Evolent Health(EVH) - 2023 Q2 - Quarterly Report

FORM 10-Q General Information This section provides foundational details of the Form 10-Q filing, including registrant identification, compliance status, and cautionary notes on forward-looking statements Filing Details and Registrant Information This section provides the basic filing information for the Quarterly Report on Form 10-Q for Evolent Health, Inc. for the period ended June 30, 2023, including its incorporation state, address, and stock exchange listing - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2023[2] | Detail | Value | | :--- | :--- | | Registrant Name | Evolent Health, Inc. | | State of Incorporation | Delaware | | Principal Executive Offices | 800 N. Glebe Road, Suite 500, Arlington, Virginia 22203 | | Trading Symbol | EVH | | Exchange | New York Stock Exchange | Compliance and Filer Status Evolent Health, Inc. confirms compliance with SEC filing requirements, electronic submission of Interactive Data Files, and is classified as a 'Large accelerated filer' for reporting purposes - The registrant has filed all required reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days[3] - The registrant has submitted electronically every Interactive Data File required pursuant to Rule 405 of Regulation S-T during the preceding 12 months[3] | Status | Value | | :--- | :--- | | Filer Classification | Large accelerated filer | | Emerging Growth Company | No | | Shell Company | No | | Class A Common Stock Outstanding (as of July 28, 2023) | 113,244,482 shares | Explanatory Note and Forward-Looking Statements This section clarifies the company's identity and provides cautionary language regarding forward-looking statements, highlighting inherent risks and uncertainties that could cause actual results to differ materially from projections - Evolent Health, Inc. operates as a holding company, with its principal asset being all of the Class A common units of Evolent Health LLC, through which operations are conducted[9] - Forward-looking statements are subject to risks and uncertainties, including integration challenges from acquisitions (NIA), revenue concentration from large partners, healthcare regulatory changes, and the ability to manage growth and cost structure[12][13] - The company disclaims any obligation to update forward-looking statements to reflect events or circumstances occurring after the report date[16] PART I - FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis of Evolent Health, Inc.'s financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Evolent Health, Inc. for the periods ended June 30, 2023, and December 31, 2022, including balance sheets, statements of operations, changes in equity, cash flows, and comprehensive notes detailing accounting policies, transactions, and financial performance Consolidated Balance Sheets The consolidated balance sheets show a significant increase in total assets, primarily driven by acquisitions, and corresponding increases in liabilities and shareholders' equity from December 31, 2022, to June 30, 2023 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $2,646,831 | $1,817,293 | $829,538 | 45.6% | | Total Liabilities | $1,380,783 | $957,876 | $422,907 | 44.2% | | Total Shareholders' Equity | $1,093,219 | $859,417 | $233,802 | 27.2% | | Cash and Cash Equivalents | $142,530 | $188,200 | $(45,670) | -24.3% | | Intangible Assets, net | $801,923 | $442,784 | $359,139 | 81.1% | | Goodwill | $1,117,556 | $722,774 | $394,782 | 54.6% | | Long-term debt, net | $633,013 | $412,986 | $220,027 | 53.3% | | Tax receivable agreement liability | $112,134 | $45,950 | $66,184 | 144.0% | Consolidated Statements of Operations and Comprehensive Income (Loss) The company experienced significant revenue growth for both the three and six months ended June 30, 2023, compared to the prior year, but also reported increased operating losses and net losses attributable to common shareholders, largely due to higher expenses including depreciation, amortization, and a right-of-use asset impairment | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change (3M) | % Change (3M) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $469,136 | $319,939 | $149,197 | 46.6% | | Total operating expenses | $490,704 | $324,572 | $166,132 | 51.2% | | Operating loss | $(21,568) | $(4,633) | $(16,935) | -365.5% | | Net loss attributable to common shareholders | $(41,411) | $(4,588) | $(36,823) | -802.6% | | Basic and diluted loss per common share | $(0.37) | $(0.05) | $(0.32) | -640.0% | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (6M) | % Change (6M) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $896,826 | $616,996 | $279,830 | 45.4% | | Total operating expenses | $928,749 | $624,427 | $304,322 | 48.7% | | Operating loss | $(31,923) | $(7,431) | $(24,492) | -329.6% | | Net loss attributable to common shareholders | $(67,669) | $(9,938) | $(57,731) | -580.9% | | Basic and diluted loss per common share | $(0.62) | $(0.11) | $(0.51) | -463.6% | - A right-of-use assets impairment charge of $24.1 million was recognized for the three and six months ended June 30, 2023[24] - Interest expense significantly increased to $14.5 million (3 months) and $27.4 million (6 months) in 2023, up from $2.1 million and $4.4 million in 2022, respectively[24] Consolidated Statements of Changes in Mezzanine Equity and Shareholders' Equity Shareholders' equity increased significantly from December 31, 2022, to June 30, 2023, primarily due to the issuance of Series A Preferred Stock and Class A common stock for acquisitions, despite