of the 2025 Notes. These adjustments resulted in an increase of $41.3 million to the debt component of the 2025 Notes. Additionally, the allocation of the issuance costs to the equity component and all issuance costs related to the 2025 Notes are being amortized to interest expense using the effective interest method over the contractual term of the 2025 Notes which is included in the cumulative adjustment to the opening balance of accumulated deficit. The Company recorded interest expense related to the amortization of the issuance costs of $0.4 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, and $2.5 million and $7.4 million for the three and nine months ended September 30, 2021, respectively.

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

2021 Notes

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

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

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

Upon maturity of the 2021 Notes on December 1, 2021, outstanding 2021 Notes with a principal amount of $26.7 million were settled, at the option of the holders, by converting $26.3 million aggregate principal amount of 2021 Notes to common shares and cash repayment of $0.4 million aggregate principal amount of 2021 Notes.

Convertible Senior Notes Carrying Value

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


	September 30, 2022		December 31, 2021
2024 Notes
Carrying value	$	23,879	$	89,361
Unamortized debt discount and issuance costs	402		27,690
Principal amount	$	24,281	$	117,051
Remaining amortization period (years)	2.2		2.9
Fair value(1)	$	49,290	$	195,445

2025 Notes
Carrying value	$	168,565	$	126,315
Unamortized debt discount and issuance costs	3,935		46,185
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	3.0		3.8
Fair value(1)	$	215,625	$	177,251

————————

(1)Fair values for notes are derived from available trading prices closest to the respective balance sheet date.

Note 11. Commitments and Contingencies

Commitments

Letters of Credit

As of September 30, 2022 and December 31, 2021, the Company was party to irrevocable standby letters of credit with a bank for $13.1 million and $15.4 million, respectively, for the benefit of regulatory authorities, real estate and risk-sharing agreements. As such, we held $13.1 million and $15.4 million, respectively, in restricted cash and restricted investments as collateral as of September 30, 2022 and December 31, 2021. The letters of credit have current expiration dates between December 2022 and March 2032 and will automatically extend without amendment for an additional one-year period and will continue to automatically extend after each one-year term from the expiry date unless the bank elects not to extend beyond the initial or any extended expiry date.

Indemnifications

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

Pre-IPO Investor Registration Rights Agreement

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

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

Guarantees

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

Reinsurance Agreements

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

At the Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption of the financial risks by Molina of the D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare Advantage Organization and the D-SNP Business is transferred to Molina. The Company and EVH Passport continued to administer the D-SNP Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business was officially transferred to Molina effective September 1, 2021. As of September 30, 2022, there are no material outstanding amounts under this reinsurance agreement.

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. Revenue associated with the UPMC Reseller Agreement in the three and nine months ending September 30, 2022 was $0.1 million and $1.2 million, respectively, and is in wind-down.

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 reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the IPG acquisition, the Company has recorded a partial TRA liability of $42.9 million as of September 30, 2022, which represents 85%

of the deferred tax assets related to the Company’s unrealized tax benefits on historical pre-IPO losses and tax basis increases from exchanges, offset with the related valuation allowance.

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

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, a second amended complaint was filed on June 8, 2020, and a third amended complaint, now titled Plymouth County Retirement System v. Evolent Health, Inc., Frank Williams, Nicholas McGrane, Seth Blackley, was filed on December 2, 2021. On July 13, 2022, the parties to the class action executed a term sheet for settlement of the litigation, subject to documentation of the settlement and approval of the court after notice to class members. On August 2, 2022, the lead plaintiff in the case filed an unopposed motion seeking preliminary approval of the settlement and related exhibits, including draft notice to class members and a proposed final order. The settlement stipulation is subject to preliminary and final approval by the court. The Final Settlement Hearing is scheduled for November 18, 2022. If the settlement is approved, we expect that the agreed-upon settlement payment of $23.5 million will be funded entirely by applicable directors’ and officers’ liability insurance. As such, we do not expect to incur a significant net loss or cash outflow as a result of the settlement of this matter.

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

Credit and Concentration Risk

The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of September 30, 2022, approximately 98.2% of our $194.8 million of cash and cash equivalents, restricted cash and restricted investments 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 short-term trade accounts receivable, excluding pharmacy claims receivable and premiums receivable, as of September 30, 2022 and December 31, 2021:


	September 30, 2022	December 31, 2021
Cook County Health and Hospitals System	30.1%	*
Florida Blue Medicare, Inc.	*	46.4%
Molina Healthcare	*	10.4%
Bright Health Management, Inc.	12.2%	*

————————

* 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 nine months ended September 30, 2022 and 2021:


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022	2021	2022	2021
Cook County Health and Hospitals Systems	21.2%	29.0%	23.0%	29.0%
Florida Blue Medicare, Inc.	13.7%	13.8%	12.5%	14.2%

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 2032. Under the lease agreements, in addition to base rent, the Company is generally responsible for operating and maintenance costs and related fees. Several of these agreements include tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability on our consolidated balance sheets equal to the difference between rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis over the terms of the leases. The Company’s primary office location is in Arlington, Virginia, which has served as its corporate headquarters since 2013. The Arlington, Virginia office lease expires in January 2032. 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 $2.3 million and $3.8 million in letters of credit as of September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, the Company held $2.3 million

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

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


Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required
Arlington, VA	9.3	$	33,212	$	1,579
Riverside, IL	8.5	38,940		232
Edison, NJ	3.6	1,839		222
Alpharetta, GA	3.0	1,409		—
Pune, India	1.0	621		—
Brea, CA	4.7	4,304		—

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	2,221	$	2,417	$	6,726	$	9,672
Variable lease cost	1,599		1,183		4,096		3,696
Total lease cost	$	3,820	$	3,600	$	10,822	$	13,368

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


	Operating lease expense
2022	$	2,756
2023	10,865
2024	10,595
2025	10,012
2026	8,987
Thereafter	40,377
Total lease payments	83,592
Less:
Interest	18,699
Present value of lease liabilities	$	64,893

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


	September 30, 2022
Weighted average discount rate	6.34	%
Weighted average remaining lease term	8.0

Note 13. Income (Loss) Per Common Share

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Income (loss) from continuing operations	$	2,123	$	(13,040)	$	(7,352)	$	(33,337)
Income (loss) from discontinued operations, net of tax	—		—		(463)		1,383
Net income (loss) attributable to common shareholders of Evolent Health, Inc.	$	2,123	$	(13,040)	$	(7,815)	$	(31,954)

