Annual
Report
OUR MISSION
To change the health of the nation
by changing the way health care is delivered
Too OOOuuurrr SShhaaarreeehhoooollddeeers
The past year was unprecedented in recent memory. The global COVID-19
pandemic and the movement for racial justice threw into stark relief long-standing
issues with our health care system—including the need for whole-person health
that is affordable and simple. Here at Evolent Health, we re-dedicated ourselves
to our core mission during 2020, delivering our quality and cost improvement
solutions to more than nine million individuals across the country. This focus
delivered strong results for our members, the communities we serve, our health
plan and provider partners, and our shareholders.
We have been focused on our mission of
reducing the cost of care and improving the
quality of care since our inception. With over
one trillion dollars in annual waste in the
United States health care system to address,
our solutions have a total addressable market
size of over $130 billion and 2020 revenues
of $1 billion, leaving significant opportunity
ahead. Our differentiated products and
momentum in this large market led to
strong growth performance in 2020.
We added eight new partners, including
regional and national payers, independent
physicians and ACOs. We also expanded
significantly with existing partners. The
expansion and increased diversification of
our partner base demonstrates Evolent’s
unique market position and how our partners
value our proven approach to reducing
the total cost of care, improving clinical
outcomes and simplifying administration.
In 2020, we were pleased to contribute to
the health of our clients’ members. Through
our clinical programs, which include complex
care, transition care, maternity, and behavioral
health, we engaged more than 35,000 high-risk,
high-cost patients and evaluated over 60,000
more. We also directly managed over 166,000
active cancer cases across the country.
Across the year, Evolent delivered strong
financial performance and further positioned
the company for success in the future. Coupled
with robust revenue growth, our dedicated
cost reduction efforts drove continued
Adjusted EBITDA margin expansion. We
executed on our portfolio simplification plan
to fully focus our strategic vision on our core
services business, and have now monetized,
or entered into agreements to monetize,
all health plan assets. The monetization of
these assets and our disciplined focus on our
cost structure allowed us to de-lever, and as
of today, we have a strong cash position.
PATIENTS ENGAGED
PATIENTS EVALUATED
Growth and Strong Financial Performance
From a performance perspective, we are
pleased that we achieved our key financial
objectives for 2020. In 2020, we exceeded
the high-end ranges for both our top and
bottom-line targets, made strong progress
on our cost reduction effort and achieved
positive cash flow ahead of schedule. Our
consistently strong results across 2020
demonstrate our commitment to execute
against our attractive financial model and
we carry that momentum into 2021.
In 2020, we grew total revenue by 20.8 percent,
from $846.4 million the year prior to $1.0
billion. Adjusted EBITDA1 for the full year was
$41.4 million compared to $(11.0) million in
2019. Our strong performance across 2020 was
driven by strength in our performance-based
arrangements, continued focus on cost control
efforts, new partner additions, and cross-sell
expansions within our existing partner base.
This growth is propelled by our proven
results. For example, as announced by the
Centers for Medicare and Medicaid Services
in 2020, five Next Generation Accountable
Care Organizations (NGACOs) that Evolent
supported earned a combined $84 million
in savings for Medicare in 2019.2 This cohort
received shared savings payments of more
than $66 million and outperformed other
ACOs in the program in average savings
by approximately 40%. Evolent’s close,
collaborative partnership with our partners
and approach to managing total cost of
care through our proprietary population
health technology and clinical capabilities
have helped drive these strong results.
Proprietary Technology, Clinical
Intellectual Property and Scaled Services
The combination of our proprietary technology,
our clinical intellectual property and our
scaled services allow us to proactively address
the health needs of vulnerable patients.
Highlights of our clinical achievements
across 2020 include:
• Developed and deployed a specialized
COVID-19 risk stratification model, used by
many of our partners across the country.
• Completed over 140,000 calls between
April and August 2020 across more
than eight of our partners to educate
members on the COVID-19 virus
and how to prevent the spread.
• Earned NCQA Accreditation in Utilization
Management for New Century Health.
• Released Panel Insight, a new module
in our proprietary technology platform
Identifi®, that prioritizes and scores
critical interventions for each physician
practice, making it easier for practices to
focus on the highest yield inventions.
• Demonstrated success of Evolent’s Complex
Care Programs, which target Medicare
beneficiaries with multiple chronic diseases.
Across five Medicare ACOs over a two-year
period, hospitalizations were 21% lower
and total medical spend was 22% lower for
high-risk beneficiaries who participated
in Evolent’s care management programs
versus high-risk beneficiaries who did not.3
• Enhanced our core Identifi® technology
platform and clinical analytics capability
with four new Identifi® releases and the
addition of four new standard report
offerings for Utilization Management clients.
1 Non-GAAP measure. See Appendix A for definition and reconciliation to net loss attributable to common
shareholders of Evolent Health, Inc., which was $(334.2) million for the year ended December 31, 2020.
2 Centers for Medicare and Medicaid Services. Next Generation ACO Model: Performance Year 4 (2019) (XLS).
https://innovation.cms.gov/innovation-models/next-generation-aco-model.
3 O’Hara, Neal, et al. Effective Care Management by Next Generation Accountable Care Organizations.
The American Journal of Managed Care. Volume 26, Issue 07, July 2020. https://www.ajmc.com/view/
effective-care-management-by-next-generation-accountable-care-organizations.
A World-Class Environment for Top Talent
Looking Forward
Across the organization, we have a strong and
diverse leadership team with a wide breadth of
expertise that helps us to execute on the key
objectives of our strategic plan. We are proud
that Evolent has established a reputation as a
leading destination for the best and brightest
in the health care industry. We received more
than 130,000 applications for 1,200 filled
positions this past year, demonstrating the
strong brand we have built for top talent.
As a mission-driven organization, our company
culture reflects an atmosphere of respect,
honesty and humility. Evolent recently
received a perfect 100 score on the Human
Rights Campaign Foundation’s Corporate
Equality Index for 2020. Across the year, we
appointed a Diversity, Equity and Inclusion
leader and fostered the development of
eight business resource groups, which focus
on promoting inclusion, educating on bias
and culture and supporting DE&I initiatives.
This year, we also launched a firmwide
inclusion score which debuted at 87%.
Our investment in employee engagement and
strong individual and leadership development
has allowed us to retain top performers
and create a highly motivated workforce.
Evolenteers logged more than 42,000 hours
of learning and development courses and
approximately 15,000 hours of community
service in 2020. In response to COVID-19,
individuals and teams across the company
sewed masks and delivered them to those in
need, including over 10,000 masks for children
in Chicago communities; volunteered at local
food banks; and went above and beyond their
normal responsibilities to ensure high-risk
members had groceries and medications to stay
safe at home. We are proud of our employees
living our values and their commitment to
drive change during this unprecedented year.
Looking toward the future, Evolent remains
committed to executing our strategy of:
1. Driving strong organic growth and
achieving our growth targets
2. Scaling the business to drive
enhanced margins
3. Efficiently allocating capital
Overall, we feel very well positioned
operationally and strategically, and we
are pleased to enter 2021 with strong
momentum and high visibility.
On behalf of over 3,200 talented employees
and our national network of partners, we are
proud of our collective accomplishments
over the past year. We are inspired by the
resiliency and dedication of our partners
on the frontlines of the COVID-19 pandemic
and will continue to proactively support
this effort in every way possible.
In closing, we remain focused on our strategic
priorities and connected to our mission of
changing the health of the nation by changing
the way health care is delivered. I would
like to deeply thank all Evolenteers for their
continued commitment to our partners and the
communities we serve. I would also like to thank
our partners, communities and shareholders
in what has been an extraordinary year.
Sincerely,
Seth Blackley
Chief Executive Officer
and Co-Founder
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
_________________________
(Mark One)
S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-37415
_________________________
Evolent Health, Inc.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
32-0454912
(I.R.S. Employer
Identification No.)
800 N. Glebe Road
, Suite 500 , Arlington , Virginia
(Address of principal executive offices)
22203
(Zip Code)
(571) 389-6000
Registrant’s telephone number, including area code
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock of Evolent Health, Inc., par value
$0.01 per share
Trading Symbol(s) Name of each exchange on which registered
EVH
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes S No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No S
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes S No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes S No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer S Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
1
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. S
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (based on the closing price of
the shares on the New York Stock Exchange on such date) as of the last business day of the registrant’s most recently completed second fiscal
quarter was $540.0 million.
As of February 22, 2021, there were 86,091,822 shares of the registrant’s Class A common stock outstanding.
Documents Incorporated by Reference
Selected portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled for June 10, 2021, have been incorporated by
reference into Part III of this Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange
Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.
————————————————————————————————————————————————————————
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Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Evolent Health, Inc.
Table of Contents
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
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Explanatory Note
In this Annual Report on 10-K, unless the context otherwise requires, “Evolent,” the “Company,” “we,” “our” and “us” refer to
Evolent Health, Inc. and its consolidated subsidiaries. Evolent Health LLC, a subsidiary of Evolent Health, Inc. through which we
conduct our operations, has owned all of our operating assets and substantially all of our business since inception. Evolent Health, Inc.
is a holding company.