a net loss attributable to common shareholders | Metric (in thousands) | Balance as of Dec 31, 2022 | Balance as of June 30, 2023 | Change | | :--- | :--- | :--- | :--- | | Total Shareholders' Equity | $859,417 | $1,093,219 | $233,802 | | Series A Preferred Stock (Amount) | — | $172,829 | $172,829 | | Class A Common Stock (Shares) | 101,501 | 113,083 | 11,582 | | Additional Paid-In Capital | $1,486,857 | $1,774,784 | $287,927 | | Retained Earnings (Accumulated Deficit) | $(606,154) | $(660,459) | $(54,305) | - Issuance of Series A Preferred Stock, net of issuance costs, contributed $168.0 million to mezzanine equity in the six months ended June 30, 2023[31] - Shares issued for acquisition (NIA) totaled 8,475 thousand shares, valued at $261.2 million, significantly increasing Class A common stock and additional paid-in capital[31] Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company experienced a net decrease in cash and cash equivalents, with significant cash outflows from investing activities (primarily acquisitions) largely offset by inflows from financing activities (debt and preferred stock issuance) | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash and restricted cash used in operating activities | $(7,320) | $(43,778) | | Net cash and restricted cash provided by (used in) investing activities | $(403,347) | $330 | | Net cash and restricted cash provided by (used in) financing activities | $403,059 | $(30,686) | | Net decrease in cash and cash equivalents and restricted cash | $(7,559) | $(74,509) | | Cash and cash equivalents and restricted cash as of end-of-period | $207,599 | $280,433 | - Cash paid for asset acquisitions and business combinations (primarily NIA) was $388.2 million in the first six months of 2023[34] - Proceeds from issuance of long-term debt (net of offering costs) were $256.1 million, and proceeds from issuance of preferred stock (net of offering costs) were $168.0 million in the first six months of 2023[34] Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's financial statements, covering organizational changes, significant accounting policies, recent acquisitions (NIA, IPG), revenue recognition, debt, equity, and various commitments and contingencies Note 1. Organization Evolent Health, Inc. is a Delaware-incorporated holding company that supports healthcare entities through its subsidiaries, focusing on value-based specialty care. It recently consolidated its reportable segments into one and maintains sufficient liquidity - The Company changed its reportable segments to one unified segment, effective March 31, 2023, to reflect growth in its value-based specialty care business[38] - As of June 30, 2023, the Company had unrestricted cash and cash equivalents of $142.5 million and believes it has sufficient liquidity for at least the next twelve months[39] Note 2. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principles This note outlines the basis for preparing the unaudited interim financial statements, key accounting policies, and the impact of recent accounting standard changes, particularly regarding convertible instruments and business combinations - The interim consolidated financial statements are unaudited and include all necessary adjustments for fair presentation, with certain GAAP disclosures omitted as permitted by SEC regulations[42] - Key accounting estimates include valuation of assets (intangibles, goodwill), liabilities, business combinations, revenue recognition (variable consideration), and reserves for claims[44] | Restricted Cash & Investments (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Collateral for letters of credit for facility leases | $2,132 | $2,269 | | Collateral with financial institutions | $16,038 | $10,912 | | Claims processing services | $46,899 | $13,777 | | Total Restricted Cash and Restricted Investments | $65,069 | $26,958 | - The company amortizes identified intangible assets over their estimated useful lives, with corporate trade names now accelerated to be fully amortized by December 2024 due to brand unification[55] Note 3. Recently Issued Accounting Standards The company adopted ASU 2020-06, simplifying accounting for convertible instruments, and ASU 2021-08, clarifying accounting for contract assets/liabilities in business combinations, with the former having a significant impact on equity and debt carrying amounts - Adoption of ASU 2020-06 on January 1, 2022, using a modified retrospective method, increased retained earnings by $39.8 million, reduced additional paid-in capital by $106.2 million, and increased the net carrying amount of 2024 and 2025 Notes by $25.1 million and $41.3 million, respectively[71] - ASU 2021-08, adopted in Q1 2023, clarifies accounting for contract assets and liabilities in business combinations but did not materially impact consolidated financial statements[72] Note 4. Transactions This note details the acquisitions of National Imaging Associates Inc. (NIA) in January 2023 and Implantable Provider Group (IPG) in August 2022, including their respective acquisition considerations, purchase price allocations, and pro forma financial impacts - The acquisition of NIA on January 20, 2023, for $715.7 million (net of cash), included $387.8 million cash, $261.3 million in Class A common stock, and $66.6 million in contingent consideration[74] | NIA Acquisition (in thousands) | Amount | | :--- | :--- | | Total Consideration | $715,694 | | Identifiable Intangible Assets Acquired | $404,000 | | Goodwill Acquired | $395,164 | | Revenue from NIA (6 months ended