# Evolent Health, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Evolent Health, Inc.](/companies/evh.md) (CIK 1628908)
- Form: 10-Q
- Filed: 2024-08-09
- Accepted by EDGAR: Aug 8, 2024, 17:59 ET
- Period: 2024-06-30
- Accession: 0001628908-24-000090
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1628908/000162890824000090/evh-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1628908/000162890824000090/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $647.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $1.29bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $540.3m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $1.08bn | us-gaap:CostOfRevenue |
| Selling, general and administrative | 3 months, 2024-04-01 to 2024-06-30 | $69.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2024-01-01 to 2024-06-30 | $148.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | $7.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | −$5.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $6.0m | us-gaap:InterestExpenseNonoperating |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $12.0m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | −$238.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $327.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $1.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$15.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 114,688,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 114,415,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $26.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-06-30 | $101.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $521.0m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $2.48bn | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $483.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $1.24bn | us-gaap:Liabilities |
| Long-term debt | at 2024-06-30 | $598.8m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-06-30 | $1.05bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,041 characters.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with our interim consolidated financial statements and the accompanying notes to our interim consolidated financial statements presented in “Part I – Item 1. Financial Statements” of this Form 10-Q; our 2023 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 2024.

### INTRODUCTION

### Business Overview

We are a market leader in connecting care for people with complex conditions like cancer, cardiovascular disease, and musculoskeletal diagnoses. We work on behalf of health plans and other risk-bearing entities and payers (our customers) to support physicians and other healthcare providers (our users) in providing high quality evidence-based care to their patients. We believe adherence to evidence-based clinical pathways supports better outcomes for patients, a better experience for physicians, and lower costs for the healthcare system overall.

Specialty care represents a significant and fast-growing portion of healthcare costs in the U.S., driven in part by the pace of development of new therapies and treatments. To manage these increasing costs, some health plans and other risk-bearing entities historically deployed cost containment strategies that can limit access to care and operate in narrow silos (for example, prior authorization for radiological studies being considered independently from a comprehensive chemotherapy regimen). We believe Evolent can bring an integrated approach to a patient’s condition across multiple specialties, using technology to recommend our evidence-based clinical pathways in a way that provides rapid feedback to the provider, seeks to remove barriers to care, and aligns financial incentives with the best evidence.

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.

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

### Recent Events

### Business Combination

On August 1, 2024, the Company completed its acquisition of Machinify, Inc. (“Machinify”) contemplated by the previously announced agreement to acquire certain assets of Machinify and the exclusive, perpetual and royalty-free license of Machinify Auth, a proven software platform that leverages the latest advances in artificial intelligence for cash consideration of $19.5 million, plus an earn-out of up to $12.5 million. The acquisition is expected be accounted for as a business combination.

### Impact of Inflation

We experience pricing pressures in the form of competitive prices in addition to rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits and facility leases. We do not believe these impacts were material to our revenues or net income during the six months ended June 30, 2024. However, significant sustained inflation driven by the macroeconomic environment or other factors could negatively impact our margins, profitability and results of operations in future periods.

### Customers

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

|  | For the Three Months Ended June 30, 2024 | 2023 | For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Centene Corporation | \* | 10.3% | \* | \* |
| Cook County Health and Hospitals Systems | 11.0% | 17.6% | 11.2% | 17.4% |
| Florida Blue Medicare, Inc. | 12.6% | 11.1% | 12.6% | 11.5% |
| Humana Insurance Company | 21.8% | \* | 21.7% | \* |
| Molina Healthcare, Inc. | 12.9% | 16.4% | 12.1% | 14.9% |