Weighted-average common shares outstanding - basic	95,286		85,800		91,643		85,306
Incremental diluted shares from stock options	1,915		—		—		—
Incremental diluted shares from Restricted stock units ("RSUs"), performance-based RSUs (“PSUs”) and leveraged stock units ("LSUs")	2,107		—		—		—
Convertible notes	—		—		—		—
Weighted-average common shares outstanding - diluted	99,308		85,800		91,643		85,306

Income (loss) per common share
Basic:
Continuing operations	$	0.02	$	(0.15)	$	(0.08)	$	(0.39)
Discontinued operations	—		—		(0.01)		0.02
Basic income (loss) per share attributable to common shareholders of Evolent Health, Inc.	$	0.02	$	(0.15)	$	(0.09)	$	(0.37)
Diluted:
Continuing operations	$	0.02	$	(0.15)	$	(0.08)	$	(0.39)
Discontinued operations	—		—		(0.01)		0.02
Diluted income (loss) per share attributable to common shareholders of Evolent Health, Inc.	$	0.02	$	(0.15)	$	(0.09)	$	(0.37)

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

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


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022	2021	2022	2021
Restricted stock units ("RSUs"), performance-based RSUs (“PSUs”) and leveraged stock units ("LSUs")	—	2,012	1,818	1,700
Stock options	—	2,004	1,858	2,008
Convertible senior notes	9,007	12,696	10,714	12,696
Total	9,007	16,712	14,390	16,404

Note 14. Stock-based Compensation

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


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022	2021	2022	2021
Award Type


Stock options	$	78	$	274	$	331	$	945
RSUs	4,830		2,381		12,778		6,782
LSUs	387		995		1,544		2,302
PSUs	1,697		745		4,697		1,725
Total compensation expense by award type	$	6,992	$	4,395	$	19,350	$	11,754

Line Item
Cost of revenue	$	1,024	$	131	$	2,986	$	1,618
Selling, general and administrative expenses	5,968		4,264		16,364		10,136
Total compensation expense by financial statement line item	$	6,992	$	4,395	$	19,350	$	11,754

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

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


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022	2021	2022	2021
RSUs	87	134	1,067	1,162
PSUs	—	—	479	319

Note 15. Income Taxes

For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the full year, adjusted for discrete items recognized during the interim period. Discrete items (e.g., significant or unusual items) are separately recognized in the quarter during which they occur and can cause the effective tax rate to vary from quarter to quarter.

An income tax benefit of $(45.5) million and $(44.5) million and was recognized for the three and nine months ended September 30, 2022, respectively, which resulted in effective tax rates of 104.9% and 85.8%, respectively. An income tax expense of $0.2 million and $0.9 million was recognized for the three and nine months ended September 30, 2021, respectively, which resulted in effective tax rates of (1.8)% and (2.9)%, 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 benefit recorded during the three and nine months ended September 30, 2022 primarily relates to the $46.8 million reduction in the valuation allowance resulting from deferred tax liabilities established as part of the IPG acquisition accounting, partially offset by state and foreign taxes. The income tax expense recorded during the three and nine months ended September 30, 2021, primarily relates to foreign taxes.

As of December 31, 2021, the Company had unrecognized tax benefits of $0.6 million that, if recognized, would not affect the effective tax rate due to the valuation allowance against its net deferred tax asset. As of September 30, 2022, the Company has additional unrecognized tax benefits of $0.4 million that, if recognized, would affect the effective tax rate. The Company is not currently subject to income tax audits in any U.S., state, or foreign jurisdictions for any tax year.

Tax Receivables Agreement

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

Note 16. Investments in Equity Method Investees

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

interest, however, the Company is not the primary beneficiary since it does not have the power to direct activities, therefore, the Company did not consolidate the VIEs.

As of September 30, 2022 and December 31, 2021, the Company’s economic interests in its equity method investments ranged between 4% and 38% and 4% and 39%, respectively, and voting interests in its equity method investments ranged between 25% and 40%, respectively. The Company determined that it has significant influence over these entities but that it does not have control over any of the entities. Accordingly, the investments are accounted for under the equity method of accounting and the Company is allocated its proportional share of the entities’ earnings and losses for each reporting period. The Company’s proportional share of the gain from these investments was approximately $1.4 million and $3.9 million for the three and nine months ended September 30, 2022, respectively, and $0.1 million and $12.7 million for the three and nine months ended September 30, 2021, 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 $5.0 million and $12.5 million for the three and nine months ended September 30, 2022, respectively, and $4.0 million and $12.6 million for the three and nine months ended September 30, 2021, respectively.

Note 17. Fair Value Measurement

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

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

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

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

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

Recurring Fair Value Measurements

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


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Liabilities
Contingent consideration(1)	$	—	$	—	$	95,700	$	95,700
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	95,700	$	95,700


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

(1) Represents the fair value of earn-out consideration related to the IPG and Vital transactions as described in Note 4.

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

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

As discussed in Note 4, the acquisitions of IPG and Vital Decisions include a provision for additional equity consideration, at the Company’s option, contingent upon the Company obtaining certain performance metrics. The earnout period for the Vital Decisions contingent considering is the three months ending December 31, 2022, and the earnout periods for IPG are the four months ended December 31, 2022 and the nine months ended September 30, 2023. The fair value of the contingent equity considerations was estimated based on the real options approach, a form of the income approach, which estimated the probability of the Company achieving future revenues under the agreement. The significant unobservable inputs used in the fair value measurements of the IPG and Vital Decisions contingent considerations are the risk-neutral (probability weighted) earnout consideration and the applicable discount rate. A significant increase in the risk-neutral (probability weighted) earnout consideration or decrease in discount rate in isolation would result in a significantly higher fair value of the contingent consideration.

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


	For the Nine Months Ended September 30,
	2022		2021
Balance as of beginning of period	$	28,700	$	13,730
Additions	75,000		—
Settlements	—		(13,730)
Unrealized gain, net	(8,000)		—
Balance as of end of period	$	95,700	$	—

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

September 30, 2022

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

95,700

Real options approach

Risk-neutral expected earnout consideration

95,699

Weighted average discount rate

12.2

December 31, 2021

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Contingent consideration

28,700

Real options approach

Risk-neutral expected earnout consideration

30,935

Discount rate

6.04

Nonrecurring Fair Value Measurements

In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. This includes assets and liabilities recorded in business combinations or asset acquisitions, goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value.

Other Fair Value Disclosures

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

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

Note 18. Related Parties

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

As discussed in Note 16, the Company had economic interests in several entities that are accounted for under the equity method of accounting. The Company has allocated its proportional share of the investees’ earnings and losses each reporting period. In addition, Evolent has entered into services agreements with certain of the entities to provide certain management, operational and support services to help the entities manage elements of their service offerings.