As used in this Annual Report on Form 10-K:
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“ACA” means the Patient Protection and Affordable Care Act;
“Accordion” means Accordion Health, Inc.;
“accountable care organizations,” or “ACOs,” means organizations of groups of doctors, hospitals and other health care
providers which have come together voluntarily to provide coordinated care to their Medicare patients;
“ASO” means administrative services only, which refers to contracts with our partners wherein Evolent provides certain
services on a fee-basis but does not assume responsibility for the cost of care;
“Aldera” means Aldera Holdings, Inc.;
“capitated arrangements” means health care payment arrangements whereby providers are paid a fixed amount of money per
patient during a given period of time rather than on a per-service or per-procedure basis;
“CMS” means the Centers for Medicare and Medicaid Services;
“DGCL” means General Corporation Law of the State of Delaware;
“EMR” means electronic medical records;
“Evolent Health Holdings” means Evolent Health Holdings, Inc., the predecessor to Evolent Health, Inc.;
“EVH Passport” means Justify Holdings, Inc., a subsidiary of the Company;
“Exchange Act” means the Securities Exchange Act of 1934, as amended;
“founders” means the Advisory Board Company (“The Advisory Board”), and the University of Pittsburgh Medical Center
(“UPMC”);
“FTC” means the United States Federal Trade Commission;
“GAAP” means United States of America generally accepted accounting principles;
“health insurance exchanges” means organizations that provide a marketplace for individuals to purchase standardized and
government regulated health insurance policies;
“HIPAA” means The Health Insurance Portability and Accountability Act;
“HITECH Act” means The Health Information Technology for Economic and Clinical Health Act;
“IPO” means our initial public offering of 13.2 million shares of our Class A common stock at a public offering price of
$17.00 per share in June 2015;
“New Century Health” means NCIS Holdings, Inc.;
“NMHC” means New Mexico Health Connections;
“NYSE” means the New York Stock Exchange;
“Offering Reorganization” means the reorganization undertaken in 2015 prior to our IPO where our predecessor, Evolent
Health Holdings, Inc. merged with and into Evolent Health, Inc.;
“partners” means our customers, unless we indicate otherwise or the context otherwise implies;
“performance-based” means risk-based contracts with our partners wherein Evolent assumes financial responsibility for the
cost of care, which may range from upside and downside gain share to all, or substantially all, of the responsibility for the
cost of care within a defined scope subject to Evolent management controls and contractual protections;
“pharmacy benefit management,” or “PBM,” means the administration of prescription drug programs, including developing
and maintaining a list of medications that are approved to be prescribed, contracting with pharmacies, negotiating discounts
and rebates with drug manufacturers and processing prescription drug claim payments;
“population health” means an approach to health care that seeks to improve the health of an entire human population;
“SEC” means the Securities and Exchange Commission;
“Securities Act” means the Securities Act of 1933, as amended;
“third-party administration,” or “TPA,” means the processing of insurance claims or the administration of certain aspects of
employee benefit plans for a separate entity;
“True Health” means True Health New Mexico, Inc., a wholly-owned subsidiary of Evolent Health, Inc.;
“TPG” means TPG Global, LLC and its affiliates including one or both of TPG Growth II BDH, LP and TPG Eagle
Holdings, L.P.;
“TRA” means the Income Tax Receivables Agreement. See “Part II – Item 8. Financial Statements and Supplementary Data -
Note 14” for further details of the Tax Receivables Agreement;
“UHC” means University Health Care, Inc d/b/a Passport Health Plan;
“Valence Health” means Valence Health, Inc., excluding Cicerone Health Solutions, Inc.;
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“value-based care” means a health care management strategy that is focused on high-quality and cost-effective care with the
goals of promoting a healthy lifestyle, enhancing the patient experience and reducing preventable hospital admissions and
emergency visits; and
“VIE” means variable interest entities.
ii
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a
statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future
results, performance or achievements, and may contain words like: “believe,” “anticipate,” “expect,” “estimate,” “aim,” “predict,”
“potential,” “continue,” “plan,” “project,” “will,” “should,” “shall,” “may,” “might” and other words or phrases with similar meaning
in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future
actions, trends in our businesses, prospective services, future performance or financial results and the closing of pending transactions
and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking
statements provided by the PSLRA.
These statements are only predictions based on our current expectations and projections about future events. Forward-looking
statements involve risks and uncertainties that may cause actual results, level of activity, performance or achievements to differ
materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary
materially, some of which are described within the forward-looking statements, include, among others:
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the significant portion of revenue we derive from our largest partners, and the potential loss, termination or renegotiation
of our relationship or contract with any significant partner, or multiple partners in the aggregate;
evolution in the market for value-based care;
uncertainty in the health care regulatory framework, including the potential impact of policy changes;
our ability to offer new and innovative products and services;
risks related to completed and future acquisitions, investments, alliances and joint ventures, including the acquisition of
assets from New Mexico Health Connections, and the acquisitions of Valence Health Inc., excluding Cicerone Health
Solutions, Inc., Aldera Holdings, Inc., New Century Health, and Passport, which may be difficult to integrate, divert
management resources, or result in unanticipated costs or dilute our stockholders;
the financial benefits we expect to receive as a result of the sale of certain assets of Passport may not be realized;
the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control,
including governmental funding reductions and other policy changes, enrollment numbers for our partners’ plans,
premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce
health care costs;
risks relating to our ability to maintain profitability for our total cost of care and New Century Health’s performance-
based contracts and products, including capitation and risk-bearing contracts;
our ability to effectively manage our growth and maintain an efficient cost structure, and to successfully implement cost
cutting measures;
the potential negative impact of the COVID-19 pandemic and other public health emergencies;
our ability to recover the significant upfront costs in our partner relationships;
our ability to attract new partners and successfully capture new growth opportunities;
the increasing number of risk-sharing arrangements we enter into with our partners;
our ability to estimate the size of our target markets;
our ability to maintain and enhance our reputation and brand recognition;
consolidation in the health care industry;
competition which could limit our ability to maintain or expand market share within our industry;
risks related to governmental payer audits and actions, including whistleblower claims;
our ability to partner with providers due to exclusivity provisions in our contracts;
risks related to our offshore operations;
our ability to contain health care costs, implement increases in premium rates on a timely basis, maintain adequate
reserves for policy benefits or maintain cost effective provider agreements;
our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;
the impact of additional goodwill and intangible asset impairments on our results of operations;
our indebtedness, our ability to service our indebtedness, and our ability to obtain additional financing;
our ability to achieve profitability in the future;
the impact of litigation, including the ongoing class action lawsuit;
additional material weaknesses in the future may impact our ability to conclude that our internal control over financial
reporting is not effective and we may be unable to produce timely and accurate financial statements;
restrictions and penalties as a result of privacy and data protection laws;
data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;
restrictions and penalties as a result of privacy and data protection laws;
adequate protection of our intellectual property, including trademarks;
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any alleged infringement, misappropriation or violation of third-party proprietary rights;
our use of “open source” software;
our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;
our reliance on third parties and licensed technologies;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own
systems for providing services to our partners;
our reliance on third-party vendors to host and maintain our technology platform;
our obligations to make payments to certain of our pre-IPO investors for certain tax benefits we may claim in the future;
our ability to utilize benefits under the tax receivables agreement described herein;
our obligations to make payments under the tax receivables agreement that may be accelerated or may exceed the tax
benefits we realize;
the terms of agreements between us and certain of our pre-IPO investors;
the conditional conversion features of the 2024 and 2025 convertible notes, which, if triggered, could require us to settle
the 2024 or 2025 convertible notes in cash;
the impact of the accounting method for convertible debt securities that may be settled in cash;
the potential volatility of our Class A common stock price;
the potential impact of our securities class action litigation;
the potential decline of our Class A common stock price if a substantial number of shares are sold or become available
for sale;
provisions in our second amended and restated certificate of incorporation and third amended and restated by-laws and
provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;
the ability of certain of our investors to compete with us without restrictions;
provisions in our second amended and restated certificate of incorporation which could limit our stockholders’ ability to
obtain a favorable judicial forum for disputes with us or our directors, officers or employees; and
our intention not to pay cash dividends on our Class A common stock.
The risks included here are not exhaustive. Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements. More information on potential factors
that could affect our businesses and financial performance is included in “Forward Looking Statements - Cautionary Language,” “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or similarly captioned
sections of this Annual Report and the other period and current filings we make from time to time with the SEC. Moreover, we operate
in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management
to predict all such risk factors.
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we
undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances that occur after the date
of this report.
Market Data and Industry Forecasts and Projections
We use market data and industry forecasts and projections throughout this Annual Report on Form 10-K, and in particular in “Part I -
Item 1. - Business.” We have obtained the market data from certain publicly available sources of information, including publicly
available independent industry publications and other third-party sources. Unless otherwise indicated, statements in this Annual
Report on Form 10-K concerning our industry and the markets in which we operate, including our general expectations and
competitive position, business opportunity and market size, growth and share, are based on information from independent industry
organizations and other third-party sources (including industry publications, surveys and forecasts), data from our internal research
and management estimates. We believe the data that third parties have compiled is reliable, but we have not independently verified the
accuracy of this information and there is no assurance that any of the forecasted amounts will be achieved. Any forecasts are based on
data (including third-party data), models and experience of various professionals and are based on various assumptions, all of which
are subject to change without notice. While we are not aware of any misstatements regarding the industry data presented herein,
forecasts, assumptions, expectations, beliefs, estimates and projections involve risks and uncertainties and are subject to change based
on various factors, including those described under the heading “Forward-Looking Statements - Cautionary Language” and in “Part I -
Item 1A. Risk Factors.”
iv
PART I - FINANCIAL INFORMATION
Item 1. Business
Market Opportunity
We are a market leader in the new era of value-based care, in which leading health systems and physician organizations, which we
refer to as providers, as well as health plans, which we refer to as payers, are moving their business models from traditional fee-for-
service (“FFS”) reimbursement to an increasingly integrated clinical and financial responsibility for populations. We refer to our
provider and payer customers as partners. We consider this integration of health care delivery and financial responsibility with the aim
of lowering cost, enhancing quality, and improving satisfaction, to be the core of value-based care. We believe the pace of this
integration is accelerating, driven by price pressure in traditional FFS health care, a market environment that is incentivizing value-
based care models, growth in consumer-focused insurance programs, such as Medicare Advantage and innovation in data and
technology.
The U.S. health care market is projected to approach $4 trillion in spending during 2020, with less than half of payments tied to value-
based care models. We believe the shift to value-based care is accelerating, driven by price pressure in traditional FFS health care, a
policy and market environment that is incentivizing value-based care models and innovation in data and technology. We believe that
the transition to value-based care is impacting the business models of both providers and payers in all segments of the market,
including Medicare, Medicaid, and Commercial lines of business.
We believe providers are well-positioned to lead this transition to value-based care because of their control over large portions of
health care delivery costs, their primary position with consumers, and their strong local brands. Providers operating successfully in
value-based arrangements can diversify their revenue streams, capture superior economics, and improve the quality of care they
provide.
We also believe payers who successfully evolve their business model from that of FFS reimbursement towards value-based care can
gain meaningful competitive advantages. Payers who successfully integrate care delivery and financing with providers stand to gain
market advantage as medical expenses for their populations are lowered while also quality of care is improved.
The transformation of provider and payer business models from FFS to value-based care requires infrastructure that performs two
functions: (i) the ability to create clinical value, which is typically defined as lowering the cost of care while maintaining or improving
quality, that is superior to FFS, and (ii) an administrative platform on which to operate the value-based business. In addition to this
infrastructure, we believe that participants in value-based arrangements also need sustainable contractual mechanisms to enable each
party to capture clinical value that is created and sufficient lives in value-based arrangements to provide a return on infrastructure
investments.
Our Business
Our History
team, UPMC, an integrated delivery system in Pittsburgh,
Evolent was founded in 2011 by members of our management
Pennsylvania, and The Advisory Board Company, to enable providers to pursue a value-based business model and evolve their
competitive position and market opportunity. Since that time, we have grown both organically and through acquisitions. On February
1, 2016, the Company entered into a strategic alliance with UHC. In October 2016, we acquired Valence Health. Valence Health,
based in Chicago, Illinois, was founded in 1996 and provides TPA services, value-based administration, population health and
advisory services with a particular focus on the Medicaid and pediatric markets. On November 1, 2016, the Company completed the
acquisition of Aldera, a key vendor and the primary software provider for the Valence Health TPA platform. In January 2018, we
acquired a commercial health plan in New Mexico that focuses on small and large businesses, True Health. In October 2018, we
acquired New Century Health, a national population health leader in managing specialty care for Medicare, commercial and Medicaid
members under performance-based arrangements, focused primarily on oncology and cardiovascular care.