June 30, 2023) | $107,400 | | Net Loss Attributable to NIA (6 months ended June 30, 2023) | $(2,800) | - The IPG acquisition on August 1, 2022, for $461.7 million, included $256.5 million cash, $130.2 million in Class A common stock, and $75.0 million in contingent consideration[80] | Pro Forma Financial Information (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Pro Forma Revenue (with NIA as of Jan 1, 2022) | $908,251 | $749,135 | | Pro Forma Net Loss (with NIA as of Jan 1, 2022) | $(59,268) | $(27,207) | Note 5. Revenue Recognition The company recognizes revenue from multi-year contracts providing value-based care solutions, primarily using a variable fee structure based on per member per month rates or plan premiums, disaggregated by end-market and product type - Revenue is recognized over time using the time elapsed output method, with variable consideration allocated to the period to which fees relate[88] | Revenue by End-Market (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Medicaid | $209,318 | $141,502 | $392,352 | $279,303 | | Medicare | $138,700 | $111,392 | $266,369 | $208,492 | | Commercial and other | $121,118 | $67,045 | $238,105 | $129,201 | | Total Revenue | $469,136 | $319,939 | $896,826 | $616,996 | | Revenue by Product Type (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Performance Suite | $276,576 | $208,085 | $516,449 | $379,249 | | Specialty Technology and Services Suite | $77,052 | $12,874 | $142,368 | $26,454 | | Administrative Services | $77,754 | $92,357 | $160,821 | $199,216 | | Cases | $37,754 | $6,623 | $77,188 | $12,077 | | Total Revenue | $469,136 | $319,939 | $896,826 | $616,996 | | Contract Balances (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Short-term receivables | $344,781 | $246,209 | | Short-term deferred revenue | $6,950 | $5,758 | | Long-term deferred revenue | $1,853 | $2,533 | Note 6. Credit Losses The company is exposed to credit losses primarily from accounts receivable, with an allowance for credit losses based on historical delinquency rates and adjusted for current conditions. The allowance increased significantly in the first half of 2023, partly due to the NIA acquisition - As of June 30, 2023, 70% of trade accounts receivable, non-trade accounts receivable, and contract assets were current, with 20% past due less than 60 days[106] | Allowance for Credit Losses (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Balance as of beginning of period | $(10,180) | $(3,374) | | NIA acquisition | $(240) | — | | Provision for credit losses | $(4,390) | $322 | | Charge-offs | $1,898 | — | | Balance as of end of period | $(12,912) | $(3,052) | Note 7. Property and Equipment, Net The company's net property and equipment decreased slightly from December 31, 2022, to June 30, 2023, with significant investments in internal-use software development costs and corresponding depreciation expenses | Property and Equipment (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Computer hardware | $31,139 | $30,092 | | Internal-use software development costs | $203,817 | $189,119 | | Total property and equipment, net | $83,524 | $87,874 | - The company capitalized $13.8 million in internal-use software development costs for the six months ended June 30, 2023[107] - Depreciation expense related to property and equipment was $16.3 million for the six months ended June 30, 2023, with $13.5 million specifically for capitalized internal-use software development costs[108] Note 8. Goodwill and Intangible Assets, Net Goodwill significantly increased due to the NIA acquisition, and intangible assets also grew, with accelerated amortization for corporate trade names as part of a brand unification strategy. No goodwill or intangible asset impairment was identified in the first half of 2023 | Goodwill (in thousands) | Amount | | :--- | :--- | | Balance as of December 31, 2022 | $722,774 | | Goodwill acquired (NIA) | $395,164 | | Balance as of June 30, 2023 | $1,117,556 | | Intangible Assets, Net (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Corporate trade name | $28,300 | $31,874 | | Customer relationships | $694,535 | $372,259 | | Technology | $74,417 | $31,567 | | Provider network contracts | $4,670 | $7,017 | | Total intangible assets, net | $801,922 | $442,784 | - Amortization expense for intangible assets was $45.1 million for the six months ended June 30, 2023, a significant increase from $14.8 million in the prior year[118] - Corporate trade names will be fully amortized by December 2024 due to accelerated amortization as part of a unified brand strategy[119] Note 9. Long-term Debt The company's long-term debt significantly increased with the Credit Agreement Amendment for the NIA acquisition, including new term loans and revolving commitments. It also details the carrying values and fair values of its 2024 and 2025 Convertible Senior Notes - On January 20, 2023, the Credit Agreement was amended to include an additional $240.0 million in term loans and $25.0 million in revolving commitments to finance the NIA acquisition[123] - Interest expense related to the Credit Agreement was $23.7 million for the six months ended June 30, 2023[126] | Convertible Senior Notes (in thousands) | June 30, 2023 Carrying Value | December 31, 2022 Carrying Value | June 30, 2023 Fair Value | December 31, 2022 Fair Value | | :--- | :--- | :--- | :--- | :--- | | 2024 Notes | $24,018 | $23,925 | $38,000 | $38,000 | | 2025 Notes | $169,527 | $168,885 | $192,445 | $185,546 | - The adoption of ASU 2020-06 on January 1, 2022, resulted in the combination