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

### Repositioning Costs

During the second quarter of 2023, the Company implemented a broad set of repositioning initiatives designed to further align the Company’s assets and talent towards the value-based specialty care opportunity, with the intent of streamlining its operations and supporting the goal of realizing long-term sustainable earnings growth (the “2023 Repositioning Plan’). These initiatives include making organizational changes across the business that resulted in severance, terminated benefits and related payroll taxes and dedicated employee costs associated with recent acquisitions as well as third-party professional fees. Dedicated employee costs primarily include project management and technology staff costs needed to migrate acquired businesses to Evolent’s integrated technology platform and costs related to the consolidation of brands, internal operations, strategies, processes and platforms. Dedicated employee costs are limited to employees that will have no role in ongoing operations and have no planned role at Evolent once the repositioning activities are completed. Professional services costs primarily relate to services provided by a third-party vendor to review our operating model and organizational design in order to improve our profitability, create value through our solutions and invest in strategic opportunities in future periods. Office space consolidation includes early termination penalties and associated expenses. Costs associated with the 2023 Reposition Plan were recorded in selling, general and administrative expenses on the consolidated statements of operations and comprehensive income (loss). The 2023 Repositioning Plan was completed during the second quarter of 2024.

The following table provides a summary of our total costs associated with our repositioning plans for the three and six months ended June 30, 2024, respectively , by major type of cost (in thousands):

|  | For the Three Months Ended June 30, 2024 | For the Six Months Ended June 30, 2024 | Cumulative Amount Incurred Through June 30, 2024 |
| --- | ---: | ---: | ---: |
| Severance and termination benefits | $31 | $1,835 | $10,399 |
| Dedicated employee costs | — | 1,185 | 8,085 |
| Professional services | 639 | 4,127 | 17,038 |
| Office space consolidation | — | 3,452 | 10,314 |
| Total | $670 | $10,599 | $45,836 |

### Critical Accounting Policies and Estimates

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 2023 Form 10-K for a complete summary of our 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. 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 our reporting unit is below its carrying amount.

Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring our reporting unit’s fair value.

If the Company determines that it is more likely than not that the fair value of our reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value 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 both a discounted cash flow analysis and market multiple analysis in order to estimate our reporting units fair value. The discounted cash flow analysis relies 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 unit 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, 2023, the Company performed its annual goodwill impairment review for fiscal year 2023. In addition, the Company underwent organizational changes which required a reassessment of reporting units. As a result, the Company determined it has one reporting unit due to the economic similarity of the services provided to our partners. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of our reporting unit was below its respective carrying values. As a result, a quantitative goodwill impairment analysis was not required. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three and six months ended June 30, 2024. We will perform our annual impairment test of October 31, 2024.

### Adoption of New Accounting Standards

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

### 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

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

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 partners and providers. 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.

We also deploy our services in capitation arrangements under our specialty care management solution and total cost of care solution, which we call the “Performance Suite.” Capitation arrangements under the Performance Suite may include performance-based arrangements and/or gainshare features. We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the principal or agent in the arrangement, we review each third-party relationship on a contract-by- contract basis. As we integrate goods and services provided by third parties into our overall service, we control the services provided to the customer prior to its delivery. As such, we are the principal and we will recognize revenue on a gross basis. In certain cases, we act as an agent and do not control the services from third parties before it is delivered to the customer, thereby recognizing revenue on a net basis.

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

Contracts with Multiple Performance Obligations

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

#### Cost of Revenue (exclusive of depreciation and amortization)

Our cost of revenue includes direct expenses and shared resources that perform services in direct support of our partners. Costs consist primarily of claims expense, employee-related expenses (including compensation, benefits and stock-based compensation), expenses recorded as part of a Medicare shared savings program 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 transition services agreements (“TSA”) fees associated with our acquisitions, costs associated with our centralized infrastructure and research and development activities to support our network development capabilities, 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 internal-use software development costs.

#### Lives on Platform and PMPM Fees

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

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

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

Management uses Lives on Platform, PMPM fees, Cases, Revenue per Case and Average Unique Members because we believe that they provide insight into the unit economics of our services. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance.