On December 30, 2019, we closed a transaction whereby EVH Passport acquired substantially all of the assets and assumed
substantially all of the liabilities of UHC (the “Passport Closing”), including UHC’s Medicaid contract (the “Passport Medicaid
Contract”) with the Kentucky Cabinet for Health and Family Services (“CHFS”). UHC was our largest partner in terms of revenue in
2019 and 2018, representing 18.7% and 17.5% of our revenues for such years, respectively. In connection with the Passport Closing,
EVH Passport issued a 30% equity interest in EVH Passport, in the aggregate, to The University of Louisville, the University of
Louisville Physicians, University Medical Center, the Jewish Heritage Fund for Excellence, Norton Healthcare, Inc. and the
Louisville/Jefferson County Primary Care Association (collectively, the “Sponsors”).
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On July 16, 2020, EVH Passport and Evolent Health LLC entered into an Asset Purchase Agreement (the “Molina APA”) with Molina
Healthcare, Inc. (“Molina”), which contemplated the sale by EVH Passport to Molina of certain assets, including certain intellectual
property rights of EVH Passport and EVH Passport’s rights under the Passport Medicaid Contract with CHFS. On September 1, 2020,
EVH Passport and Molina completed the closing of the transactions contemplated by the Molina APA (the “Molina Closing”), and the
Passport Medicaid Contract was novated to Molina. Following the Molina Closing, EVH Passport redeemed the Sponsors’ equity
interests in EVH Passport in accordance with the terms of EVH Passport’s Stockholders’ Agreement, and, as a result, EVH Passport
became a wholly owned subsidiary of the Company. In addition, following the Molina Closing, EVH Passport began to wind down its
business.
On January 11, 2021, Evolent Health LLC, EH Holding Company, Inc. (“EH Holdings”) and True Health, each wholly owned
subsidiaries of the Company, agreed to sell True Health to Bright Health Management, Inc. Though we cannot predict the certainty or
timing of closing, we expect the transaction to close in the first half of 2021, subject to satisfaction of customary closing conditions,
including regulatory approvals.
During 2020, we managed our operations and allocated resources across two reportable segments, our Services segment and our True
Health segment. The Company made organizational changes, including re-evaluating its reportable segments, as a result of the entry
into the agreement to sell True Health on January 11, 2021. Effective during the first quarter of 2021, the Company will bifurcate its
Services segment into two reportable segments as follows:
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Evolent Health Services, which houses our Administrative Simplification solution and certain supporting population
health infrastructure; and
Clinical Solutions, which includes our specialty management and physician-oriented total cost of care solutions, along
with the New Century Health and Evolent Care Partners brands.
Services Overview
Our services segment includes clinical and administrative solutions designed to help our customers manage and administer patient
health in a more cost-effective manner. We have two clinical solutions: (i) total cost of care management, and (ii) specialty care
management services, and one administrative solution: comprehensive health plan administrative services. From time to time, we
package our solutions under various go-to-market brand names to create product differentiation. Our partners may engage us to
provide one type of solution, or multiple types of solutions, depending on specific needs.
Core elements of our total cost of care management services include: (i) Identifi®, our proprietary technology system that aggregates
and analyzes data, manages care workflows and engages patients, (ii) population health performance, which supports the delivery of
patient-centric cost effective care and (iii) delivery network alignment, comprising the development of high performance delivery
networks.
Our specialty care management services support a broad range of specialty care delivery stakeholders during their transition from fee-
for-service to value-based care, independent of their stage of maturation and specific market dynamics. We focus on the oncology and
cardiology markets with the objective of helping providers and payers deliver higher quality, more affordable care and we provide
comprehensive quality management for oncology and cardiology patients.
Our comprehensive health plan administration services help payers and providers assemble the infrastructure required to operate,
manage and capitalize on a variety of financial and administrative management services, such as health plan services, risk
management, analytics and reporting and leadership and management.
The majority of our services revenue is derived from recurring multi-year contracts, which we refer to as platform and operations.
Platform and operations services accounted for 87.3% and 77.9% of our consolidated revenue for the years ended December 31, 2020
and 2019, respectively. We believe the recurring, multi-year nature of our platform and operations contracts enables us to have strong
visibility into future revenue. The amount of revenue in a given platform and operations contract is typically driven by: (i) the number
of members that Evolent is contracted to manage, (ii) the population types being served (e.g., Medicare, Medicaid, Commercial), and
(iii) the depth and breadth of the services and technology applications that our partners utilize from us. In situations involving clinical
solutions, we typically elect to: (iv) participate alongside or co-own risk-sharing arrangements with our partners whereby we share in a
portion of the upside and downside clinical performance, or by owning a portion of the underwriting results. We believe performance-
based contracts align our partners’ incentives with our own and enables us to capture greater value from our contracts. We believe we
are in the early stages of capitalizing on these aligned operating partnerships. We believe the current value-based care arrangements of
our payer and provider partners represent a relatively small portion of their overall total opportunity.
Our services business model benefits from scale, as we leverage our purpose-built technology-enabled solutions and centralized
resources in conjunction with the growth of our partners’ membership base. While our absolute investment in our centralized
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resources and technologies may increase over time, we expect it will decrease as a percentage of revenue as we are able to scale this
investment across a broader group of partners. We expect to grow with current partners as they increase membership in their existing
value-based operations, through expanding the number of services we provide to our existing partners, by adding new partners and by
capturing value through risk-sharing arrangements.
The other portion of our services revenue, which we call transformation is typically composed of implementation services associated
with our recurring revenue relationships. Due to the nature of recurring multi-year contracts, as we have added additional partners,
transformation revenue has decreased to approximately 1% of total revenues.
Clinical Solutions
We have two clinical solutions: total cost of care management and specialty care management services. We manage both of these
solutions in our services segment.
Total Cost of Care Management Solution
Our total cost of care management solution was developed based on the intellectual property contributions of UPMC at our founding.
Since then, we have continued to invest in the solution to broaden, deepen and scale its capabilities.
Our total cost of care management solution enables providers to manage populations they may be accountable for under value-based
contracts with payers or ACO contracts with CMS. This solution seeks to reduce the total cost of care for a given population by
identifying and managing high cost patients with targeted interventions managed and coordinated through primary care physicians.
The economic model of our total cost of care management solution is primarily performance-based, which we believe enhances our
ability to influence provider behavior by aligning our incentives with our partners. We estimate the total addressable market size of
our total cost of care management solution to be approximately $60 billion. We use, and may continue to use, different go-to-market
brand names for various solution packages, depending on the markets we seek to address. These go-to-market brand names include:
(i) Value Based Services, wherein we support primarily health systems in their value-based operations, and (ii) Evolent Care Partners,
wherein we offer physicians the opportunity to join Evolent’s proprietary payer contracting vehicles, scaled risk pools, and operating
model.
We refer to the offerings within this solution as value-based care services. Core elements of our value-based care services include:
(i) Identifi®, our proprietary technology system that aggregates and analyzes data, manages care workflows and engages patients, (ii)
population health performance, which supports the delivery of patient-centric cost effective care and (iii) delivery network alignment,
comprising the development of high performance delivery networks. We integrate change management processes and ongoing
physician-led transformation into all value-based services to build engagement, integration and alignment within our partners to
successfully deliver value-based care and sustain performance. We have standardized the processes described below and are able to
leverage our expertise across our partner base. Through the technological and clinical integration we achieve, our solutions are
delivered as engrained components of our partners’ core operations rather than as add-on solutions.
(i)
Identifi®
Identifi® is our proprietary technology system that aggregates and analyzes data, manages care workflows and engages
patients. Identifi® links our processes with those of our partners and other third parties to create a connected clinical delivery
ecosystem, stratify patient populations, standardize clinical work flows and enable high-quality, cost-effective care. The
configurable nature and broad capabilities of Identifi® help enhance the benefits our partners receive from our value-based
care services and increase the effectiveness of our partners’ existing technology architecture. Highlights of the capabilities of
Identifi® include the following:
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Data and integration services: Data from disparate sources, such as EMRs, and lab and pharmacy data, is collected,
assembled, integrated and maintained to provide health care professionals with a holistic view of the patient.
Clinical and business content: Clinical and business content is applied to the integrated data to create actionable
information to optimize clinical and financial performance.
EMR integration: Data and clinical insights from Identifi® are fed back into partner EMRs to improve both provider and
patient satisfaction, create workflow efficiencies, promote clinical documentation and coding and provide clinical
support at the point-of-care.
Applications: A suite of cloud-based applications manages the clinical, financial and operational aspects of the value-
based model. Our applications scale with the clinical, financial and administrative needs of our provider partners. As
additional capabilities are required by our partners, they are often deployed as applications through Identifi®.
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(ii) Population Health Performance
Population Health Performance is an integrated suite of technology-enabled solutions that supports the delivery of quality
care in an environment where a provider’s need to manage health has significantly expanded. These solutions include:
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Clinical programs: Care processes and ongoing clinical innovation that enables providers to target the right intervention
at the right time for a given patient.
Specialized care team: Multi-disciplinary team that is deployed telephonically from a centralized location or throughout
a local market to operate clinical programs, engage patients and support physicians.
Patient engagement: Integrated technologies and processes that enable outreach to engage patients in their own care
process.
Quality and risk coding: Engagement of physicians to identify opportunities to close gaps in care and improve clinical
documentation efforts.
(iii) Delivery Network Alignment
We help our partners build the capabilities that are required to develop and maintain a coordinated and financially-aligned
provider network that can deliver high-quality care necessary for value-based contracts. These capabilities include:
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High-performance network: Supporting the capabilities needed to build, maintain and optimize provider- and clinically-
integrated networks.
Value compensation models: Developing and supporting physician incentive payment programs that are linked to quality
outcomes, payer shared savings arrangements and health plan performance.
Integrated specialty partnerships: Supporting the technology-enabled strategies, analytics and staff needed to optimize
network referral patterns.
Specialty Care Management Services Solution
The foundation for our specialty care management services solution was derived through our acquisition in 2018 of New Century
Health, a national population health leader in managing specialty care for Medicare, commercial and Medicaid members under
performance-based and administrative services arrangements. Since then, we have continued to invest in the solution to broaden,
deepen, and scale its capabilities.
Since its founding in 2002, New Century Health has focused on the oncology and cardiology markets. Using clinical data analytics,
predictive modeling and decision support tools, New Century Health has developed proprietary clinical pathways in these markets.