of debt and equity components of the 2024 and 2025 Notes into single debt instruments[134][144] Note 10. Commitments and Contingencies The company has various commitments, including letters of credit and a Tax Receivables Agreement (TRA) liability that significantly increased due to the NIA acquisition. It also faces litigation and significant credit and revenue concentration risks with a few key partners - The Tax Receivables Agreement (TRA) liability increased by $66.2 million for the six months ended June 30, 2023, totaling $112.1 million, primarily due to a valuation allowance reduction from NIA acquisition deferred tax liabilities[155] - The company is subject to significant concentration risk, with Cook County Health and Hospitals System, Molina Healthcare, and Florida Blue Medicare, Inc. representing substantial portions of its revenue and accounts receivable[160][162] | Top Partners' Share of Consolidated Revenue | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | | Cook County Health and Hospitals Systems | 17.6% | 17.4% | | Centene Corporation | 10.3% | * | | Florida Blue Medicare, Inc. | 11.1% | 11.5% | | Molina Healthcare | 16.4% | 14.9% | * Represents less than 10.0% of the respective balance. Note 11. Leases The company leases office space and equipment under operating lease agreements, with a significant right-of-use asset impairment charge of $24.1 million recognized in Q2 2023 due to decommissioning its Chicago, IL lease - A right-of-use asset impairment charge of $24.1 million was recognized for the three months ended June 30, 2023, due to decommissioning the Chicago, IL lease[167] | Lease Expense (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $(1,727) | $2,231 | $213 | $4,505 | | Variable lease cost | $1,565 | $1,171 | $3,121 | $2,497 | | Total lease cost | $(162) | $3,402 | $3,334 | $7,002 | | Lease Liabilities Maturity (in thousands) | Operating Lease Expense | | :--- | :--- | | 2023 | $4,444 | | 2024 | $11,610 | | 2025 | $11,285 | | 2026 | $10,291 | | 2027 | $10,044 | | Thereafter | $32,161 | | Total lease payments | $79,835 | | Less: Interest | $17,041 | | Present value of lease liabilities | $62,794 | Note 12. Convertible Preferred Equity In connection with the NIA acquisition, the company issued 175,000 shares of Series A Preferred Stock for $168.0 million, which ranks senior to common stock, pays quarterly cash dividends, and is convertible into Class A Common Stock - On January 20, 2023, 175,000 shares of Series A Preferred Stock were issued at $960.00 per share, generating $168.0 million in gross proceeds to finance the NIA acquisition[170] - Series A Preferred Stock ranks senior in dividend and liquidation rights, has an initial liquidation preference of $1,000.00 per share, and pays quarterly cash dividends at Adjusted Term SOFR plus 6.00%[171][172] - Holders can convert shares into Class A Common Stock at an initial conversion price of $40.00 per share. The company may redeem shares on or after January 20, 2025, at 165.00% of the liquidation preference[173][174] - Dividends paid on Series A Preferred Stock were $8.5 million for the six months ended June 30, 2023[180] Note 13. Loss Per Common Share The company reported basic and diluted net loss per common share of $(0.37) for the three months and $(0.62) for the six months ended June 30, 2023, with a significant number of anti-dilutive shares excluded from the calculation | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common shareholders (in thousands) | $(41,411) | $(4,588) | $(67,669) | $(9,938) | | Weighted-average common shares outstanding (in thousands) | 111,278 | 90,071 | 109,540 | 89,792 | | Loss per common share (Basic and Diluted) | $(0.37) | $(0.05) | $(0.62) | $(0.11) | | Anti-dilutive Shares Excluded (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Restricted stock units, performance-based RSUs, leveraged stock units | 1,073 | 1,642 | 1,505 | 1,817 | | Stock options | 976 | 1,852 | 1,106 | 1,807 | | Series A Preferred Stock | 4,375 | — | 4,375 | — | | Convertible senior notes | 6,188 | 11,582 | 6,188 | 11,582 | | Total | 12,612 | 15,076 | 13,174 | 15,206 | Note 14. Stock-based Compensation Total stock-based compensation expense increased significantly for both the three and six months ended June 30, 2023, primarily driven by Restricted Stock Units (RSUs) and Performance Stock Units (PSUs), with the majority allocated to selling, general and administrative expenses | Stock-based Compensation Expense (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Stock options | $14 | $91 | $74 | $253 | | RSUs | $6,903 | $4,647 | $14,392 | $7,948 | | LSUs | $77 | $382 | $361 | $1,157 | | PSUs | $1,972 | $1,892 | $4,849 | $3,000 | | Total compensation expense by award type | $8,966 | $7,012 | $19,676 | $12,358 | | Allocation by Line Item (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | $42 | $1,162 | $1,582 | $1,962 | | Selling, general and administrative expenses | $8,924 | $5,850 | $18,094 | $10,396 | | Total compensation expense by financial statement line item | $8,966 | $7,012 | $19,676 | $12,358 | Note 15. Income Taxes The company recognized a significant income tax benefit for the six months ended June 30, 2023, primarily due to a reduction in the valuation allowance resulting from deferred tax liabilities established during the NIA acquisition, leading to a positive effective tax rate | Income Tax (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Provision for (benefit from) income taxes | $(970) | $(184) | $(69,159) | $1,018 | | Effective tax rate | 2.7% | 3.9% | 