### Consolidated Results

*(in thousands, except percentages)*

| 2024 | For the Three Months Ended June 30, 2023 |  | Change Over Prior Period $% | 2024 | For the Six Months Ended June 30, 2023 |  | Change Over Prior Period $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Revenue** | $647,145 | $469,136 | $178,009 | 37.9% | $1,286,798 | $896,826 | $389,972 | 43.5% |
| **Expenses** |  |  |  |  |  |  |  |  |
| Cost of revenue | 540,302 | 351,938 | 188,364 | 53.5% | 1,075,849 | 662,413 | 413,436 | 62.4% |
| Selling, general and administrative expenses | 69,185 | 90,389 | (21,204) | (23.5)% | 148,289 | 180,115 | (31,826) | (17.7)% |
| Depreciation and amortization expenses | 29,870 | 32,134 | (2,264) | (7.0)% | 59,373 | 61,409 | (2,036) | (3.3)% |
| Right-of-use assets impairment | — | 24,065 | (24,065) | (100.0)% | — | 24,065 | (24,065) | (100.0)% |
| Change in fair value of contingent consideration | — | (7,822) | 7,822 | 100.0% | 8,908 | 747 | 8,161 | 1,092.5% |
| Total operating expenses | 639,357 | 490,704 | 148,653 | 30.3% | 1,292,419 | 928,749 | 363,670 | 39.2% |
| Operating income (loss) | $7,788 | $(21,568) | $29,356 | 136.1% | $(5,621) | $(31,923) | $26,302 | 82.4% |
| Cost of revenue as a % of revenue | 83.5% | 75.0% |  |  | 83.6% | 73.9% |  |  |
| Selling, general and administrative expenses as a % of revenue | 10.7% | 19.3% |  |  | 11.5% | 20.1% |  |  |

### Comparison of the Results for Three Months Ended June 30, 2024 to 2023

#### Revenue

Total revenue increased by $178.0 million, or 37.9%, to $647.1 million for the three months ended June 30, 2024, as compared to 2023. This increase is primarily due to the expansion of new go lives in our risk markets of $149.6 million, growth of existing Performance Suite of $21.9 million, go lives from our musculoskeletal (“MSK”) offerings of $7.1 million and rate increases offset by lower run out services from our contract with Bright Health Management, Inc. (“Bright Health”) of $11.8 million and $13.3 million in lower accrued revenue from the Medicare Shared Savings Program (“MSSP”) in the quarter compared to the prior year period.

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

|  | For the Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Medicaid | $217,068 | $209,318 |
| Medicare | 268,673 | 138,700 |
| Commercial and other | 161,404 | 121,118 |
| Total | $647,145 | $469,136 |

The following table represents the Company’s Lives on Platform, Cases, PMPM fees and revenue per case for the three months ended June 30, 2024 and 2023 (Average Lives on Platform/Cases in thousands):

|  | Average Lives on Platform/ Cases For the Three Months Ended June 30, 2024 | 2023 | Average PMPM Fees / Revenue per Case For the Three Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Performance Suite | 6,901 | 3,810 | $22.30 | $24.20 |
| Specialty Technology and Services Suite | 71,701 | 72,954 | 0.38 | 0.35 |
| Administrative Services | 1,268 | 1,822 | 15.97 | 14.22 |
| Cases | 15 | 15 | 2,849 | 2,505 |
| Average Unique Members | 39,856 | 41,794 |  |  |

#### Cost of Revenue

Cost of revenue increased by $188.4 million, or 53.5%, to $540.3 million for the three months ended June 30, 2024, as compared to 2023, due to growth in our revenue and a shift in mix towards our Performance Suite, which has a lower gross margin than our solutions. The increase in cost of revenue this quarter is driven primarily by $199.8 million of higher claims cost compared to the prior year period, which is attributable to higher medical expenses in certain markets for our Performance Suite relating to higher disease prevalence and acuity of the populations under management, inclusive of favorable developments of claims from prior years of $10.3 million. The growth in cost of revenue was also offset by a $10.5 million decrease in personnel costs compared to the prior year period.

Approximately $1.2 million and $42.0 thousand of total cost of revenue was attributable to stock-based compensation expense for the three months ended June 30, 2024, and 2023 respectively. Cost of revenue represented 83.5% and 75.0% of total revenue for the three months ended June 30, 2024, and 2023 respectively. The majority of the increase in cost of revenue as a percentage of revenue was due to the rapid growth of our Performance Suite, which has a lower gross margin and longer maturation profile than our other product types.

#### Selling, General and Administrative Expenses

Selling, general, and administrative expenses decreased by $21.2 million, or 23.5%, to $69.2 million for the three months ended June 30, 2024, as compared to 2023, principally as a result of lower TSA fees related to our acquisition of NIA of $8.5 million, professional fees of $10.9 million and a reduction in personnel costs of $7.5 million as a result of the 2023 Repositioning Plan.