Managed through its proprietary specialty care management platform, New Century combines high performance networks of
specialists and enhanced clinical pathways to deliver higher quality and more affordable care, which we consider to be hallmarks of
value-based care, to patients, providers and payers. Historically, New Century Health focused on the Medicare market and offered
performance-based contracts, as well as ASO arrangements, primarily to payers in the Medicare HMO segment of the overall
Medicare market. More recently, New Century Health has entered into performance-based contracts with Medicaid health plans. We
estimate the total addressable market for New Century Health to be $50 billion.
New Century Health provides a differentiated approach designed to meet market challenges based on (i) networks of high-
performance providers, (ii) design of evidence-based clinical pathways and (iii) leveraging our proprietary specialty care management
technology.
(1) High performance provider networks
We develop high-performance provider networks with tools, capabilities and incentives to align and support physicians. We
develop and manage comprehensive specialty networks, provide physician engagement and support and identify provider
financial incentive alignment. Key features include:
Direct contracts with specialists facilitates ease of care.
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Comprehensive specialty networks include multiple downstream subspecialists.
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Incentivize financial payment for quality and cost efficient utilization
• Minimize “buy and bill” incentives through shared savings methodologies
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Dedicated provider operations provide staff to support practices.
Clinical response team provides clinical education on-site to practice staff.
Dedicated central call center facilitates referrals and helps to resolve claims issues.
Established system of ongoing provider education and training.
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(2) Design evidence-based clinical pathways
We design high-quality evidence-based clinical pathways to drive provider behavior towards improved quality of care at a
lower cost. The transparent pathway development process for our specialty population health focal areas, oncology and
cardiology, is designed to achieve the following objectives:
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Reduce unnecessary clinical variation.
Support physician clinical decision making of evidence-based therapies.
Facilitate total cost-of-care management.
Our clinical pathways are based on national guidelines with independent scientific advisory boards, in-house clinical
expertise with original publications and presentations at national congress. We employ a collaborative review process that is
not based on denials, which includes customized clinical review based on tier 1-5 drugs and proactive monitoring response to
therapy. We employ quality metrics and clinical benchmarking to continually improve our pathways. We incentivize
financial payment for quality by minimizing “buy and bill” incentives and through a shared savings methodology.
(3) Leverage proprietary specialty care management technology
We leverage a custom specialty care management workflow platform, CareProTM, to provide clinical decision support and
manage providers to high-quality care, while aiming to achieve significant cost savings. Our technology consists of a clinical
decision support portal that provides oversight of individual treatment plans for pathway adherence. Our platform integrates
clinical analytics and protocols, pharmacy management, physician engagement, network management and claims payment to
drive improved outcomes for partners.
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Decision support portal delivers specialty specific clinical experience based on assigned roles (e.g. cardiologist vs.
oncologist).
Custom-built rules engine allows flexibility for multiple specialties and automated decisions based on clinical relevance,
considering, for example, rigor levels based on specified payers and providers.
• Workflow capability facilitates a seamless collaboration within and across organizations, connecting payers and clearing
houses for systematic data exchange.
Nurse triage system leverages proprietary technology infrastructure.
Overall flexibility enables a new business launch of existing specialty within 60 days.
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Administrative Solution: Comprehensive Health Plan Administration Services
The foundation for our comprehensive health plan administrative services solution was derived through our acquisitions in 2015 of
Valence Health and Aldera. Since the time of these acquisitions, we have invested to upgrade the platform and integrate it with
Identifi® and our clinical solutions to create an integrated value-based care platform.
Our comprehensive health plan administrative services help providers and regional payers assemble the complete infrastructure
required to operate and manage value-based care and health plan businesses. The economic model of this solution is primarily ASO or
fee-based with defined service-level agreements around key operating metrics. We estimate the total addressable market for our
comprehensive health plan administrative services solution to be $23 billion. These services include:
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• Health plan services: A comprehensive suite of services including third-party administration, enrollment and billing
support, medical and utilization management, third-party payment and program integrity support and provider network
contracting services. Other health plan related services include sales and marketing, product development, actuarial, and
regulatory and compliance.
Pharmacy benefit management: Our team of professionals support the drug component of providers’ plan offerings and
bring national buying power and dedicated resources that are tightly integrated with the care delivery model.
Differentiated from what we consider to be traditional PBMs, our solution is integrated into patient care and engages
population health levers including generic utilization, provider management, and utilization management to reduce unit
pharmacy costs.
Risk management: The capabilities needed to successfully manage risk for payers, including analysis, data and
operational integration with payer processes, and ongoing performance management.
Analytics and reporting: The ongoing and ad hoc analytic teams and reports required to measure, inform and improve
performance, including population health analytics, market analytics, network evaluation, staffing models, physician
effectiveness, clinical delivery optimization and patient engagement.
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Leadership and management: Our local and national talent assist our partners in effectively managing the performance
of their value-based operations.
True Health
On January 2, 2018, Evolent acquired certain assets from New Mexico Health Connections, one of the first consumer operated and
oriented plans established following the implementation of the ACA-including a commercial plan and health plan management
services organization. The acquired assets were contributed to a new entity, True Health, a wholly-owned subsidiary of Evolent. True
Health is a physician led health plan offering individual, small group, large group, ASO and Federal Employee Health Benefit health
insurance products to New Mexico consumers.
True Health accounted for 11.5% and 20.3% of our consolidated revenue for the years ended December 31, 2020 and 2019,
respectively.
The core elements of True Health include:
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A statewide network of primary care and specialty providers, with an emphasis on primary care coordination.
Extensive care management and prevention capabilities leveraging diagnostic and actuarial analysis to drive care and
health metrics.
Focus on community partnerships, both medical and socioeconomic, to improve individual and population health status
and promote trusted collaborations with clinicians in facilitating access to care and working through insurance issues.
Advanced analytics aim to avoid costly interventions and complications in the future by focusing on preventative care.
Our True Health segment derives revenue from premiums earned over the terms of the related insurance policies. As of December 31,
2020, True Health served approximately 24,000 members, consisting principally of large group and off-exchange small group
members. True Health provides an opportunity for us to leverage our services offerings to support True Health and transform the
health plan into a value-based provider-centric model of care.
During the fourth quarter of 2017, we entered into a $10.0 million capital-only reinsurance agreement with NMHC, which expired on
December 31, 2018. The purpose of the capital-only reinsurance was to provide balance sheet support to NMHC. There was no
uncertainty to the outcome of the arrangement as there was no transfer of underwriting risk to Evolent or True Health, and neither
Evolent nor True Health was at risk for any cash payments on behalf of NMHC. As a result, this arrangement did not qualify for
reinsurance accounting and we recorded the fees received under the deposit-only reinsurance agreement as non-operating income on
our consolidated statements of operations and comprehensive income (loss).
During the fourth quarter of 2018, the Company terminated its prior reinsurance agreement with NMHC and entered into an updated
15-month quota-share reinsurance agreement with NMHC. As a result of certain changes in terms as compared to the prior reinsurance
agreement, the new reinsurance agreement qualified for reinsurance accounting due to the deemed risk transfer and, as such, the
Company began recording the full amount of the gross reinsurance premiums and claims assumed by the Company on its
Consolidated Statements of Operations and Comprehensive Income (Loss) from its legal effective date. Under the terms of the new
reinsurance agreement, NMHC ceded 90% of its gross premiums to the Company and the Company indemnified NMHC for 90% of
its claims liability. The maximum amount of insurance risk to the Company was capped at 105% of premiums ceded to the Company
by NMHC. During the third quarter of 2019, the Company terminated the new reinsurance agreement with NMHC effective in the
fourth quarter of 2019, approximately one and a half months prior to its scheduled end. In 2020, True Health launched a product on
the individual exchange. Refer to “Part II - Item 8. Financial Statements and Supplementary Data - Note 10” for additional discussion
regarding the reinsurance agreement. Refer to “Part II - Item 8. Financial Statements - Note 26” for additional discussion regarding the
True Health sale.
Significant Activities
In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the
“2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and
certain new investors. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million
aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate
principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes.
Refer to “Part II - Item 8. Financial Statements - Note 9” for additional discussion regarding the Company’s 2024 Notes.
On July 16, 2020, EVH Passport, Evolent Health LLC and Molina entered into the Molina APA, which contemplated the sale by EVH
Passport to Molina of certain assets, including certain intellectual property rights of EVH Passport and EVH Passport’s rights under
the Passport Medicaid Contract. On September 1, 2020, EVH Passport and Molina completed the Molina Closing, and the Passport
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Medicaid Contract was novated to Molina. As a result, EVH Passport began to wind down its business. In connection with the Molina
Closing, Molina deposited $20.0 million in cash in escrow, which was subsequently released to the Company in January, 2021. Prior
to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under
the equity method of accounting. As a result of the transaction, the Company concluded that a reconsideration event occurred whereby
EVH Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport;
accordingly, the Company consolidated EVH Passport as of September 1, 2020 in its consolidated financial statements. The Company
accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did
not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in
the Company’s consolidated financials, on November 16, 2020, EVH Passport redeemed the Sponsors’ equity interests in EVH
Passport for $20.0 million in cash in accordance with the terms of EVH Passport’s Stockholders’ Agreement, and, as a result, EVH
Passport became a wholly owned subsidiary of the Company. The Company expects a return of capital from EVH Passport, expected
to be between $130 million and $170 million in total, which is subject to regulatory approval from the Kentucky Department of
Insurance. Refer to “Part II - Item 8. Financial Statements - Note 4” for additional discussion regarding the Passport transactions.
On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares
Capital Corporation. The total amount paid to Ares Corporation under the Credit Agreement in connection with the prepayment was
$98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. In addition to the
payment of the Credit Agreement, the Company settled the outstanding warrants associated with the debt for $13.7 million. Refer to
“Part II - Item 8. Financial Statements - Note 26” for additional discussion regarding the Credit Agreement repayment.
On January 11, 2021, Evolent Health LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered
into a Stock Purchase Agreement (the “True Health SPA”) with Bright Health Management, Inc. (“Bright HealthCare”), pursuant to
which EH Holdings expects to sell all of its equity interest in True Health to Bright HealthCare for a purchase price of $22.0 million
plus excess risk based capital, subject to satisfaction of customary closing conditions, including regulatory approvals. The purchase
price is subject to a customary purchase price adjustment following the closing of the transactions contemplated by the True Health
SPA (the “True Health Closing”) based in part on actual medical claims experience. Refer to “Part II - Item 8. Financial Statements -
Note 26” for additional discussion regarding the True Health sale.
Financing Strategy
Our capital structure is designed to offer an efficient complement of funding sources to maintain appropriate liquidity to support our
business and meet our financial obligations. To maintain our desired capital profile, we utilize a mix of debt and equity funding. Debt
funding may include convertible debt, lines of credit, long-term credit agreements or other liabilities. Equity capital primarily consists
of issuing common stock. As of December 31, 2020, we had $263.3 million of long-term debt, net of discount outstanding.