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

The following table presents assets and liabilities attributable to our related parties (in thousands):


	September 30, 2022		December 31, 2021
Assets
Accounts receivable, net	$	10,752	$	2,719
Prepaid expenses and other current assets	—		15
Prepaid expenses and other noncurrent assets	884		4,877

Liabilities
Accounts payable	$	432	$	1,967
Accrued liabilities	954		1,120
Reserve for claims and performance-based arrangements	—		734

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


	For the Three Months Ended September 30, 2022				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	36,321	$	9,775	$	111,195	$	35,718

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses)	30,121		751		93,266		1,850
Selling, general and administrative expenses	443		74		745		186

Note 19. Repositioning and Other Changes

We continually assess opportunities to improve operational effectiveness and efficiency to better align our expenses with revenues, while continuing to make investments in our solutions, systems and people that we believe are important to our long-term goals. 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 that will provide future benefit to the Company. The Repositioning Plan concluded in the fourth quarter of 2021.

The following table provides a summary of our total costs associated with the Repositioning Plan by major type of cost (in thousands):


	Cumulative Costs Incurred through December 31, 2021		Incurred For the Nine Months Ended September 30, 2021
Severance and termination benefits	$	185	$	185
Office space consolidation	2,742		2,071
Professional services	5,666		3,787
Total	$	8,593	$	6,043

Note 20. Segment Reporting

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 care management and physician-oriented total cost of care solutions, along with the New Century Health and Evolent Care Partners brands.

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

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

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

Adjusted EBITDA is defined as net income (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 gain on transfer of membership, loss on extinguishment/repayment of debt, net, gain from equity method investees, changes in fair value of contingent consideration, change in the tax receivable agreement liability, other income (expense), net, repositioning costs, stock-based compensation expense, severance costs, amortization of contract cost assets, strategy and shareholder advisory services, acquisition-related costs and gain (loss) from discontinued operations.

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

The following tables present our segment information (in thousands):


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated Total
Revenue
For the Three Months Ended September 30, 2022
Total revenue	$	107,033	$	245,257	$	295	$	352,585	$	—	$	352,585

For the Three Months Ended September 30, 2021
Total revenue	$	63,315	$	159,614	$	(458)	$	222,471	$	—	$	222,471


	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Consolidated Total
For the Three Months Ended September 30, 2022
Adjusted EBITDA	$	18,507	$	16,303	$	34,810	$	(6,755)	$	28,055

For the Three Months Ended September 30, 2021
Adjusted EBITDA	$	(3,353)	$	23,883	$	20,530	$	(6,765)	$	13,765


	Evolent Health Services		Clinical Solutions		Intersegment Eliminations		Subtotal		Corporate (1)		Consolidated Total
Revenue
For the Nine Months Ended September 30, 2022
Total revenue	$	307,147	$	663,060	$	(626)	$	969,581	$	—	$	969,581

For the Nine Months Ended September 30, 2021
Total revenue	$	223,924	$	437,031	$	(1,356)	$	659,599	$	—	$	659,599

	Evolent Health Services		Clinical Solutions		Subtotal		Corporate (1)		Consolidated Total
For the Nine Months Ended September 30, 2022
Adjusted EBITDA	$	41,854	$	51,988	$	93,842	$	(19,793)	$	74,049

For the Nine Months Ended September 30, 2021
Adjusted EBITDA	$	9,120	$	53,456	$	62,576	$	(20,558)	$	42,018

————————

(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 income (loss) attributable to common shareholders of Evolent Health, Inc. (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss) attributable to common shareholders of Evolent Health, Inc.	$	2,123	$	(13,040)	$	(7,815)	$	(31,954)
Less:
Interest income	425		120		765		311
Interest expense	(4,754)		(6,367)		(9,143)		(18,978)
Benefit from (provision for) income taxes	45,516		(234)		44,498		(936)
Change in tax receivable agreement liability	(42,870)		—		(42,870)		—
Depreciation and amortization expenses	(17,196)		(14,859)		(47,414)		(44,962)
Gain on transfer of membership	—		—		—		22,969
Loss on extinguishment/repayment of debt, net	(10,192)		—		(10,192)		(19,158)
Gain from equity method investees	1,392		63		3,940		12,725
Change in fair value of contingent consideration	12,700		225		5,822		819
Other income (expense), net	(345)		(41)		130		(73)
Repositioning costs	—		—		—		(6,043)
Stock-based compensation expense	(6,992)		(4,395)		(19,350)		(11,754)
Severance costs	(996)		—		(1,035)		(52)
Amortization of contract cost assets	(25)		(110)		(79)		(433)
Strategy and shareholder advisory expenses	—		—		—		(6,513)
Acquisition costs	(2,595)		(1,207)		(6,473)		(3,277)
Gain (loss) from discontinued operations (1)	—		—		(463)		1,383
Adjusted EBITDA	$	28,055	$	13,765	$	74,049	$	42,018

————————

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

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

Note 21. Reserve for Claims and Performance-Based Arrangements

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

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

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

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

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

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

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

Activity in reserves for claims and performance-based arrangements was as follows (in thousands):


	For the Nine Months Ended September 30,
	2022						2021
	EHS (1)		Clinical Solutions (1)		Total		EHS (1)		Clinical Solutions (1)		Total
Balance, beginning of period	$	25,618	$	145,676	$	171,294	$	56,295	$	122,532	$	178,827
Incurred health care costs:
Current year to date period	—		471,502		471,502		6,622		376,506		383,128
Prior year to date period	(5,714)		(2,440)		(8,154)		527		92		619
Total claims incurred	(5,714)		$	469,062	463,348		7,149		376,598		383,747
Claims paid related to:
Current year to date period	—		(369,708)		(369,708)		(20,801)		(229,315)		(250,116)
Prior year to date period	(10,846)		(118,390)		(129,236)		(19,174)		(101,406)		(120,580)
Total claims paid	(10,846)		(488,098)		(498,944)		(39,975)		(330,721)		(370,696)
Balance, end of period	$	9,058	$	126,640	$	135,698	$	23,469	$	168,409	$	191,878

————————

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

Note 22. Supplemental Cash Flow Information

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


	For the Nine Months Ended September 30,
	2022		2021
Supplemental Disclosure of Non-cash Investing and Financing Activities
Accrued property and equipment purchases	$	1,014	$	497
Class A common stock issued in connection with business combinations	130,175		—
Class A common stock issued in connection with debt repayment	101,999		—
Accrued net working capital adjustment with business combinations	791		—
Effects of Leases
Operating cash flows from operating leases	14,453		9,854
Leased assets disposed of (obtained in) exchange for operating lease liabilities	4,305		(2,157)
Supplemental Disclosures
Cash paid for interest	(6,269)		(3,771)
Cash paid for taxes, net	(955)		(734)

Note 23. Subsequent Events

Goodwill Impairment

On October 11, 2022, our Evolent Health Services segment was notified by Bright Health Group that it intended to exit its Individual and Family lines of business. Due to an expected decrease in projected future cash flows which could impact our estimated fair value, our existing goodwill in the EHS segment may require an adjustment. Such adjustment could be material. As of the date of this filing, the Company has not yet completed the analysis due to the complexities and time involved in determining the implied fair value of the goodwill. The analysis will be completed in the fourth quarter of 2022. As of September 30, 2022, goodwill in our EHS segment is $214.2 million. If the fair value of the EHS segment is determined to be less than the carrying value, an adjustment to goodwill will be required, and such amount could be material.