Approximately $11.5 million and $8.9 million of total selling, general and administrative costs were attributable to stock-based compensation expense for the three months ended June 30, 2024, and 2023, respectively. Acquisition and severance costs accounted for approximately $1.0 million and $0.4 million of total selling, general and administrative expenses for the three months ended June 30, 2024, and 2023, respectively. Selling, general and administrative expenses represented 10.7% and 19.3% of total revenue for the three months ended June 30, 2024, as compared to 2023, respectively, driven in part by the Company’s 2023 Repositioning Plan which concluded in the three months ended June 30, 2024.

### Comparison of the Results for The Six Months Ended June 30, 2024 to 2023

#### Revenue

Total revenue increased by $390.0 million, or 43.5%, to $1,286.8 million for the six months ended June 30, 2024, as compared to 2023. The increase in revenue is primarily from $296.1 million from new risk contracts, $38.9 million from transitioning a Specialty Technology and Services Suite customer to the Performance Suite, $31.7 million from new MSK contracts and $17.6 million from new oncology and cardiology contracts. Growth was also offset in part by a $27.9 million reduction in revenue from the run out of the Bright Health contract.

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

|  | For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Medicaid | $432,192 | $392,352 |
| Medicare | 555,633 | 266,369 |
| Commercial and other | 298,973 | 238,105 |
| Total | $1,286,798 | $896,826 |

The following table represents the Company’s Lives on Platform, Cases, Average PMPM fees, Revenue per Case and Average Unique Members for the three and six months ended June 30, 2024 and 2023 (Average Lives on Platform/Cases in thousands):

|  | Average Lives on Platform/ Cases For the Six Months Ended June 30, 2024 | 2023 | Average PMPM Fees / Revenue per Case For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Performance Suite | 6,976 | 3,526 | $21.74 | $24.41 |
| Specialty Technology and Services Suite | 72,002 | 66,728 | 0.39 | 0.36 |
| Administrative Services | 1,261 | 1,840 | 15.77 | 14.57 |
| Cases | 31 | 30 | 2,849 | 2,530 |
| Average Unique Members | 39,872 | 41,531 |  |  |

#### Cost of Revenue

Cost of revenue increased by $413.4 million, or 62.4%, to $1,075.8 million for the six months ended June 30, 2024, as compared to 2023, principally as a result of the 43.5% growth in our revenue compared to the six months ended June 30, 2023. The increase included approximately $414.7 million from higher claims cost from acquisitions and transition from ASO to risk based contracts for certain customers as well as $15.3 million in professional fees due primarily to the accrual of Medicare Shared Savings Program network gainshare. These increases were offset in part by a decrease of $9.7 million from lower personnel costs.

Approximately $2.2 million and $1.6 million of total cost of revenue was attributable to stock-based compensation expense for the six months ended June 30, 2024, and 2023, respectively. Cost of revenue represented 83.6% and 73.9% of total revenue for the six months ended June 30, 2024, and 2023 respectively. Our cost of revenue increased as a percentage of our total revenue due to a change in the mix of our service offerings with the rapid growth of our Performance Suite solutions. We expect our cost of revenue to decrease as a percentage of total revenue over the longer-term subject to the composition of our growth.

#### Selling, General and Administrative Expenses

Selling, general, and administrative expenses decreased by $31.8 million, or 17.7%, to $148.3 million for the six months ended June 30, 2024, as compared to 2023. The decrease was primarily driven by lower TSA fees related to our NIA acquisition of $16.1 million recorded in 2023 and lower bad debt expense of $5.1 million due to collection timing from our customers, offset by higher stock compensation of $11.1 million due to the achievement and change in projected achievement of certain performance measurements and $3.2 million from an increase in technology services.