Competitive Strengths
We believe we are well-positioned to benefit from the transformations occurring in health care payment and delivery described above.
We believe this environment that rewards the better use of information to drive patient outcomes aligns with our business model,
recent investments and other competitive strengths.
Early Innovator
We believe we are an innovator in the delivery of comprehensive value-based care solutions. We were founded in 2011, ahead of the
implementation of the ACA and before the rapid expansion of programs, such as Medicare ACOs or Medicare Bundled Payment
Initiatives. Since our inception, we have invested a significant amount in expanding our offerings.
Differentiated Offering in High Cost Oncology and Cardiology Markets
Cardiovascular disease and cancer accounted for approximately 25% of total U.S. health expenditures in 2014 to 2015. One of the
major cost drivers is spending on oncology drugs which rose 50% from $38 billion in 2013 to $57 billion in 2018. We offer a
comprehensive performance based solution that we believe delivers meaningful savings to customers relative to historical spend. Our
specialty care management solution manages over 3.6 million lives in Medicare, Medicaid and Commercial markets as of
December 31, 2020 and we believe our solution is one of the most comprehensive in the market today.
Comprehensive End-to-End Solutions
We provide end-to-end, built-for-purpose, technology-enabled solutions for our partners to succeed in value-based payment models.
We believe that offering comprehensive and integrated solutions which bring together clinical and administrative management allows
payers and providers to accelerate their path to adoption of value-based care.
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Depth of Market Experience
With experience across Medicare, Medicaid and commercial markets, our depth and variety of expertise allows us to serve a variety of
customer types in the broad health care marketplace including health systems, providers, physicians, health plans, ACOs, delegated
arrangements and other payers.
Proprietary Technology
Our integrated proprietary technology, Identifi®, allows us to deliver a connected delivery ecosystem, implement replicable clinical
processes, scale our value-based services and capitalize on multiple types of value-based payment relationships.
We leverage a custom specialty care management workflow platform, CareProTM, to provide clinical decision support and manage
providers to high-quality care, while aiming to achieve significant cost savings. Our technology consists of a clinical decision support
portal that provides oversight of individual treatment plans for pathway adherence. Our platform integrates clinical analytics and
protocols, pharmacy management, physician engagement, network management and claims payment to drive improved outcomes for
partners.
We believe we are creating scaled benefits for our partners in areas such as data analytics, administrative services and care
management. We expect Identifi® and CareProTM to enable us to deliver increasing levels of efficiency to our partners.
Provider-Heritage Brand Identity
We believe our provider-heritage brand identity and origins differentiate us from our competitors in the value-based care services area.
We believe our solutions resonate with potential partners seeking proven solutions that work with providers in a non-abrasive way.
Our analytical and clinical solutions are rooted in UPMC’s experience in growing a provider-led, integrated delivery network over the
15 years prior to the founding of Evolent Health, Inc., and growing to become one of the largest provider-owned health plans in the
country. Our unique position allows for the sharing of data across multiple payers and care delivery integration regardless of payer,
which we believe is not possible with traditional, payer-siloed solutions.
Partnership-Driven Business Model
Our business model is predicated on strategic partnerships with leading providers and payers that are attempting to evolve two of their
most critical business functions: how they deliver care and how they are compensated for it. The partnership model enables cultural
alignment, integration into the provider care delivery and payment work flow, contractual relationships and a cycle of clinical and cost
improvement with shared financial benefit. In certain cases, we also agree to participate alongside our partners in risk-sharing or other
support arrangements to increase our alignment of interests via performance-based relationships.
Proven Leadership Team
We have made a significant investment in building an industry-leading management team. Our senior leadership team has extensive
experience in the health care industry and a track record of delivering measurable clinical, financial and operational improvement for
health care providers and payers. Our Chief Executive Officer, Seth Blackley, had served as our President since August 2011. Prior to
co-founding the company, Mr. Blackley was the Executive Director of Corporate Development and Strategic Planning at The
Advisory Board from June 2007 to August 2011.
Growth Opportunities
Multiple Avenues for Growth with Our Existing, Embedded Partner Base
We have established a multi-year partnership model with multiple drivers of embedded growth through the following avenues:
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growth in lives in existing covered populations;
partners expanding into new lines of value-based care to capture growth in new profit pools;
cross-selling additional solutions to existing partners; and
capturing value created through a variety of value-based arrangements by participating alongside our partners in upside
risk sharing arrangements.
In addition to growth within our existing partner base, we also evaluate and consider pursuing opportunities to expand into businesses
related to the services we currently provide.
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Significant Market Potential for Specialty Care Management Solution
As of December 31, 2020, our specialty care management solution is managing less than 5% of lives in the Medicare market and less
than 1% of lives in the Medicaid and Commercial markets. Oncology and Cardiology spend is increasing as a percentage of total
health care spend and both markets are experiencing periods of significant advancements in treatment options and pharmacy solutions,
thus presenting a challenge to payers to manage spend. We offer a comprehensive, performance-based solution and believe we have
significant growth potential in this market.
Early Stages of a Rapidly Growing Transformational Addressable Market
We believe that our existing partners represent a small fraction of providers and payers that could benefit from our solutions. The
transformation of the care delivery and payment model in the United States has been rapid, but it is still in the early stages.
Approximately 50% of health care payments were paid through value-based care programs in 2018 and it is estimated that this number
will continue to grow.
We believe there is significant market opportunity in our total cost of care solution. As of December 31, 2020, our solution served less
than 1% of the Medicare Shared Savings Program ACO-assignable population. Furthermore, we believe that populations covered by
CMS ACOs will continue to grow, and also that the solution will be relevant to private payer value-based arrangements.
We believe there is a significant market opportunity in our specialty care management services solution. As of December 31, 2020,
New Century Health served approximately 1.6 million Medicaid Managed Care and Medicare HMO patients out of total population of
approximately 69 million. This represents a market share of roughly 2% of this total population. We believe that the adoption of this
solution in oncology and cardiology by payers serving the Medicare HMO market is very low but is likely to increase as the growth in
spending in these specialties is higher than the growth in overall health care spending. Furthermore, we believe that our specialty care
management solution is scalable to Medicaid and other lines of business.
Capitalize on Growth in Select Government-Driven Programs
The number of people managed by government-driven programs in the United States has seen significant growth since 2016.
Specifically, the number of Medicare beneficiaries reached 62 million in 2019, an 11% increase from 2016. The nature of our variable
fee economic model enables us to benefit from this growth in government-managed lives. A significant portion of our revenues are
attributable to government-driven programs, primarily comprised of Medicaid and, to a less significant extent, Medicare.
Ability to Capture Additional Value through Delivering Clinical Results
We are capturing only a portion of the addressable clinical and administrative dollars in the market through our current solutions. We
believe there is a significant opportunity to capture an increasing portion of the medical dollar over time, namely the remainder of the
premium dollar which goes to medical expenses, and we have begun to do so in certain performance-based relationships. We believe
business models that allow us to participate in the medical savings through a variety of risk-sharing arrangements that align incentives
to reduce costs and improve quality outcomes will enable us to grow and differentiate ourselves from other vendors.
Expand Offerings to Meet Evolving Market Needs
There are multiple business offerings that our partners may require to operate in a value-based care environment that we do not
currently provide, including but not limited to:
•
•
•
•
•
PBM expansion to include additional specialty pharmacy management capabilities;
additional specialty lines of business beyond oncology and cardiology, including kidney, maternity and end-of-life care;
physician employment;
on-site or specialty clinic services; and
consumer engagement and digital outreach.
Selectively Pursue Strategic Acquisitions and Investments
We believe that the nature of our competitive landscape provides meaningful acquisition and investment opportunities. Our industry is
in the early stages of its life cycle and there are multiple firms attempting to capitalize on the transformation of the care delivery model
and the various forms of new profit pools. We believe that our partners will require an end-to-end solution and we believe we are well
positioned to meet this demand by expanding the breadth of our offerings through not only organic growth, but also the acquisition of
niche vendors and non-core portions of larger enterprises. From time to time, we may also pursue acquisition and investment
9
opportunities of businesses related to services we currently provide or that are complementary to our technical capabilities. As an
example of executing on our strategy, on October 1, 2018, we completed the acquisition of New Century Health, a national population
health leader in managing specialty care for Medicare, commercial and Medicaid members under risk-based, capitated relationships.
Our acquisition of New Century Health opened a direct sales channel to the payer market.
Sales and Marketing
We market and sell our services to payers and providers throughout the United States. Our sales team works closely with our
leadership team and subject matter experts to foster long-term relationships with our partners’ leadership and board of directors given
the nature of our partnerships. Our dedicated business development team works closely with our partners to identify additional service
opportunities on a continuous basis.
Services Partner Relationships
Our services business is predicated on strategic partnerships with leading payers and providers that are attempting to evolve two of
their most critical business functions: how they deliver care and how they are compensated for it. The partnership model enables
cultural alignment, integration into the care delivery and payment work flow, contractual relationships and a cycle of clinical and cost
improvement with shared financial benefit.
We have sought to partner with leading payers and providers in sizable markets, which we believe creates a growth cycle that benefits
from the secular transition to value-based care.
As of December 31, 2020, we had contractual relationships with over 37 operating partners. The following table summarizes those
customers of our services segment who represented at least 10.0% of our consolidated revenue for the periods presented:
Cook County Health and Hospitals System
Passport (1)
New Mexico Health Connections
1. Represents revenues from EVH Passport/UHC through the Molina Closing. Subsequent to the Molina Closing on September 1, 2020, the Company has not received
any material revenue from EVH Passport. However, as part of the Molina Closing, we entered into a new contract with Molina on similar terms to our prior services
contract with EVH Passport through December 31, 2020 which accounted for approximately 8.8% of our consolidated revenues for the year ended December 31,
2020.
20.3 %
16.8 %
*
For the Year Ended December 31,
2018
2019
2020
*
*
17.5 %
18.7 %
*
10.9 %
* Represents less than 10.0% of the respective balance.
As of December 31, 2020, our average contractual relationship with our operating partners was approximately 5.1 years, with an
average of 1.8 years of performance remaining per contract. The contracts of New Century Health typically run for one-year terms,
with year-to-year renewal provisions.