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 2021 Form 10-K, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our current reports on Form 8-K filed in 2022.

INTRODUCTION

Background

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

Business Overview

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

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

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

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

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

Recent Events

Evolent Health’s Response to COVID-19

Due to the nature of the services we provide and market dynamics in our end markets and with our significant customers, to date the COVID-19 pandemic has not materially impacted our financial condition, the results of operations, or our outlook. As of September 30, 2022, we had cash and cash equivalents of $156.8 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 pandemic has also affected global access to capital and caused significant volatility in financial markets. In addition, we have and are experiencing varying levels of inflation resulting in part from higher labor costs. Significant deterioration of the U.S. and global economies or rapid increases in inflation could have an adverse impact on our future liquidity needs. Although the impact

of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of the pandemic on medical costs (including in oncology and cardiology), our partners and the global economy is uncertain and will depend on various factors, including the scope, severity and duration of the pandemic, including resurgence of COVID-19 cases due to more contagious variants such as Omicron and the effectiveness of vaccines. A prolonged economic downturn or recession resulting from the pandemic or more broadly, including from macroeconomic conditions 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 uninterrupted high-quality service to our partners. Evolent has deployed a multi-faceted response to COVID-19, overseen by its Emergency Preparedness Team, led by the General Counsel, Chief Compliance Officer and Chief People and Brand Officer, that focuses on maintaining its workforce in a manner that does not disrupt service delivery or operations. Evolent is closely monitoring and overseeing any issues of noncompliance or deficiencies with client operational service level agreements and continuing to review contractual business requirements in light of state and federal mandates, emergency laws and orders, and available financial support opportunities. Evolent is also mindful of the impact COVID-19 has on its vendors and subcontractors and we will continue to work with them regarding our collective obligations to Evolent’s customers. We require a COVID-19 Business Continuity Attestation from subcontractors and vendors, confirming that operational and financial obligations will be met and aiming to ensure that privacy and security risks or incidents can be mitigated and disclosed in a timely manner.

Evolent has instituted a voluntary return to the office. Fully vaccinated employees and those who have provided an approved religious or medical exemption are permitted to return to the Company’s offices in-person.

Summary of Impact of COVID-19

In evaluating the impact of COVID-19 on our business, we considered, among other factors, the nature of the services we provide, end market trends and outlook and customer-specific trends. In addition, we focused on possible changes in membership and medical utilization trends. Based on our analysis, we do not believe that our overall membership has been significantly impacted by the pandemic to date. With regards to medical utilization trends, in particular in our two largest specialties oncology and cardiology, while forecasting future impact is challenging, our analysis suggests that utilization during the nine months ended September 30, 2022 (as measured by authorizations per thousand members) is similar to what it was before the pandemic.

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

Impact of Inflation

We experience pricing pressures in the form of competitive prices in addition to rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits and facility leases. We do not believe these impacts were material to our revenues or net income during the nine months ended September 30, 2022. However, significant sustained inflation driven by the macroeconomic environment or other factors could negatively impact our margins, profitability and results of operations in future periods.

Customers

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


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2022	2021	2022	2021
Cook County Health and Hospitals Systems	21.2%	29.0%	23.0%	29.0%
Florida Blue Medicare, Inc.	13.7%	13.8%	12.5%	14.2%

Transactions

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

Acquisition of IPG

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

Total merger consideration, net of cash on hand and certain closing adjustments, was $461.7 million, based on the closing price of the Company’s Class A common stock on the NYSE on August 1, 2022. The merger consideration consisted of $256.5 million of cash consideration, 3.7 million shares of Class A common stock, fair valued at $130.2 million as of August 1, 2022, and an earn-out of up to $87.0 million, fair valued at $75.0 million as of August 1, 2022 is payable in cash and/or shares of the Company’s Class A Common Stock, at the Company’s option. IPG will report into Evolent’s specialty care management offering, New Century Health, and will be consolidated into the Company’s Clinical Solutions segment. Refer to “Part I - Item 1. Financial Statements - Note 4” for additional discussion regarding the IPG transactions.

Ares Secured Credit Facilities

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

The interest rate for each loan under the 2022 Credit Facilities is calculated, at the option of the Borrowers, (a) in the case of the Term Loan, at either the Adjusted Term SOFR Rate (as defined in the 2022 Credit Agreement) plus 5.50%, or the base rate plus 4.50% and (b) in the case of a Revolving Loan, at either the Adjusted Term SOFR Rate plus 3.50%, or the base rate plus 2.50%. A commitment fee of (a) 2.00% of the aggregate amount of the commitments in respect of the Term Loan Facility as of the Closing Date and (b) 2.00% of the aggregate amount of the commitments in respect of the Revolving Facility was paid as of the Closing Date. Refer to “Part I - Item 1. Financial Statements - Note 10” for additional discussion regarding the 2022 Credit Facilities.

2024 Notes Conversion

On August 11, 2022, the Company entered into exchange agreements with certain holders of the 2024 Notes. Pursuant to the agreements, these holders exchanged $92.8 million in aggregate principal amount of such notes for shares of the Company’s Class A common stock. On August 17 and 18, 2022, the Company consummated the exchanges and issued an aggregate of 5,394,165 shares of Class A common stock to the holders. The August 2022 exchanges of the 2024 Notes resulted in a $10.2 million loss on extinguishment/repayment of debt, net, on the consolidated statements of operations and comprehensive income (loss).

Subsequent Events

Critical Accounting Policies and Estimates

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

If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). We use discounted cash flow analyses and market multiple analyses in order to estimate reporting unit fair values. Discounted cash flow analyses rely on significant judgement and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins. These assumptions are based on estimates of future revenue and earnings after considering such factors as general economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The weighted average cost of capital is based on market-based factors/inputs but also considers the specific risk characteristics of the reporting unit’s cash flow forecast. A significant change to these estimates and assumptions could cause the estimated fair values of our reporting units and intangible assets to decline and increase the risk of an impairment charge to earnings. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

On October 31, 2021, the Company performed its annual goodwill impairment review for fiscal year 2021. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest fair value of our single reporting unit was below the carrying value. As a result, a quantitative goodwill impairment analysis was not required.