Approximately $29.2 million and $18.1 million of total selling, general and administrative expenses were attributable to stock-based compensation expense for the six months ended June 30, 2024 and 2023, respectively. Acquisition and severance costs accounted for approximately $1.3 million and $12.0 million of total selling, general and administrative expenses for the six months ended June 30, 2024 and 2023, respectively. Selling, general and administrative expenses represented 11.5% and 20.1% of total revenue for the six months ended June 30, 2024, as compared to 2023, respectively, driven in part by the Company’s 2023 Repositioning Plan which concluded in the three months ended June 30, 2024.

#### Right-of-Use Asset Impairment

During the six months ended June 30, 2023, the Company decommissioned its Chicago, IL lease and wrote off the associated right-of-use asset, recognizing an impairment charge of $24.1 million in right-of-use assets impairment on the consolidated statements of operations and comprehensive income (loss). There were no such impairments in 2024.

#### Change in Fair Value of Contingent Consideration

We recorded a loss on change in fair value of contingent consideration of $8.9 million for the six months ended June 30, 2024 primarily related to the liabilities acquired as a result of the acquisitions of NIA in January 2023. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 17” in this Form 10-Q for more information related to changes in the fair value of contingent consideration.

### Discussion of Non-Operating Results

#### Interest Expense

Our interest expense is attributable to borrowings under convertible senior notes and 2022 Credit Agreement with Ares. Interest expense and amortization of debt issuance costs activity were as follows (in thousands):

| 2029 Notes | For the Three Months Ended June 30, 2024 | 2023 | For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $3,522 | $— | $7,044 | $— |
| Amortization of debt issuance costs | 480 | — | 960 | — |
| Interest expense for 2029 Notes | $4,002 | $— | $8,004 | $— |
| **2022 Credit Agreement** |  |  |  |  |
| Interest expense | $943 | $12,595 | $1,889 | $23,720 |
| Amortization of debt issuance costs | 80 | 636 | 159 | 1,180 |
| Interest expense for 2022 Credit Agreement | $1,023 | $13,231 | $2,048 | $24,900 |
| **2024 Notes** |  |  |  |  |
| Interest expense | $— | $212 | $— | $425 |
| Amortization of debt issuance costs | — | 46 | — | 92 |
| Interest expense for 2024 Notes | $— | $258 | $— | $517 |
| **2025 Notes** |  |  |  |  |
| Interest expense | $647 | $647 | $1,294 | $1,294 |
| Amortization of debt issuance costs | 323 | 322 | 646 | 642 |
| Interest expense for 2025 Notes | $970 | $969 | $1,940 | $1,936 |

The decrease in interest expense for the three and six months ended June 30, 2024 compared to the same periods in 2023 is primarily due to the repayment of the Term Loan Facility of the Credit Agreement in a prior period, offset by interest expense from the 2029 Notes. See “Part I - Item 1. Financial Statements and Supplementary Data - Note 9” in this Form 10-Q for more information related to interest expense by debt issuance.

#### Change in Tax Receivable Agreement Liability

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

#### Provision for (Benefit from) Income Taxes

An income tax provision (benefit) of $(0.2) million and $0.3 million was recognized for the three and six months ended June 30, 2024, respectively, which resulted in effective tax rates of (17.5)% and (2.1)%, respectively. An income tax provision (benefit) of $(1.0) million and $(69.2) million was recognized for the three and six months ended June 30, 2023, respectively, which resulted in effective tax rates of 2.7% and 56.0%, respectively. The decrease in benefits from income taxes was driven primarily by a reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the NIA acquisition in January 2023.

#### Dividends and Accretion of Series A Preferred Stock

We pay quarterly regular cash dividends on the Series A Preferred Stock at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. In addition, we accrete deferred financing costs and the redemption value in excess of par value in additional paid-in-capital on the consolidated balance sheets. The Company paid $10.1 million of dividends and accreted $5.8 million of deferred issuance costs and redemption value during the six months ended June 30, 2024.

### REVIEW OF CONSOLIDATED FINANCIAL CONDITION

### Liquidity and Capital Resources

The Company reported net loss attributable to common shareholders of Evolent Health, Inc. of $31.6 million and $67.7 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, the Company had $101.3 million of cash and cash equivalents and $36.7 million in restricted cash and restricted investments.