Our contracts governing the relationships with our operating partners include key terms which may include the period of performance,
revenue rates, advanced billing terms, service level agreements, termination clauses, exclusivity clauses and right of first refusal
clauses. Typically, these contracts provide for a monthly payment calculated based on a specified rate multiplied by the number of
members that our partners are managing. The specified rate varies depending on which market-facing solutions the partner has
adopted and the number of services and technology applications they are utilizing. In some cases, we are responsible for paying for all,
or substantially all, of the cost of care for a defined scope of health care services out of the revenue we receive. Some of our contracts
allow for advance billing of our partners. In some of our contracts, a defined portion of the revenue is at risk and can be refunded to
the partner if certain service levels are not attained. We monitor our compliance with the service levels to determine whether a refund
will be provided and record an estimate of these refunds. In addition, certain of our contracts provide that if we fail to meet specified
implementation targets, the contracts will terminate and we will be subject to financial penalties. Separately, the contracts of New
Century Health typically run for one year terms. While they typically contain year-to-year renewal provisions, we cannot assure you
any or all of these contracts will be renewed in any particular year.
Although the revenue from our contracts is not guaranteed because certain of our contracts are terminable for convenience by our
partners after a notice period has passed, certain partners would be required to pay us a termination fee in certain circumstances.
Termination fees and the related notice period in certain of our contracts are determined based on the scope of the market-facing
solutions that the partner has adopted and the duration of the contract. Most of our contracts include cure periods for certain breaches,
during which time we may attempt to resolve any issues that would trigger a partner’s ability to terminate the contract. However,
certain of our contracts are also terminable immediately on the occurrence of certain events. For example, some of our contracts may
be terminated by the partner if we fail to achieve target performance metrics over a specified period. Certain of our contracts may be
terminated by the partner immediately following repeated failures by us to provide specified levels of service over periods ranging
10
from six months to more than a year. Certain of our contracts may be terminated immediately by the partner if we lose applicable
licenses, go bankrupt, lose our liability insurance, become insolvent, file for bankruptcy or receive an exclusion, suspension or
debarment from state or federal government authorities. Additionally, if a partner were to lose applicable licenses, go bankrupt, lose
liability insurance, become insolvent, file for bankruptcy or receive an exclusion, suspension or debarment from state or federal
government authorities, our contract with such partner could in effect be terminated. The loss, termination or renegotiation of any
contract could negatively impact our results. In addition, as our partners’ businesses respond to market dynamics and financial
pressures, and as our partners make strategic business decisions in respect of the lines of business they pursue and programs in which
they participate, we expect that certain of our partners will, from time to time, seek to restructure their agreements with us.
The contracts often contain exclusivity or other restrictive provisions, which may limit our ability to partner with or provide services
to other providers or purchase services from other vendors within certain time periods and in certain geographic areas. The exclusivity
and other restrictive provisions are negotiated on an individual basis and vary depending on many factors, including the term and
scope of the contract. The time limit on these exclusivity and other restrictive provisions typically corresponds to the term of the
contract. These exclusivity or other restrictive provisions often apply to specific competitors of our health system partners or specific
geographic areas within a particular state or an entire state, subject to certain exceptions, including, for example, exceptions for
employer plan entities that have operations in the restricted geographic areas but that are headquartered elsewhere. Accordingly, these
exclusivity clauses may prevent us from entering into relationships with certain potential partners.
The contracts with our partners impose other obligations on us. For example, we typically agree that all services provided under the
partner contract and all employees providing such services will comply with our partner’s policies and procedures. In addition, in most
instances, we have agreed to indemnify our partners against certain third-party claims, which may include claims that our services
infringe the intellectual property rights of such third parties.
Competition
The market for our solutions is fragmented, competitive and characterized by rapidly evolving technology standards, customer needs
and the frequent introduction of new products and services. Our competitors range from smaller niche companies to large, well-
financed and technologically-sophisticated entities. Our partners may also choose to insource Solution functions from us in part or in
whole. Our services solutions compete based on several factors, including breadth, depth and quality of product and service offerings,
ability to deliver clinical, financial and operational performance improvement using products and services, quality and reliability of
services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. We also
compete based on price and aligned performance relationships.
Our health plan, True Health, also competes with local and regional health care benefits plans, health care benefits and other plans
sponsored by large commercial health care benefit insurance companies, health system owned health plans, new entrants into the
marketplace and numerous for-profit and not-for-profit organizations.
Health Care and Insurance Laws and Regulations
Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations. Various federal and state
agencies have discretion to issue regulations and interpret and enforce health care laws. While we believe we comply in all material
respects with applicable health care and insurance laws and regulations, these regulations can vary significantly from jurisdiction to
jurisdiction, and interpretation of existing laws and regulations may change periodically. Federal and state legislatures also may enact
various legislative proposals that could materially impact certain aspects of our business. The following are summaries of key federal
and state laws and regulations that impact our operations:
Health Care Reform
In March 2010, the ACA and the Health Care and Education Reconciliation Act of 2010, which we refer to, collectively, as health care
reform, was signed into law. Health care reform contains provisions that have changed and will continue to change the health
insurance industry in substantial ways. For example, health care reform includes a mandate that employers with over 50 employees
offer their employees group health insurance coverage or face tax penalties; prohibitions against insurance companies that offer
Individual Major Medical plans using pre-existing health conditions as a reason to deny an application for health insurance; medical
loss ratio requirements that require each health insurance carrier to spend a certain percentage of their premium revenue on
reimbursement for clinical services and activities that improve health care quality; establishment of health insurance exchanges to
facilitate access to, and the purchase of, health insurance; and subsidies and cost-sharing credits to make health insurance more
affordable for those below certain income levels.
Health care reform amended various provisions in many federal laws, including the Code, the Employee Retirement Income Security
Act of 1974 and the Public Health Services Act. Health care reform is being implemented by the Department of Health and Human
11
Services, the Department of Labor and the Department of Treasury. Most of the ACA regulations became effective on January 1,
2014.
During 2017, several attempts were made to amend the ACA, although no amendment proposal gained the requisite support from the
U.S. Senate to pass a repeal bill. As a result, in October 2017, former President Trump issued an executive order relating to the ACA
titled “Promoting Healthcare Choice and Competition Across the United States,” which further directs federal agencies to modify how
the ACA is implemented, and soon after announced the termination of the cost-sharing subsidies that reimburse insurers under the
ACA. It is expected that the Biden administration will repeal the Executive Order, but it is not known what other changes the new
administration will implement through Congress or future executive orders, and how those may impact our partners and our business.
Because of the continued uncertainty about the ACA, including the timing of and potential for further legal challenges, repeal or
amendment of that legislation and future of the health insurance exchanges, we cannot quantify or predict with any certainty the likely
impact of the ACA on our business, financial condition, operating results and prospects. In addition, Congress, state legislatures and
third-party payers may continue to review and assess alternative health care delivery and payment systems and may in the future
propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the health care
delivery system, including with respect to Medicare and Medicaid programs. We cannot assure you as to the ultimate content, timing,
or effect of any changes, nor is it possible at this time to estimate the impact of any such potential legislation or changes. Health care
reform has resulted in profound changes to the individual health insurance market and our business, and we expect these changes to
continue.
Stark Law
We are subject to federal and state “self-referral” laws. The Stark Law is a federal statute that prohibits physicians from referring
patients for items covered by Medicare or Medicaid to entities with which the physician has a financial relationship, unless that
relationship falls within a specified exception. The Stark Law is a strict liability statute and is violated even if the parties did not have
an improper intent to induce physician referrals. The Stark Law is relevant to our business because we frequently organize
arrangements of various kinds under which (a) physicians and hospitals jointly invest in and own ACOs, clinically integrated networks
and other entities that engage in value-based contracting with third-party payers or (b) physicians are paid by hospitals or hospital
affiliates for care management, medical or other services related to value-based contracts. We evaluate when these investment and
compensation arrangements create financial relationships under the Stark Law and design structures that are intended to satisfy
exceptions under the Stark Law or Medicare Shared Savings Program waiver.
Anti-kickback Laws
In the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes
or other remuneration in exchange for the referral of patients or other health-related business. The United States federal health care
programs’ Anti-Kickback Statute makes it unlawful for individuals or entities knowingly and willfully to solicit, offer, receive or pay
any kickback, bribe or other remuneration, directly or indirectly, in exchange for or to induce the referral of an individual to a person
for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a
federal health care program or the purchase, lease or order, or arranging for or recommending purchasing, leasing or ordering, any
good, facility, service, or item for which payment may be made in whole or in part under a federal health care program. Penalties for
violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from federal health care
programs. The Anti-Kickback Statute raises similar compliance issues as the Stark Law. While there are safe harbors under the Anti-
Kickback Statute, they differ from the Stark Law exceptions in that compliance with a safe harbor is not mandatory. If an arrangement
falls outside the safe harbors, it must be evaluated on its specific facts to assess whether regulatory authorities might take the position
that one purpose of the arrangement is to induce referrals of federal health care program business. Our business arrangements
implicate the Anti-Kickback Statute for the same reasons they raise Stark Law issues. We evaluate whether investment and
compensation arrangements being developed by us on behalf of hospital partners fall within one of the safe harbors or Medicare
Shared Savings Program waiver. If not, we consider the factors that regulatory authorities are likely to consider in attempting to
identify the intent behind such arrangements. We also design business models that reduce the risk that any such arrangements might be
viewed as abusive and trigger Anti-Kickback Statute claims.
Antitrust Laws
The antitrust laws are designed to prevent competitors from jointly fixing prices. However, competitors often work collaboratively to
reduce the cost of health care and improve quality. To balance these competing goals, antitrust enforcement agencies have established
a regulatory framework under which claims of per se price fixing can be avoided if a network of competitors (such as an ACO or
clinically integrated network) is financially or clinically integrated. In this context, we evaluate the tests for financial and clinical
integration that would be applied to the provider networks that we are helping to create and support, including the nature and extent of
any financial risk that must be assumed to be deemed financially integrated and the types of programs that must be implemented to
achieve clinical integration. However, even if a network is integrated, it is still subject to a “rule of reason” test to determine whether
12
its activities are, on balance, pro-competitive. The key factors in the rule of reason analysis are market share and exclusivity. We focus
on network size, composition and contracting policies to strengthen our partners’ position that their networks meet the rule of reason
test.
Federal Civil False Claims Act and State False Claims Laws
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to
be presented, a false or fraudulent claim for payment by a federal health care program. The “qui tam” or “whistleblower” provisions of
the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has
submitted a false claim to the federal government, and to share in any monetary recovery. Our activities relating to the way we sell and
market our services, including our provider-led risk adjustment solution, may be subject to scrutiny under these laws.
HIPAA, Privacy and Data Security Regulations
By processing data on behalf of our partners, we are subject to specific compliance obligations under privacy and data security-related
laws, including HIPAA, the HITECH Act and related state laws. We are also subject to federal and state security breach notification
laws, as well as state laws regulating the processing of protected personal information, including laws governing the collection, use
and disclosure of social security numbers and related identifiers.