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the nine months ended September 30, 2022. We will perform our annual impairment test on October 31, 2022, including assessing the qualitative and quantitative indicators from the shutdown of Bright Health Group’s Individual and Family Plans line of business.

Adoption of New Accounting Standards

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

cash conversion feature or convertible instruments with a beneficial conversion feature and no longer permits the use of the treasury stock method from calculating earnings per share. As a result, after adopting the ASU’s guidance, we will not separately present in equity an embedded conversion feature of such debt. Instead, we will account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The Company adopted the standard using a modified retrospective method as of January 1, 2022, with adjustments which reduced additional paid-in capital by $106.2 million and increased retained earnings by $39.8 million and increased the net carrying amount of the 2024 Notes and 2025 Notes by $25.1 million and $41.3 million.

RESULTS OF OPERATIONS

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

Key Components of our Results of Operations

Revenue

We derive revenue primarily from platform and operations services.

Platform and Operations Services Revenue

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.

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.

Selling, General and Administrative Expenses

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

Depreciation and Amortization Expense

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

Lives on Platform and PMPM Fees

Total Lives on Platform are calculated by summing our Evolent Health Services Lives on Platform and our Clinical Solutions Lives on Platform. Evolent Health Services Lives on Platform are calculated by summing members on our value-based care and comprehensive health plan administrative platform. Clinical Solutions Lives on Platform are calculated by summing the Clinical Solutions Lives on Platform in our Performance suite and New Century Health Technology and Services suite Lives on Platform. Clinical Solutions Lives on Platform in our Performance suite are calculated by summing members covered for oncology specialty care services and members covered for cardiology specialty care services for contracts not under ASO arrangements. New Century Health Technology and Services suite Lives on Platform are calculated by summing members covered for oncology specialty care services, members covered for cardiology specialty care services and members covered for advance care planning services for contracts under ASO arrangements. Members covered for more than one category are counted in each category. Clinical Solutions Cases are calculated by summing the number of individuals receiving services through our IPG and Vital Decisions programs in a given period.

Evolent Health Services average per member per month (“PMPM”) fee is defined as platform and operations revenue pertaining to the Evolent Health Services segment during the period reported divided by the average of the beginning and ending Evolent Health Services segment membership during the period reported divided by the number of months in the period. Clinical Solutions Performance suite Average PMPM fee is defined as platform and operations services revenue pertaining to our Clinical Solutions Performance suite during the period reported divided by the average of the beginning and ending Clinical Solutions Performance suite membership during the period reported divided by the number of months in the period. New Century Health Technology and Services suite Average PMPM fee is defined as platform and operations revenue pertaining to the New Century Health Technology and Services suite during the period reported divided by the average of the beginning and ending New Century Health Technology and Services suite membership during the period reported divided by the number of months in the period. Clinical Solutions Revenue per Case is calculated by the revenue pertaining to IPG and Vital divided by the number of cases for a given period.

Management uses lives on platform, PMPM fees, cases and revenue per case because we believe that they provide insight into the unit economics of our services. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance.

Evolent Health, Inc. Consolidated Results


(in thousands, except percentages)	For the Three Months Ended September 30,						Change Over Prior Period			For the Nine Months Ended September 30,						Change Over Prior Period
	2022			2021			$		%	2022			2021			$		%
Revenue	$	352,585		$	222,471		$	130,114	58.5%	$	969,581		$	659,599		$	309,982	47.0%

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	266,617			163,126			103,491		63.4%	736,061			493,071			242,990		49.3%
Selling, general and administrative expenses	68,521			51,292			17,229		33.6%	186,408			152,582			33,826		22.2%
Depreciation and amortization expenses	17,196			14,859			2,337		15.7%	47,414			44,962			2,452		5.5%
Change in fair value of contingent consideration	(12,700)			(225)			(12,475)		(5,544.4)%	(5,822)			(819)			(5,003)		(610.9)%
Total operating expenses	339,634			229,052			110,582		48.3%	964,061			689,796			274,265		39.8%
Operating income (loss)	$	12,951		$	(6,581)		$	19,532	296.8%	$	5,520		$	(30,197)		$	35,717	118.3%

Cost of revenue as a % of revenue	75.6		%	73.3		%				75.9		%	74.8		%
Selling, general and administrative expenses as a % of revenue	19.4		%	23.1		%				19.2		%	23.1		%

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

Revenue

Total revenue increased by $130.1 million, or 58.5%, to $352.6 million for the three months ended September 30, 2022, as compared to 2021. This increase is primarily due to the addition of new partners and expansion with existing partners.

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


	For the Three Months Ended September 30,
	2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions
Medicaid	$	60,054	$	41,857	$	79,664	$	51,829
Medicare	6,335		4,816		111,632		105,219
Commercial and other	40,939		16,184		53,961		2,566
Total	$	107,328	$	62,857	$	245,257	$	159,614

Revenue from our Evolent Health Services segment increased by $44.5 million for the three months ended September 30, 2022, as compared to 2021 due to the addition of new partners. Revenue from our Clinical Solutions segment increased by $85.6 million for three months ended September 30, 2022 as compared to 2021 due to new partner additions as well as expansion into new markets.

The following table represents the Company’s lives on platform as of September 30, 2022 and 2021 and PMPM fees for the three months ended September 30, 2022 and 2021 (Lives on Platform in thousands):


	Lives on Platform/ Cases during Period		Average PMPM Fees / Revenue per Case
	September 30,		For the Three Months Ended September 30,
	2022	2021	2022		2021
Evolent Health Services	2,123	1,564	$	16.41	$	13.19
Clinical Solutions
Performance suite	2,498	1,471	27.02		34.16
New Century Health Technology and Services suite	14,853	11,670	0.29		0.36
Cases	13	—	2,201.00		—

We had 52 and 41 operating partners as of September 30, 2022 and 2021, respectively.