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

#### Cash Flows

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

|  | For the Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash and restricted cash provided by (used in) operating activities | $26,326 | $(7,320) |
| Net cash and restricted cash used in investing activities | (23,273) | (403,347) |
| Net cash and restricted cash (used in) provided by financing activities | (88,499) | 403,059 |

Operating Activities

Cash flows from operating activities primarily represent inflows and outflows associated with our operations. Primary activities include net income from operations adjusted for non-cash transactions, working capital changes and changes in other assets and liabilities.

Cash flows provided by operating activities of $26.3 million for the six months ended June 30, 2024 were affected by decreases in accounts receivable from timing of our partner and vendor payments including higher cash receipts from certain performance-based customers as well as an increase of $8.9 million from contingent consideration, which was more than offset by payment for claims and performance-based arrangements of $86.5 million. Of the total $88.8 million in NIA contingent consideration paid in the period, $22.2 million represented a change in fair value of NIA contingent consideration in excess of the initial fair value at the acquisition date through payment date, and is therefore included in cash flows provided by operating activities.

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

Investing Activities

Cash flows used in investing activities of $23.3 million for the six months ended June 30, 2024 were primarily attributable to a purchase of investments for $4.9 million and $12.5 million of investments in internal-use software and purchases of property and equipment.

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

Financing Activities

Cash flows used in financing activities of $88.5 million for the six months ended June 30, 2024, were primarily related to $6.1 million of restricted cash inflows from working capital related to claims processing offset, in part by $10.1 million of preferred dividends paid on our Series A Preferred Stock and $14.7 million from withholding taxes paid on of vested restricted stock units that were net settled. Additional cash used in financing activities included $66.6 million, the portion of the NIA contingent consideration representing the fair value at the acquisition date.

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

#### Contractual and Other Obligations

We believe that the amount of cash and cash equivalents on hand and cash flows from operations will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures working capital and debt service for the next twelve months. Our estimated known contractual obligations (in thousands) as of June 30, 2024, were as follows:

|  | 2024 | 2025-2026 | 2027-2028 | 2029+ | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating leases for facilities | $4,210 | $15,844 | $12,718 | $12,428 | $45,200 |
| Purchase obligations related to vendor contracts | 7,371 | 21,930 | 935 | — | 30,236 |
| Convertible notes interest payments (1) | 8,338 | 30,763 | 28,175 | 14,088 | 81,364 |
| Convertible notes principal repayment | — | 172,500 | — | 402,500 | 575,000 |
| Total known contractual obligations | $19,919 | $241,037 | $41,828 | $429,016 | $731,800 |

(1) Refer to the discussion in “Part I - Item 1. Financial Statements and Supplementary Data - Note 9” for additional information on payment dates for our convertible notes interest.

In addition, as of June 30, 2024, we had $37.5 million of aggregate principal amount in a secured revolving credit facility which will mature in 2029. The interest rate for the secured revolving credit facility will be calculated, at the option of the borrowers at either the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 4.00%, or the base rate plus 3.00%.

Also, as of June 30, 2024, we had 175,000 shares of the Series A Preferred Stock outstanding. Regular dividends on the Series A Preferred Stock are paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. The regular dividend rate will also increase by 2.0% per annum upon the occurrence and during the continuance of certain triggering events.

The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. Our joint ventures and other investments from time to time may, and some do, include put or call features under which we could be contractually required to purchase interests from our joint venture partner at an exercise price determined in reference to a multiple of the dollar amount of our joint venture partner’s total capital contributions, the performance of the joint venture, and other factors. One of our investments includes a put option that could be exercised by our joint venture partner which, if exercised, would require us to acquire the interests in the joint venture that we do not own for a price that may be up to $50.0 million.

#### Accounts Receivable, net

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the six months ended June 30, 2024, accounts receivable, net, decreased primarily due to the timing of cash receipts from certain customers.

#### Restricted Cash and Restricted Investments

Restricted cash and restricted investments of $36.7 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $18.4 million, collateral for letters of credit required as security deposits for facility leases of $1.9 million, amounts held with financial institutions for risk-sharing arrangements of $16.4 million as of June 30, 2024. See “Part I - Item 1. Financial Statements and Supplementary Data - Note 2” for further details of the Company’s restricted cash balances.

#### Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are carried at cost and includes prepaid expenses and non-trade accounts receivable. During the six months ended June 30, 2024, prepaid and other current assets decreased due to a decrease of trade receivables related to certain customers that have the legal right to net payment for amounts due from customers and claims payable of $5.4 million and lower non-trade accounts receivable of $2.0 million, offset by higher prepaid expenses of $4.5 million as a result of higher insurance premiums.

#### Uses of Capital

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

## Market risk

As filed, 2,970 characters.

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

#### Interest Rate Risk

As of June 30, 2024, the Company had cash and cash equivalents and restricted cash and restricted investments of $137.9 million, which consisted of bank deposits with FDIC participating banks of $134.9 million and bank deposits in international banks of $3.1 million.

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

As of June 30, 2024, we had $575.0 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. In addition, as of June 30, 2024, we have $37.5 million of aggregate principal amount in a secured revolving credit facility and $175.0 million shares of Series A Preferred Stock outstanding, all of which are floating rate instruments based on the SOFR and subject to fluctuations in interest rates. In the case of (a) the revolving loan, interest is calculated at either the Adjusted Term SOFR Rate (as defined in the Certificate of Designation) plus 4.00%, or the base rate plus 3.00% and (b) the Series A Preferred Stock, dividends are to be paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. For every 1% increase in SOFR, the Company would record additional interest expense of $0.4 million per annum and preferred dividends of $1.8 million per annum.

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

#### Foreign Currency Exchange Risk

We have foreign currency risks related to our operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee and the Philippine Peso. In general, we are a net payer 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 gain (loss) of $(47) thousand and $(0.1) million for the three and six months ended June 30, 2024, respectively and $8 thousand and $0.1 million for the three and six months ended June 30, 2023, respectively.

## Controls and procedures

As filed, 2,544 characters.

#### 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 Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2024, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

#### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

#### Inherent Limitations of Internal Controls

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

## Risk factors

As filed, 5,636 characters.

Our significant business risks are described in Part I, Item 1A. “Risk Factors” to our 2023 Form 10-K. These risk factors are supplemented for the item described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.

***We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our partners and operating our business, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, negatively impact our relationships with partners, adversely affect our brand and our business.***

Our ability to deliver our solutions, particularly our cloud-based solutions, is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. As a result, our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information technology, emerging cybersecurity risks and threats, evolving industry and regulatory standards and changing preferences of our partners.

Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our services, and we may experience more significant interruptions in the future. We rely on internal systems as well as third-parties, including bandwidth and telecommunications equipment providers, to provide our services and operate our business. We do not maintain redundant systems or facilities for some of these services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our services and prevent or inhibit the ability of our partners to access our services. These systems may be at greater risk of interruption as a result of increased use of mobile and cloud technologies, including as a result of the shift to work from home arrangements as a result of the COVID-19 pandemic.

In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact our relationship with our partners, our business, results of operations and financial condition. To operate without interruption, both we and our service providers must guard against:

- damage from fire, power loss and other natural disasters;
- telecommunications failures;
- software and hardware errors, failures and crashes;
- security breaches, computer viruses and similar disruptive problems; and
- other potential interruptions.

Any disruption in the network access, telecommunications or co-location services provided by third-party vendors or any failure of or by third-party vendors’ systems or our own systems to handle current or higher volume of use could significantly harm our business. Similarly, disruptions of service to other third parties or to our customers can negatively impact our ability to serve our clients and run our business. For example, in February 2024, Change Healthcare, a subsidiary of UnitedHealth Group and the largest clearinghouse for medical claims in the U.S., was the subject of a cyberattack that required it to take offline its computer systems that handled electronic payments and insurance claims. As a result of the outage, we had reduced visibility into setting our claims reserve for the six months ended June 30, 2024. Similar events could occur in the future, and the impact to our business could be material.

We exercise limited control over third-parties, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with partners and adversely affect our business and could expose us to third-party liabilities. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

The reliability and performance of our Internet connection may be harmed by increased usage or by denial-of-service attacks. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services.

Filed Aug 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001628908-24-000090. Last ingested by Listed: Nov 5, 2026, 11:57 ET. No prices; not investment advice.