56.0% | -11.4% | - The income tax benefit for the six months ended June 30, 2023, primarily relates to a $56.1 million reduction in the valuation allowance due to deferred tax liabilities from the NIA acquisition[187] - The company had unrecognized tax benefits of $1.6 million as of June 30, 2023[188] Note 16. Investments in Equity Method Investees The company holds non-controlling ownership interests in joint ventures and other entities, accounted for under the equity method, and provides management and support services to these investees, generating revenue - The company's economic interests in equity method investments ranged between 4% and 38%, and voting interests between 25% and 40%, as of June 30, 2023[191] | Gain from Equity Method Investees (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Gain | $200 | $2,000 | $600 | $2,500 | | Revenue from Services Agreements (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,600 | $3,900 | $9,400 | $7,500 | Note 17. Fair Value Measurement The company measures contingent consideration liabilities at fair value on a recurring basis, using Level 3 inputs and a real options approach, with the fair value increasing significantly due to additions from the NIA acquisition | Contingent Consideration (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Fair Value | $113,300 | $78,000 | | Valuation Technique | Real options approach | Real options approach | | Significant Unobservable Inputs | Risk-neutral expected earnout consideration, Weighted average discount rate | Risk-neutral expected earnout consideration, Weighted average discount rate | | Input Ranges (Discount Rate) | 8.50% - 13.98% | 9.85% - 10.01% | | Changes in Level 3 Liabilities (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Balance as of beginning of period | $78,000 | $28,700 | | Additions | $66,600 | — | | Settlements | $(32,047) | — | | Total (gain) loss, net | $747 | $4,700 | | Balance as of end of period | $113,300 | $33,400 | Note 18. Related Parties The company has ongoing financial relationships with related parties, including equity method investees and UPMC, involving both revenue generation from services and cost of revenue for subcontracted tasks | Related Party Balances (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Accounts receivable, net | $7,326 | $8,787 | | Prepaid expenses and other current assets | $43 | — | | Accounts payable | — | $27 | | Accrued liabilities | — | $192 | | Related Party Revenues and Expenses (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $39,486 | $42,810 | $94,207 | $74,874 | | Cost of revenue | $32,076 | $36,684 | $79,582 | $63,145 | | Selling, general and administrative expenses | $997 | $236 | $1,239 | $302 | Note 19. Repositioning and Other Changes The company initiated a repositioning plan in Q2 2023 to align assets and talent with value-based specialty care, incurring $11.3 million in charges for severance, dedicated employee costs, and professional services, with total expected charges of $25.3 million - A repositioning plan was implemented in Q2 2023 to streamline operations and focus on value-based specialty care, involving organizational changes and brand consolidation[206] | Repositioning Plan Costs (in thousands) | Incurred for 3 Months Ended June 30, 2023 | Incurred for 6 Months Ended June 30, 2023 | Total Amount Expected to be Incurred | | :--- | :--- | :--- | :--- | | Severance and termination benefits | $4,737 | $4,737 | $7,300 | | Dedicated employee costs | $1,737 | $1,737 | $7,725 | | Professional services | $4,787 | $4,787 | $10,300 | | Total | $11,261 | $11,261 | $25,325 | - The repositioning program is anticipated to be substantially complete by the first half of 2024[207] Note 20. Reserve for Claims and Performance-Based Arrangements The company maintains reserves for claims and performance-based arrangements, using actuarial principles and estimates for incurred but not reported claims, with the balance increasing significantly for the six months ended June 30, 2023 - Reserves reflect estimates for payments under performance-based arrangements and the ultimate cost of incurred but not reported claims, including expected development on reported claims[210] - The estimation process involves considerable judgment and is highly sensitive to changes in key assumptions like completion factors and medical cost trends[215] | Reserves for Claims and Performance-Based Arrangements (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Balance, beginning of period | $199,730 | $171,294 | | Total claims incurred | $358,985 | $269,393 | | Total claims paid | $(312,904) | $(302,653) | | Balance, end of period | $245,811 | $125,960 | Note 21. Supplemental Cash Flow Information This note provides supplemental non-cash investing and financing activities, including the impact of business combinations on goodwill and the issuance of Class A common stock for acquisitions, as well as operating cash flows from operating leases | Supplemental Non-cash Activities (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Accrued property and equipment purchases | $24 | $1,118 | | Increase/decrease to goodwill from measurement period adjustments/business combinations | $(391) | — | | Class A common stock issued in connection with business combinations | $261,271 | — | | Operating cash flows from operating leases | $6,532 | $7,010 | Note 22. Subsequent Events Subsequent to the reporting period, the company issued a notice of redemption for its outstanding 2024 Notes, planning to redeem them for cash or convert them into Class A