Cost of Revenue

The following table provides a summary of our total cost of revenue by segment (amounts in thousands):


	For the Three Months Ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	53,635	$	42,651	$	212,377	$	119,894	$	605	$	581	$	266,617	$	163,126

Cost of revenue increased by $103.5 million, or 63.4%, to $266.6 million for the three months ended September 30, 2022, as compared to 2021, principally as a result of the growth in our revenue. By key line items, the increase was driven by approximately $68.6 million due to higher claims activity in our Clinical Solutions and Evolent Health Services segments, $11.7 million due to higher personnel costs due to increased headcount and benefits to employees, $15.1 million of surgical management device costs at IPG and $5.4 million in higher professional fees primarily due to costs incurred for contracts that went live during the quarter and third-party service fees for existing customers. Approximately $1.0 million and $0.1 million of total personnel costs was attributable to stock-based compensation expense for the three months ended September 30, 2022 and 2021, respectively. Cost of revenue represented 75.6% and 73.3% of total revenue for the three months ended September 30, 2022 and 2021, respectively. Our cost of revenue increased as a percentage of our total 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 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 (amounts in thousands):


	For the Three Months Ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	26,867	$	26,826	$	16,412	$	4,314	$	25,242	$	20,152	$	68,521	$	51,292

Selling, general, and administrative expenses increased by $17.2 million, or 33.6%, to $68.5 million for the three months ended September 30, 2022, as compared to 2021. The increase is driven primarily by the acquisitions of Vital Decisions and IPG. By key line items, the increase was driven by higher personnel fees due to increased headcount and expected benefits accruals to employees of $8.1 million, higher stock compensation of $1.7 million, higher insurance costs of $0.5 million and technology services due to higher headcount of $2.6 million. Approximately $6.0 million and $4.3 million of total personnel costs were attributable to stock-based compensation expense for the three months ended September 30, 2022 and 2021, respectively. Acquisition and severance costs accounted for approximately $3.6 million and $1.2 million of total selling, general and administrative expenses for the three months ended September 30, 2022 and 2021, respectively. Selling, general and administrative expenses represented 19.4% and 23.1% of total revenue for the three months ended September 30, 2022, as compared to 2021, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to decrease as a percentage of our total revenue over the long term due to cost saving initiatives completed in the fourth quarter of 2021.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $2.3 million, or 15.7%, to $17.2 million for the three months ended September 30, 2022, as compared to 2021 due primarily to amortization of intangible assets acquired through our asset acquisitions and business combinations. 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.

Change in Fair Value of Contingent Consideration

We recorded a (gain) loss on change in fair value of contingent consideration of $(12.7) million and $(0.2) million for the three months ended September 30, 2022 as compared to 2021. The change in fair value of contingent consideration for the three months ended September 30, 2022 is due to changes in the fair values of contingent liabilities incurred as a result of the acquisition of Vital Decisions in October 2021 and IPG in August 2022. The change in fair value of contingent consideration for the three months ended September 30, 2021 is due to liabilities incurred from entering into the warrant agreements as part of the 2019 Credit Agreement.

Comparison of the Results for the Nine Months Ended September 30, 2022 to 2021

Revenue

Total revenue increased by $310.0 million, or 47.0%, to $969.6 million for the nine months ended September 30, 2022, as compared to 2021. This increase is primarily due to the addition of new partners and expansion with existing partners.

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


	For the Nine Months Ended September 30,
	2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions
Medicaid	$	183,542	$	154,850	$	226,684	$	148,816
Medicare	21,031		19,500		315,334		281,763
Commercial and other	101,948		48,207		121,042		6,463
Total	$	306,521	$	222,557	$	663,060	$	437,042

Revenue from our Evolent Health Services segment increased by $84.0 million for the nine months ended September 30, 2022, as compared to 2021 due to expansion of services with existing customers. Revenue from our Clinical Solutions segment increased by $226.0 million for the nine months ended September 30, 2022 as compared to 2021 due to new partner additions as well as expansion into new markets within current New Century Health Technology and Services Suite partners.

The following table represents the Company’s lives on platform as of September 30, 2022 and 2021 and PMPM fees for the nine months ended September 30, 2022 and 2021 (Lives on Platform in thousands):


	Lives on Platform/ Cases during Period		Average PMPM Fees / Revenue per Case
	September 30,		For the Nine Months Ended September 30,
	2022	2021	2022			2021
Evolent Health Services	2,123	1,564	$	18.00		$	12.23
Clinical Solutions
Performance suite	2,498	1,471	32.41			28.78
New Century Health Technology and Services suite	14,853	11,670	0.30			0.38
Cases	24	—	1,472.40		—	—

Cost of Revenue

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


	For the Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	169,612	$	145,354	$	564,628	$	345,874	$	1,821	$	1,843	$	736,061	$	493,071

Cost of revenue increased by $243.0 million, or 49.3%, to $736.1 million for the nine months ended September 30, 2022, as compared to 2021, principally as a result of the growth in our revenue. By key line items, the increase was driven by approximately $164.7 million due to higher claims activity in our Clinical Solutions and Evolent Health Services segments, $32.9 million of higher personnel costs due to increased headcount, employee benefits and expected bonus accruals to employees, $22.6 million in higher professional fees primarily due to costs incurred for contracts that went live during the quarter and third-party service fees for existing customers and $15.1 million of surgical management device costs at IPG. Approximately $3.0 million and $1.6 million of total personnel costs was attributable to stock-based compensation expense for the nine months ended September 30, 2022 and 2021, respectively. Cost of revenue represented 75.9% and 74.8% of total revenue for the nine months ended September 30, 2022 and 2021, respectively. Our cost of revenue increased as a percentage of our total 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 revenue over the longer-term subject to the composition of our growth.

Selling, General and Administrative Expenses

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


	For the Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
	Evolent Health Services				Clinical Solutions				Corporate				Total
Total	$	69,264	$	69,555	$	43,398	$	21,086	$	73,746	$	61,941	$	186,408	$	152,582

Selling, general, and administrative expenses increased by $33.8 million, or 22.2%, to $186.4 million for the nine months ended September 30, 2022, as compared to 2021, principally as a result of acquisitions. By key line items, the increase was driven by higher personnel fees due to increased headcount and expected benefits accruals to employees of $26.1 million, higher stock compensation of $6.3 million, technology services due to higher headcount of $6.8 million and higher insurance costs of $1.0 million offset, in part by lower professional fees from the Repositioning Plan and shareholder advisory services of $9.2 million and the termination of certain leases of $2.6 million. Approximately $16.4 million and $10.1 million of total personnel costs were attributable to stock-based compensation expense for the nine months ended September 30, 2022 and 2021, respectively. Acquisition and severance costs accounted for approximately $7.5 million and $3.3 million of total selling, general and administrative expenses for the nine months ended September 30, 2022 and 2021, respectively. Selling, general and administrative expenses represented 19.2% and 23.1% of total revenue for the nine months ended September 30, 2022, as compared to 2021, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to decrease as a percentage of our total revenue over the long term due to cost saving initiatives completed in the fourth quarter of 2021.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $2.5 million, or 5.5%, to $47.4 million for the nine months ended September 30, 2022, as compared to 2021 due primarily to amortization of intangible assets acquired through our asset acquisitions and business combinations. 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.