The regulations that implement HIPAA and the HITECH Act establish uniform standards governing the conduct of certain electronic
health care transactions and protecting the security and privacy of individually identifiable health information maintained or
transmitted by health care providers, health plans and health care clearinghouses, all of which are referred to as “covered entities,” and
their “business associates” (which includes anyone who performs a service on behalf of a covered entity involving the use or
disclosure of protected health information and is not a member of the covered entity’s workforce). Our partners’ health plans generally
will be covered entities, and, as their business associate, they may ask us to contractually comply with certain aspects of these
standards by entering into requisite business associate agreements.
HIPAA Health Care Fraud Standards
The HIPAA health care fraud statute created a class of federal crimes, including health care fraud and false statements relating to
health care matters, known as the “federal health care offenses.” The HIPAA health care fraud statute prohibits, among other things,
executing a scheme to defraud any health care benefit program, while the HIPAA false statements statute prohibits, among other
things, concealing a material fact or making a materially false statement in connection with the payment for health care benefits, items
or services. Entities that are found to have aided or abetted in a violation of the HIPAA federal health care offenses are deemed by
statute to have committed the offense and are punishable as a principal.
Medicare and Medicaid
Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, as well as certain
other individuals. Medicaid programs are jointly funded by federal and state governments and are administered by states under an
approved plan that provides hospital and other health care benefits to qualifying individuals. As we increase our exposure to Medicare
and Medicaid businesses through new and existing partners, we increase our exposure to changes in government policy with respect to
and regulation of the Medicaid and Medicare programs in which we and our partners participate. We are subject to regulation by both
CMS and state agencies in respect of certain services we provide relating to Medicaid and Medicare programs.
Because some of our partners are participants in governmental programs, our services have in the past and may again in the future be
subject to periodic surveys and audits by governmental entities or contractors for compliance with Medicare and other standards and
requirements. As a result of surveys or audits, CMS may seek premium and other refunds, prohibit us from continuing to market or
enroll members in plans, exclude us from participating in one or more programs or institute other sanctions against us if we fail to
comply with CMS regulations or Medicare contractual requirements.
The regulations and requirements applicable to us and other participants in Medicaid and Medicare programs are complex and subject
to change. In January 2020, CMS announced a new demonstration program that will allow states to adopt a block grant, capped-
funding approach to Medicaid. We cannot quantify or predict with any certainty the likely impact of the demonstration program, other
changes in the law or new interpretations of existing laws on our business, financial condition, operating results and prospects.
Following recent elections, Congress and state and local legislatures may propose and adopt legislation or policy changes or
implementations effecting additional fundamental changes with respect to Medicare and Medicaid programs. Such changes in the law,
or new interpretations of existing laws, may have a significant impact on our methods and costs of doing business. Additionally,
expansion of enforcement activity could adversely affect our business and financial condition. Going forward, we expect CMS and
13
Congress to continue to closely scrutinize each component of the Medicare program as well as modify the terms and requirements of
the program.
It is not possible to predict the outcome of this Congressional or regulatory activity, either of which could adversely
affect us. Similarly, we cannot predict whether pending or future federal or state legislation or court proceedings will change various
aspects of the Medicaid and Medicare programs, nor can we predict the impact those changes will have on our business operations or
financial results, but the effects could be materially adverse.
Consumer Protection Laws
Federal and state consumer protection laws are being applied increasingly by the FTC, Federal Communications Commission and
states’ attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or
otherwise, and to regulate the presentation of website content and to regulate direct marketing, including telemarketing and telephonic
communication. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer
notice, choice, security and access.
State Privacy Laws
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations, which we
refer to as state privacy laws, that govern the use and disclosure of a person’s medical information or records and, in some cases, are
more stringent than those issued under HIPAA. These state privacy laws include regulation of health insurance providers and agents,
regulation of organizations that perform certain administrative functions, such as UR, or TPA, issuance of notices of privacy practices
and reporting and providing access to law enforcement authorities. In those cases, it may be necessary to modify our operations and
procedures to comply with these more stringent state privacy laws. If we fail to comply with applicable state privacy laws, we could
be subject to additional sanctions.
Other State Laws
State insurance laws require licenses for certain health plan administrative activities, including TPA licenses for the processing,
handling and adjudication of health insurance claims and UR agent licenses for providing medical management services. Given the
nature and scope of services that we provide to certain partners, we are required to maintain TPA and UR agent licenses and ensure
that such licenses are in good standing on an annual basis. In addition, laws in many states govern prompt payment obligations for
health care services. These laws generally define claims payment processes and set specific time frames for submission, payment, and
appeal steps. Failure to meet these requirements and time frames may result in rejection, delay of claims and possible interest and
regulatory penalties. The Company has also established a captive insurance company under the laws of the State of Vermont and is
subject to the captive insurance laws of that state.
Insurance subsidiaries and investees must be licensed by and are subject to the regulations of the jurisdictions in which they conduct
business. For example, True Health is regulated under specific New Mexico laws and regulations and indirectly affected by other
health care-related laws and regulations and EVH Passport is regulated under specific Kentucky laws and regulations and indirectly
affected by other health care-related laws and regulations. State regulations mandate minimum capital or restricted cash reserve
requirements.
Intellectual Property
Our continued growth and success depend, in part, on our ability to protect our intellectual property and proprietary technology,
including our Identifi® software and CareProTM platform. We primarily protect our intellectual property through a combination of
copyrights, trademarks and trade secrets, intellectual property licenses and other contractual rights (including confidentiality, non-
disclosure and assignment-of-invention agreements with our employees, independent contractors, consultants and companies with
which we conduct business).
However, these intellectual property rights and procedures may not prevent others from creating a competitive online presence or
otherwise competing with us. We may be unable to obtain, maintain and enforce the intellectual property rights on which our business
depends, and assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our
business, financial condition and results of operations. For additional information related to our intellectual property position see “Part
I - Item 1A. Risk Factors - Risks relating to our business and industry.”
14
Research and Development
Our research and development expenditures primarily consist of our strategic investment in enhancing the functionality and usability
of our software, Identifi® and developing programs and processes to maximize care delivery efficiency and effectiveness. We also
capitalize software development costs related to Identifi®. Our research and development expenditures and capitalized software
development costs also include the suite of products developed by New Century Health, Accordion, Valence Health and Aldera.
Human Capital Management
We believe our commitment to and investment in human capital enables our continued efforts to dramatically reduce the total cost of
care, improve clinical quality and simplify administration. As of December 31, 2020, we had approximately 2,900 global employees.
None of our employees are represented by a labor union, and we are not a party to any collective bargaining agreements. We focus on
the following key measures and objectives in managing our business in order to deploy and develop our human capital strategy:
•
•
•
•
Employee Compensation and Incentives
Employee Training and Career Development
Employee Well Being
Diversity, Equity and Inclusion
Employee Compensation and Incentives
We aim to attract and retain the highest caliber of health care talent. We believe in pay for performance and structure our
compensation to annually incent & reward exceptional performance at all levels in the organization. Ensuring that our employees are
compensated fairly and have the appropriate incentives in place to meet and exceed their potential is an integral part of our human
capital management. We annually conduct pay equity assessments and compensation reviews, and we continue to actively work to
reduce unconscious bias in our hiring practices, performance reviews and promotion opportunities that may contribute to pay
inequities.
Employee Training and Career Development
We believe that the continued edification and development of our talent is important in continuing to maintain growth as a company as
well as the growth of our individual talent. Training programs are available to all employees through our company portal that is
managed by our learning and development team. Our learning and development portal enables employees to find on-demand content,
view and attend live learning sessions. Additionally, during 2020 we launched our internal mobility initiative. The initiative gives
employees the visibility and opportunity to apply for positions within their current teams as well as company-wide. We feel that this
initiative will also help with transparency of opportunities and talent across the organization as well as focus on increasing the
diversity of our senior levels within the company over time by growing our current diverse workforce.
Employee Well-Being
We believe that we have a responsibility to help maintain the health and well-being of our employees. We provide our employees with
comprehensive benefits including: competitive medical insurance, dental, vision, PTO and 401k plan. In addition, we offer 100% paid
maternity leave, parental leave, fertility support, diabetes and hypertension program offerings. In response to the COVID-19 pandemic
we have also implemented 100% work from home across our employee population, additional mental health offerings, work from
home office set-up support, regular employee feedback surveys, holistic wellness initiatives that include yoga, cooking sessions,
meditation and wellness challenges.
Diversity, Equity and Inclusion
We believe that Evolent is a stronger company with diverse employees and encourage hiring and retention practices that focus on top
performing talent regardless of gender, national origin, ethnicity or other protected class. In 2020, we refocused on additional
diversity, equity and inclusion initiatives to continue to create a more equitable workspace. This initiative included additional training
for leadership in diversity, equity and inclusion throughout the organization and the hiring of a Head of Diversity, Equity, and
Inclusion to focus on diversity as well as an internal organization review that focused around pay, job descriptions, recruiting, career
pathing and development. We feel this renewed commitment to diversity, equity and inclusion enables us to attract, develop and retain
the highest caliber talent in health care.
Overall, we believe our culture, along with our internal programs and initiatives, allow us to effectively execute our human capital
strategy.
15
Information about our Executive Officers
Our executive officers as of February 25, 2021, were as follows:
Name
Seth Blackley
John Johnson
Steve Tutewohl
Jonathan Weinberg
Aammaad Shams
Frank Williams
Age
42
37
48
53
37
54
Position
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
General Counsel
Principal Accounting Officer and Corporate Controller
Executive Chairman
Seth Blackley is our co-founder and has served as our Chief Executive Officer since October 2020. Prior to serving as our Chief
Executive Officer, Mr. Blackley served as our President from the Company’s founding in August 2011. Prior to co-founding the
company, Mr. Blackley was the Executive Director of Corporate Development and Strategic Planning at The Advisory Board from
June 2007 to August 2011. Mr. Blackley began his career as an analyst in the Washington, D.C. office of McKinsey & Company. Mr.
Blackley holds a Bachelor of Arts degree in business from The University of North Carolina at Chapel Hill, and a master of business
administration from Harvard Business School.
John Johnson has served as our Chief Financial Officer since July 2019. Prior to his role as Chief Financial Officer, Mr. Johnson
was acting Chief Financial Officer for New Century Health from March 2019 to June 2019. Prior to his New Century Health role, Mr.
Johnson was Senior Vice President, Corporate Performance at Evolent Health from January 2018 to March 2019 and Vice President,
Corporate Performance at Evolent Health from April 2016 to December 2017. Prior to joining the Company, Mr. Johnson was the
Managing Partner at Riverbend Analytics, LLC from December 2015 until April 2016 and the Vice President of Strategy at PSA
Healthcare from February 2013 until November 2015. Mr. Johnson holds a Bachelor of Arts degree in Physics from Cornell
University.