Common Stock by October 13, 2023 - On August 2, 2023, the company issued a notice to redeem its outstanding 2024 Notes for cash or conversion into Class A Common Stock by October 13, 2023[218] - As of August 2, 2023, $24.3 million aggregate principal amount of the 2024 Notes was outstanding, with the company intending to fund the redemption using cash on hand[218] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting business overview, recent events, critical accounting policies, detailed analysis of revenue and expenses, and liquidity, emphasizing growth in value-based care and impacts of acquisitions Introduction Evolent Health is a market leader in value-based care, providing integrated solutions to healthcare providers and payers. The company has consolidated its segments into one to reflect growth in its value-based specialty care business and noted no material impact from inflation on Q2 2023 results - Evolent Health provides integrated solutions for value-based care, aiming to improve healthcare quality and outcomes while reducing costs for providers and payers[222] - The company revised its segment structure to a single segment as of January 1, 2023, due to significant growth in its value-based specialty care business[224] - Inflationary pressures on operating expenses were not material to revenues or net income for the six months ended June 30, 2023[226] Recent Events Recent events include the acquisition of NIA, which was financed through a credit agreement amendment and the issuance of Series A Preferred Stock, and the implementation of a repositioning plan to streamline operations and focus on value-based specialty care - The acquisition of NIA on January 20, 2023, for $387.8 million in cash, $265.0 million in debt financing, and 8.5 million shares of Class A common stock, aims to accelerate the company's value-based specialty care strategy[230] - A Credit Agreement Amendment on January 20, 2023, provided an additional $240.0 million in term loans and $25.0 million in revolving commitments to finance the NIA acquisition[231] - The company issued 175,000 shares of Series A Preferred Stock for $168.0 million to help finance the NIA acquisition[232] - A repositioning plan initiated in Q2 2023 is expected to incur total charges of approximately $25.3 million, recorded in selling, general and administrative expenses, to align assets and talent towards value-based specialty care[235] Critical Accounting Policies and Estimates This section highlights goodwill as a critical accounting estimate, detailing the annual impairment review process which involves qualitative and quantitative assessments. No goodwill impairment was identified in 2022 or the first half of 2023 - Goodwill is reviewed at least annually for impairment, with tests performed at the reporting unit level, involving qualitative and, if necessary, quantitative assessments[237][238] - The 2022 annual goodwill impairment test for the Evolent Health Services reporting unit, prompted by a partner's exit from a line of business, showed that fair value exceeded carrying value, thus no impairment occurred[240][241] - No qualitative factors triggered a quantitative goodwill impairment test during the six months ended June 30, 2023[242] Results of Operations The company experienced substantial revenue growth for both the three and six months ended June 30, 2023, primarily driven by acquisitions and expansion with partners. However, operating expenses also increased significantly, leading to larger operating losses Key Components of our Results of Operations This section defines the key components of the company's results of operations, including revenue recognition from value-based care solutions, cost of revenue, selling, general and administrative expenses, depreciation and amortization, and operational metrics like Lives on Platform and PMPM fees - Revenue contracts are typically multi-year arrangements for value-based care solutions, utilizing a variable fee structure based on per member per month rates or plan premiums[248][249] - Cost of revenue includes claims expense, employee-related expenses, TPA support, and in some cases, capitation payments and pharmaceutical treatments[253] - Key operational metrics include 'Lives on Platform' (members covered for specialty care, risk arrangements, or administrative services), 'PMPM fees' (revenue per member per month), and 'Cases' (individuals in surgery management/advanced care planning)[256][257] Evolent Health, Inc. Consolidated Results The consolidated results show significant revenue growth for both the three and six months ended June 30, 2023, but also a substantial increase in total operating expenses, leading to a larger operating loss compared to the prior year | Metric (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change (3M) | % Change (3M) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $469,136 | $319,939 | $149,197 | 46.6% | | Cost of revenue | $351,938 | $249,705 | $102,233 | 40.9% | | Selling, general and administrative expenses | $90,389 | $58,955 | $31,434 | 53.3% | | Depreciation and amortization expenses | $32,134 | $15,112 | $17,022 | 112.6% | | Right-of-use assets impairment | $24,065 | — | $24,065 | —% | | Operating loss | $(21,568) | $(4,633) | $(16,935) | -365.5% | | Metric (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (6M) | % Change (6M) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $896,826 | $616,996 | $279,830 | 45.4% | | Cost of revenue | $662,413 | $469,444 | $192,969 | 41.1% | | Selling, general and administrative expenses | $180,115 | $117,887 | $62,228 | 52.8% | | Depreciation and amortization expenses | $61,409 | $30,218 | $31,191 | 103.2% | | Right-of-use assets impairment | $24,065 | — | $24,065 | —% | | Operating loss | $(31,923) | $(7,431) | $(24,492) | -329.6% | Comparison of the Results for Three Months Ended June 30, 2023 to 2022 Revenue increased by 46.6% to $469.1 million, driven by acquisitions and partner expansion. Cost of revenue rose 40.9% due to higher claims and personnel costs. SG&A expenses increased 53.3% due to acquisition-related fees and personnel. Depreciation and amortization more than doubled, and a $24.1 million ROU asset impairment was recognized - Total revenue increased by $149.2 million (46.6%) to $469.1 million, with $90.6 million from NIA and IPG acquisitions and $58.6 million from new/expanded partners[263] - Cost of revenue increased by $102.2 million (40.9%) to $351.9 million, primarily due to $52.4 million in higher claims costs from acquisitions and contract transitions, and $30.4 million in higher personnel costs[266] - Selling, general, and administrative expenses increased by $31.4 million (53.3%) to $90.4 million, driven by $22.2 million in NIA transfer services administration agreement fees and $8.3 million in higher personnel costs[268] - Depreciation and amortization expenses increased by $17.0 million (112.6%) to $32.1 million, mainly due to $14.6 million from acquired intangible assets and $1.9 million from accelerated trade name amortization[270] - A $24.1 million impairment charge was recognized for right-of-use assets due to decommissioning the Chicago, IL lease[271] Comparison of the Results for Six Months Ended June 30, 2023 to 2022 Revenue grew 45.4% to $896.8 million, largely from acquisitions and partner growth. Cost of revenue increased 41.1% due to higher claims and personnel. SG&A rose 52.8% from acquisition-related fees and headcount. Depreciation and amortization more than doubled, and a $24.1 million ROU asset impairment was recorded - Total revenue increased by $279.8 million (45.4%) to $896.8 million, with $172.6 million from NIA and IPG acquisitions and $107.2 million from new/expanded partners[273] - Cost of revenue increased by $193.0 million (41.1%) to $662.4 million, driven by $110.5 million in higher claims costs and $56.2 million in increased personnel costs from acquisitions[275] - Selling, general, and administrative expenses increased by $62.2 million (52.8%) to $180.1 million, primarily due to a $16.1 million NIA TSA fee, $10.6 million in higher personnel fees, and $11.7 million in acquisition/severance costs[276] - Depreciation and amortization expenses increased by $31.2 million (103.2%) to $61.4 million, mainly from $27.6 million in acquired intangible assets and $2.6 million in accelerated trade name amortization[278] - A $24.1 million impairment charge was recognized for right-of-use assets due to decommissioning the Chicago, IL lease[279] Discussion of Non-Operating Results Non-operating results were significantly impacted by a substantial increase in interest expense due to new debt for acquisitions, a large change in the Tax Receivable Agreement (TRA) liability, and a corresponding income tax benefit - Interest expense increased significantly to $27.4 million for the six months ended June 30, 2023, up from $4.4 million in the prior year, primarily due to new debt from the Credit Agreement[281] - A $66.2 million change in Tax Receivable Agreement (TRA) liability was recorded for the six months ended June 30, 2023, resulting in a total TRA liability of $112.1 million[284] - An income tax benefit of $(69.2) million was recognized for the six months ended June 30, 2023, primarily due to the reduction in valuation allowance from deferred tax liabilities related to the NIA acquisition[285] Review of Consolidated Financial Condition The company's liquidity position is deemed sufficient for the next twelve months, despite operating losses. Cash flows were significantly impacted by investing activities (acquisitions) and financing activities (debt and preferred equity issuance). Contractual obligations increased, and goodwill and intangible assets grew substantially due to recent acquisitions - The company believes its current cash and cash equivalents ($142.5 million as of June 30, 2023) are sufficient to meet working capital and capital expenditure requirements for at least the next twelve months[287][288] | Cash Flow Summary (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash and restricted cash used in operating activities | $(7,320) | $(43,778) | | Net cash and restricted cash provided by (used in) investing activities | $(403,347) | $330 | | Net cash and restricted cash provided by (used in) financing activities | $403,059 | $(30,686) | - Investing activities used $403.3 million, primarily for $388.2 million in acquisitions (NIA) and $15.9 million in internal-use software/property and equipment[293] - Financing activities provided $403.1 million, mainly from $256.1 million in debt proceeds and $168.0 million from preferred equity issuance[295] | Contractual Obligations (in thousands) | 2023 | 2024-2025 | 2026-2027 | 2028+ | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases for facilities | $4,444 | $22,895 | $20,335 | $32,161 | $79,835 | | Purchase obligations related to vendor contracts | $5,342 | $5,700 | $1,466 | — | $12,508 | | Convertible notes interest payments | $1,606 | $5,175 | — | — | $6,781 | | Convertible notes principal repayment | $24,281 | $172,500 | — | — | $196,781 | | Contingent consideration | $43,300 | $70,000 | — | — | $113,300 | | Total contractual obligations | $78,973 | $276,270 | $21,801 | $32,161 | $409,205 | - Goodwill and intangible assets increased significantly due to the NIA acquisition ($404.0 million intangible assets, $395.2 million goodwill) and IPG acquisition ($195.7 million intangible assets, $296.6 million goodwill)[304] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on its floating-rate debt and preferred stock, with a 1% increase in SOFR potentially leading to $4.5 million in additional annual interest expense and $1.8 million in preferred dividends. It also faces foreign currency exchange risk but does not currently use derivatives for hedging - As of June 30, 2023, the company had $415.0 million in secured term loans, $37.5 million in secured revolving credit facilities, and $175.0 million in Series A Preferred Stock, all of which are floating-rate instruments based on SOFR[311] - A 1% increase in SOFR would result in an additional $4.5 million in annual interest expense and $1.8 million in annual preferred dividends[311] - The company is exposed to foreign currency risks, primarily related to operating expenses denominated in Indian Rupee and Philippine Peso, but does not currently use derivative financial instruments to hedge this risk[313] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023. The acquisitions of IPG and NIA were excluded from the internal controls over financial reporting assessment for this period due to ongoing integration - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[315] - The acquisitions of IPG (August 1, 2022) and NIA (January 20, 2023) were excluded from the assessment of internal controls over financial reporting for the period ended June 30, 2023, due to ongoing integration[317] - Management acknowledges the inherent limitations of internal controls, which can only provide reasonable assurance against errors and fraud[319] PART II This part addresses legal proceedings, risk factors, equity security sales, and other required disclosures for the reporting period Item 1. Legal Proceedings This section incorporates by reference the discussion of legal proceedings from Note 10 of the financial statements, which includes a derivative action filed by a shareholder regarding oversight of Passport Health Plan - The discussion of legal proceedings is incorporated by reference from Note 10, which details a shareholder derivative action concerning the company's relationship with Passport Health Plan[321] - A shareholder sent a letter to the Board on April 6, 2023, requesting an investigation into alleged wrongdoing and litigation for breach of fiduciary duty against individuals named in the prior Derivative Action[158] Item 1A. Risk Factors This section supplements the significant business risks outlined in the 2022 Form 10-K, specifically highlighting increased exposure to online security risks, the potential failure of banking institutions holding company funds, and the challenge of accurately underwriting performance-based contracts in specialty care management - The company faces significant online security risks due to handling confidential information, with potential liabilities and reputational harm from security breaches, despite implemented measures[323] - The failure of banking institutions holding company funds, particularly amounts exceeding FDIC insured levels, could reduce available cash and negatively impact company value[328] - Failure to accurately underwrite performance-based contracts for specialty care management, especially given the unpredictable costs of oncology, cardiology, and other specialties, could reduce profitability[329] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On May 11, 2023, the company issued 27,522 shares of Class A common stock in connection with a contingent consideration earn-out provision, exempt from registration under Section 4(a)(2) and Rule 506(b) of the Securities Act - On May 11, 2023, 27,522 shares of Class A common stock were issued for a contingent consideration earn-out provision[330] - The issuance was exempt from registration under the Securities Act, relying on Section 4(a)(2) and Rule 506(b), as purchasers were accredited investors and no general solicitation occurred[330] Item 3. Defaults Upon Senior Securities This item is marked as 'Not applicable,' indicating no defaults upon senior securities for the reporting period Item 4. Mine Safety Disclosures This item is marked as 'Not applicable,' indicating no mine safety disclosures are required for the reporting period Item 5. Other Information This item states 'None,' indicating no other information is required to be disclosed for the reporting period Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to the Stock and Asset Purchase Agreement, certifications, and XBRL taxonomy documents - Exhibits include Amendment No. 1 and No. 2 to the Stock and Asset Purchase Agreement related to Magellan Health, Inc.[336] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are included[336] - XBRL (eXtensible Business Reporting Language) documents are provided for instance, schema, calculation, label, presentation, and definition linkbases[336] Signatures The report is duly signed on behalf of Evolent Health, Inc. by its Chief Financial Officer, John Johnson, and Chief Accounting Officer and Controller, Aammaad Shams, as of August 2, 2023 - The report is signed by John Johnson, Chief Financial Officer, and Aammaad Shams, Chief Accounting Officer and Controller[339] - The signing date for the report is August 2, 2023[340]