Change in Fair Value of Contingent Consideration

We recorded a gain on change in fair value of contingent consideration of $(5.8) million for the nine months ended September 30, 2022, related to the liabilities acquired as a result of the acquisitions of Vital Decisions in October 2021 and IPG in August 2022 and $(0.8) million for the nine months ended September 30, 2021, related to liabilities incurred from entering into our warrant agreements as part of the 2019 Credit Agreement that were settled in January 2021.

Discussion of Non-Operating Results

Interest Expense

Our interest expense is primarily attributable to our 2021, 2024 and 2025 Notes as well as our 2022 and 2019 Credit Agreements with Ares Capital Corporation. We recorded interest expense (including amortization of deferred financing costs) of approximately $4.8 million and $9.1 million for the three and nine months ended September 30, 2022, respectively, and $6.4 million and $19.0 million for the three and nine months ended September 30, 2021, respectively. The decrease in interest expense during the three and nine months ended September 30, 2022 compared to 2021 is driven primarily by the adoption of ASU 2020-06 and conversion of the 2024 Notes offset, in part by interest expense incurred on our 2022 Credit Agreement See “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for the information related to interest expense.

Gain from Equity Method Investees

The Company allocated its proportional share of the investees’ earnings and losses each reporting period. The Company’s proportional share of the gain from these investments was approximately $1.4 million and $3.9 million for the three and nine months ended September 30, 2022, respectively, and $0.1 million and $12.7 million for the three and nine months ended September 30, 2021, respectively. The change in gain from equity method investees for the three and nine months ended September 30, 2022 compared to 2021 is driven primarily by the sale of our Florida equity investee’s membership during the three months ended March 31, 2021.

Gain from Transfer of Membership

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

Loss on Extinguishment/Repayment of Debt

On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the 2019 Credit Agreement with Ares Capital Corporation. The total amount paid to Ares Capital Corporation under the 2019 Credit Agreement in connection with the prepayment was $98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest.

As a result of this transaction, the Company recorded loss on the repayment of debt of $19.2 million, representing the remaining unamortized debt issuance costs of $9.5 million, the make-whole premium and legal expenses.

Change in Tax Receivable Agreement Liability

Due to the reduction in the valuation allowance resulting from deferred tax liabilities established as part of the IPG acquisition, the Company has recorded a partial TRA liability of $42.9 million as of September 30, 2022, which represents 85% of the deferred tax assets related to the Company’s unrealized tax benefits on historical pre-IPO losses and tax basis increases from exchanges, offset with the related valuation allowance.

Provision for (Benefit from) Income Taxes

An income benefit of $(45.5) million and $(44.5) million and was recognized for the three and nine months ended September 30, 2022, respectively, which resulted in effective tax rates of 104.9% and 85.8%, respectively. An income tax expense of $0.2 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, which resulted in effective tax rates of (1.8)% and (2.9)%, 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.

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 $5.5 million and $30.2 million for the nine months ended September 30, 2022 and 2021, respectively. Net cash and restricted cash used in operating activities was $47.2 million and $27.9 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, the Company had $156.8 million of cash and cash equivalents and $38.1 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, which may require us o seek sources of financing.

Cash Flows

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


	For the Nine Months Ended September 30,
	2022		2021
Net cash and restricted cash used in operating activities	$	(47,248)	$	(27,909)
Net cash and restricted cash provided by (used in) investing activities	(254,659)		38,582
Net cash and restricted cash provided by (used in) financing activities	142,395		(90,446)

Operating Activities

Cash flows used in operating activities of $47.2 million for the nine months ended September 30, 2022 were primarily due to our net loss of $7.8 million, non-cash items including depreciation and amortization expenses of $47.4 million, stock-based compensation expense of $19.4 million, deferred tax benefit of $(46.4) million, amortization of contract cost assets of $14.8 million, loss on extinguishment of debt of $10.2 million, change in fair value of contingent consideration of $(5.8) million and change in our tax receivable liability of $42.9 million. Our operating cash outflows were affected by the timing of our customer and vendor payments driven by increases in accounts receivables and reductions in reserves for claims and performance-based arrangements, accrued compensation and employee benefits and accrued liabilities contributed approximately $112.7 million to our cash outflows.

Cash flows used in operating activities of $27.9 million for the nine months ended September 30, 2021 were primarily due to our net loss of $32.0 million, a loss on the repayment and termination of our Credit Agreement of $19.2 million, a gain on the disposal of assets of $1.9 million, gain on the transfer of memberships of $23.0 million and non cash items including depreciation and amortization expenses of $45.1 million and stock-based compensation expense of $11.8 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts receivables and contract cost assets and reductions in accrued liabilities and accrued compensation and employee benefits contributed approximately $88.0 million to our cash outflows. Those cash outflows were offset, in part by increased reserves for claims and performance-based arrangements of approximately $16.8 million.

Investing Activities

Cash flows used in investing activities of $254.7 million in the nine months ended September 30, 2022 were primarily attributable to $245.0 million paid for the acquisition of IPG, $9.2 million paid for a purchase price adjustment related to our disposal of True Health New Mexico and $27.6 million of investments in internal-use software and purchases of property and equipment offset, in part by $23.0 million from the transfer of membership and release of Passport escrow and $4.2 million from returns from our equity method investments.

Cash flows provided by investing activities of $38.6 million in the nine months ended September 30, 2021 were primarily attributable to cash flows of $43.0 million from the transfer of membership and release of Passport escrow and returns of investment on equity method investments of $14.2 million offset, in part by $17.7 million from investments in internal-use software and purchases of property and equipment and $3.0 million of purchases of investments.

Financing Activities

Cash flows used in financing activities of $142.4 million in the nine months ended September 30, 2022 were primarily related to $219.7 million received from our 2022 Credit Agreement offset in part by $48.3 million of cash outflows related to claims processing services on behalf of partners and $17.4 million from taxes withheld for restricted stock unit vesting.

Cash flows used in financing activities of $90.4 million in the nine months ended September 30, 2021 were primarily related to the repayment and termination of our Credit Agreement and settlement of our outstanding warrant agreements with Ares Capital Corporation of $98.4 million, offset, in part by a $1.1 million decrease in net working capital balances held on behalf of our partners for claims processing services.

Cash flows from Discontinued Operations


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

Contractual Obligations

We believe that the amount of cash and cash equivalents on hand and cash flows from operations will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures working capital and debt service for 2022. Our estimated contractual obligations (in thousands) as of September 30, 2022, were as follows:


	2022		2023-2024		2025-2026		2027+		Total
Operating leases for facilities(1)	$	2,756	$	98,519	$	59,271	$	40,377	$	200,923
Purchase obligations related to vendor contracts	3,594		4,565		—		—		8,159
Debt interest and termination payments (2)	1,506		6,875		2,588		—		10,969
Debt principal repayment	—		24,281		172,500		225,000		421,781
Total contractual obligations	$	7,856	$	134,240	$	234,359	$	265,377	$	641,832

————————

(1)Operating leases for facilities includes $77.1 million and $40.3 million of leases not yet commenced for the 2023-2024 and 2025-2026 time periods, respectively.

(2)Debt interest and termination payments does not include potential interest payments on our floating rate 2022 Credit Facilities. The interest rate for each loan under the 2022 Credit Facilities is calculated, at the option of the Borrowers, (a) in the case of a Term Loan, at either the Adjusted Term SOFR Rate (as defined in the 2022 Credit Agreement) plus 5.50%, or the base rate plus 4.50% and (b) in the case of a Revolving Loan, at either the Adjusted Term SOFR Rate plus 3.50%, or the base rate plus 2.50%. Refer to “Part I - Item 1. Financial Statements - Note 10” for additional discussion regarding the 2022 Credit Facilities.

Accounts Receivable, net

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the nine months ended September 30, 2022, accounts receivable, net, increased due primarily to the timing of cash receipts from existing customers combined with $34.2 million of receivables acquired as part of the IPG acquisition.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments of $38.1 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $24.9 million, collateral for letters of credit required as security deposits for facility leases of $2.3 million, amounts held with financial institutions for risk-sharing arrangements of $10.9 million as of September 30, 2022. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.

Goodwill and Intangible Assets

We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

As of September 30, 2022, the Company had cash and cash equivalents and restricted cash and restricted investments of $194.8 million, which consisted of bank deposits with FDIC participating banks of $191.3 million, bank deposits in international banks of $2.0 million and investments in money market funds of $1.5 million.

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

As of September 30, 2022, we had $196.8 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. In addition, as of September 30, 2022, we had $175.0 million of aggregate principal amount in a secured term loan and $50.0 million of aggregate principal amount in a secured revolving credit facility, both of which are floating rate instruments based on the Secured Overnight Funding Rate (“SOFR”) and subject to fluctuations in interest rates. For every 1% increase in SOFR, Company would record additional interest expense of $2.3 million per annum.

Refer to the discussion in “Part I - Item 1. Financial Statements - Note 10” for additional information on our long-term debt.

Foreign Currency Exchange Risk

Beginning in 2018, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee. In general, we are a net payor of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating results as expressed in U.S. dollars. At this time, we have not entered into, but in the future, we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized a foreign currency translation losses of $0.3 million and $0.7 million for the three and nine months ended September 30, 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

We have not experienced any material impact to our internal controls over financial reporting despite most of our employees 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 of legal proceedings included within “Part I – Item 1. Financial Statements and Supplementary Data - Note 11 - Commitments and Contingencies - Litigation Matters” is incorporated by reference into this 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, 2021 (the “2021 Form 10-K”). These risk factors are supplemented for the item described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.

Increasing inflationary pressures and consumer costs may have a negative effect on our margins, profitability and results of operations.

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

We are exposed to interest rate risk under the 2022 Credit Agreement, which could cause the Company’s debt service obligations to increase significantly.

We are exposed to market risk from changes in interest rates. Both the Initial Term Loan Facility and Revolving Facility that comprise the Credit Facilities is based on the SOFR, a floating rate, subject to a minimum rate set in the Credit Agreement. The Federal Reserve has raised, and may in the future further raise, interest rates to combat the effects of recent high inflation. Any further increase in the SOFR will increase the Company’s debt service obligations, which could have a negative impact on the Company’s cash flow, financial position or operating results, including cash available for servicing the Company’s indebtedness, or result in increased borrowing costs in the future.

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

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

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

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

•incur or guarantee additional debt;

•incur certain liens;

•merge or consolidate;

•transfer or sell assets;

•make certain investments;

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

•enter into transactions with affiliates.

In addition, we are required to comply with certain financial covenants consisting of a minimum liquidity test, and, commencing on the last day of the fiscal quarter ending September 30, 2022, a total secured leverage test. As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that the Company will be able to maintain compliance with these covenants in the future and, if it fails to do so, that it will be able to obtain waivers from the lenders and/or amend the covenants. The Company’s failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness could result in an event of default, which, if not cured or waived, could result in it being required to repay these borrowings before their due date and the lenders would be entitled to foreclose on collateral. If the Company is forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected. In addition, we may be unable to access future borrowings under our revolving facility if we are unable to satisfy the applicable conditions precedent.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EVOLENT HEALTH, INC.

Exhibit Index


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

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

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

2.4*						Agreement and Plan of Merger, dated August 1, 2022, by and among Evolent Health, Inc., Evolent Health LLC, Endzone Merger Sub, Inc, TPG Growth Iceman Parent, Inc. and the Sellers’ Representative , filed as Exhibit 2.4 t o the Company ’s Form 10-Q with the SEC on August 3, 2022 and incorporated herein by reference .

4.1						Registration Rights Agreement, dated August 1, 2022, by and between Evolent Health, Inc., TPG Growth V Iceman, L.P., and the individuals in Schedule I of the agreemen t , filed as Exhibit 4.1 to the Company ’s Form 10-Q with the SEC on August 3, 2022 and incorporated herein by reference.

10.1*						Credit Agreement, by and among Evolent Health, Inc., Evolent Health LLC, certain subsidiaries of Evolent Health, Inc, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent, and ACF Finco I LP, as revolving agent and collateral agent, dated as of August 1, 2022 , filed as E xhibit 10.1 to the C ompany ’s Form 10-Q with the SEC on August 3, 2022 and incorporated herein by reference .

10.2*						Security Agreement, by and among Evolent Health, Inc., Evolent Health LLC, the other guarantors and ACF Finco I LP, as collateral agent for the benefit of the secured parties, dated as of August 1, 202 2 , filed as E xhibit 10.2 to the C ompany ’s Form 10-Q with the SEC on August 3, 2022 and incorporated herein by reference .

10.3*						Guarantee Agreement, by Evolent Health, Inc. and each of the other guarantors in favor of Ares Capital Corporation, as administrative agent for the lenders, and ACF Finco I LP, as collateral agent for the lenders, dated as of August 1, 202 2 , filed as Exhibit 10.3 to the Company ’s Form 10-Q with the SEC on A ugust 3, 2022 and incorporated herein by referenc e.

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

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

SIGNATURES

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


EVOLENT HEALTH, INC.
Registrant

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

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

Dated: November 3, 2022