Steve Tutewohl has served as our Chief Operating Officer since June 2020. Mr. Tutewohl has also served as the Chief Executive
Officer of Evolent Health Services, since January 2018. Mr. Tutewohl previously served as the Chief Actuary of the Company from
January 2017 until December 2017. Prior to the Company’s acquisition of Valence Health, Mr. Tutewohl was the Strategic Accounts
Officer of Valence Health from October 1996 - January 2017. Mr. Tutewohl received his B.S. in risk management, math and actuarial
science from the University of Wisconsin.
Jonathan Weinberg has served as our General Counsel since January 2014. Prior to joining Evolent, Mr. Weinberg was a Senior Vice
President and Deputy General Counsel for Coventry Health Care, Inc. (Aetna Inc.) from 1999 to 2013, and was in charge of the day-
to-day management of the legal department as well as the company’s risk management department. Prior to joining Coventry, Mr.
Weinberg was an associate and then partner at Epstein Becker and Green, P.C. in the firm’s health care practice, specializing in
managed care issues from 1992 to 2002. Mr. Weinberg received his Bachelor of Arts in history and political science from the
University of Wisconsin-Madison and his juris doctorate from the Catholic University of America.
Aammaad Shams has served as our Controller since June 2020. Prior to his role as Controller, Mr. Shams was the Company’s
Assistant Corporate Controller from January 2020 to June 2020. Mr. Shams also served as Senior Director of Technical Accounting
from April 2018 to June 2019, and Senior Director of Accounting from July 2019 until December 2019. Prior to joining the Company,
Mr. Shams was a Director in KPMG, LLP’s Accounting Advisory Services practice from June 2015 until March 2018. Mr. Shams is
a Certified Public Accountant in the Commonwealth of Virginia.
Frank Williams is our co-founder and has served as our Executive Chairman since October 2020. Prior to serving as our Executive
Chairman, Mr. Williams served as our Chief Executive Officer from the Company’s founding in August 2011. Prior to Evolent, Mr.
Williams served as the Chief Executive Officer of The Advisory Board from June 2001 to September 2008, and as its Chairman from
September 2008 to August 2011. Previously, Mr. Williams also served as President of MedAmerica OnCall, President of Vivra
Orthopedics and as a management consultant for Bain & Co. Mr. Williams holds a bachelor of arts with high honors in political
economies of industrial societies from the University of California, Berkeley, and a master of business administration from Harvard
Business School.
16
Corporate Information
Evolent began business operations in August 2011. Evolent Health, Inc., the registrant, was incorporated in the State of Delaware in
December 2014. We completed our IPO in June 2015 and our Class A common stock is listed on the NYSE under the symbol “EVH.”
Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC,
and its only business is to act as sole managing member of Evolent Health LLC. Substantially all of our operations are conducted
through Evolent Health LLC and its consolidated subsidiaries and the financial results of Evolent Health LLC are consolidated in the
financial statements of Evolent Health, Inc.
Website to Access Our Reports
Our internet website address is www.evolenthealth.com. In addition to the information about us and our subsidiaries contained in this
Annual Report on Form 10-K, information about us can be found on our website including information on our corporate governance
principles and practices. Our Investor Relations website at ir.evolenthealth.com contains a significant amount of information about us,
including financial and other information for investors. We encourage investors to visit our website, as we frequently update and post
new information about our company on our website and it is possible that this information could be deemed to be material
information. Our website and information included in or linked to our website are not part of this Annual Report on Form 10-K.
We make available, free of charge, on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
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Item 1A. Risk Factors
The following summary highlights some of the principal risks that could adversely affect our business, financial condition or results of
operations. This summary is not complete and the risks summarized below are not the only risks we face. These risks are discussed
more fully further below. These risks include, but are not limited to, the following:
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The loss, termination or renegotiation of our relationship or contract with any significant partner, or multiple partners in
the aggregate, could negatively impact our results.
Evolution in the market for value-based care makes it difficult to forecast demand for our services.
The health care regulatory and political framework is uncertain and evolving.
If we are unable to offer new and innovative products and services, our partners may terminate or fail to renew their
relationships with us.
Acquisitions, investments, alliances and joint ventures, may be difficult to integrate, divert management resources, result
in unanticipated costs or dilute our stockholders.
The financial benefits we expect to receive as a result of our sale of assets of Passport may not be realized.
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predict and are subject to factors outside of our control.
Failure to accurately underwrite performance-based contracts could result in a reduction in profitability.
If we fail to effectively manage our growth and cost structure, our results of operations could be harmed.
Public health emergencies such as the COVID-19 pandemic could, adversely affect our business.
If we are unable to develop or grow partner relationships over time, we are unlikely to recover upfront costs and our
operating results may suffer.
If we do not attract new partners and capture new opportunities, we may not achieve our revenue projections.
An increasing number and variety of risk sharing arrangements may impact our revenues and profitability.
If the estimates and assumptions we use to determine the size of the target markets for our services are inaccurate, our
future growth rate may be impacted.
If we are not able to maintain and enhance our reputation and brand recognition, our results will be harmed.
Consolidation in the health care industry could have a material adverse effect on our business..
Competition could limit our ability to maintain or expand market share.
Audits by CMS, other governmental payers and whistleblower claims could impact our business.
Exclusivity and right of first refusal clauses in some of our contracts may restrict us.
Offshore support services may be difficult to manage or may not allow us to reach our cost reduction goals.
Our inability to contain health care costs relating to our health plan business, implement increases in premium rates on a
timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider agreements may
adversely affect our business and profitability.
Loss of one or more of our executive officers or key employees could adversely affect our business.
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• We may never realize the full value of our goodwill and other intangible assets.
• We may need to obtain additional financing which may not be available.
• We have experienced net losses in the past and we may not achieve profitability in the future.
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Litigation, government inquiries, reviews, audits or investigations could adversely affect our business.
Future material weaknesses may impact our ability produce timely and accurate financial statements.
Privacy and data protection laws may impose restrictions and subject us to penalties.
Data loss or corruption may adversely affect our reputation and relationships with existing partners.
Failure to safeguard data may result in significant liabilities, and business and reputational harm.
Failure to maintain and protect intellectual property may adversely affect our products and technology.
If our trademarks and trade names are not adequately protected, our business may be adversely affected.
Third party claims that we are violating their intellectual property rights could have a material adverse effect on our
business.
Our use of “open source” software could affect our ability to offer our services and subject us to litigation.
Failure to protect our proprietary information could impact the value of our technology and products.
Our dependence on licensed technologies could prevent us from developing and commercializing products.
Restrictions on our use of third-party technologies could have a material adverse effect on our business.
Interruption in technology services provided by third parties or our own systems could adversely impact our brand and
our business.
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• We rely on third-party vendors to host and maintain our technology platform.
• We are required to pay certain of our pre-IPO investors for certain tax benefits we may claim in the future.
• We will not be reimbursed for any payments made under the TRA if any tax benefits are disallowed.
• We may not be able to realize all or a portion of the tax benefits that resulted from the exchanges of Class B common
units for our Class A common stock from the utilization of NOLs.
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Payments by us under the TRA may be accelerated or exceed the tax benefits we realize.
Agreements between us and certain pre-IPO investors contain different
unaffiliated third parties.
The conditional conversion feature of the 2025 Notes may adversely affect our financial condition.
The accounting method for convertible debt securities that may be settled in cash could have a material effect on our
reported financial results.
terms than comparable agreements with
• We expect that our stock price will be volatile and may fluctuate or decline significantly.
• We are subject to class action litigation and an adverse outcome could have an adverse effect on us.
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The market price of our stock could decline due to the large number of shares issuable upon conversion of our
convertible notes, or by sales or issuances of substantial amounts of our Class A common stock.
Some provisions of Delaware law and our charter documents may deter third parties from acquiring us.
Our charter contains provisions renouncing our interest and expectation to participate in certain corporate opportunities
identified by or presented to certain of our pre-IPO investors.
Our charter designates Delaware courts as the sole and exclusive forum for certain types of actions and proceedings that
may be initiated by our stockholders.
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• We do not anticipate paying any cash dividends in the foreseeable future.
Our business, operations and financial position are subject to various risks. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this Annual Report on Form 10-K, including the audited annual financial
statements and notes thereto included elsewhere in this Form 10-K, when evaluating your investment in our securities. The risks and
uncertainties described below are those that we currently believe may materially affect
the Company. Additional risks and
uncertainties of which we are unaware or that we currently deem immaterial also may become important factors that affect the
Company. If any of the following risks are realized, our business, financial condition, operating results and prospects could be
materially and adversely affected. In that event, the price of our securities could decline, and you could lose part or all of your
investment. Some statements in this Form 10-K, including statements in the following risk factors, constitute forward-looking
statements. Please refer to the section entitled “Forward-Looking Statements - Cautionary Language.”
Risks relating to our business and industry
We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or
contract with a significant partner, or multiple partners in the aggregate, could negatively impact our results.
Historically, we have relied on a limited number of partners for a substantial portion of our total revenue and accounts receivable. Our
largest partner in terms of both revenue and accounts receivable, Cook County Health and Hospitals System, comprised 20.3% of our
revenue and 61.5% of our accounts receivable for 2020. The unexpected loss of Cook County or any other significant partner, or the
renegotiation of any of our significant partner contracts, could adversely affect our results. We cannot assure that similar facts will not
occur with a different partner in the future.
In the ordinary course of business, we engage in active discussions and renegotiations with our partners in respect of the services we
provide and the terms of our partner agreements, including our fees. As our partners’ businesses respond to market dynamics and
financial pressures, and as our partners make strategic business decisions in respect of the lines of business they pursue and programs
in which they participate, certain of our partners have renegotiated or terminated, and we expect that in the future additional partners
will, from time to time, seek to renegotiate or terminate their agreements with us. These discussions and future discussions have
resulted and could result in reductions to the fees and changes to the scope of services contemplated by our original partner contracts
and consequently have and could negatively impact our revenues, business and prospects.
Because we rely on a limited number of partners for a significant portion of our revenues, we depend on the creditworthiness of these
partners. Our partners are subject to a number of risks including reductions in payment rates from governmental payers, higher than
expected health care costs and lack of predictability of financial results when entering new lines of business, particularly with high-
risk populations, such as plans established under the ACA and Aged, Blind and Disabled Medicaid. If the financial condition of our
partners declines, our credit risk could increase. Should one or more of our significant partners (including Cook County) declare
bankruptcy, be declared insolvent or otherwise be restricted by state or federal laws or regulation from continuing in some or all of
their operations, this could adversely affect our ongoing revenues, the collectability of our accounts receivable and affect our bad debt
reserves and net income (loss).
Although we have long-term contracts with many partners, these contracts may be terminated before their term expires for various
reasons, such as changes in the regulatory landscape and poor performance by us, subject to certain conditions. For example, after a
specified period, certain of these contracts are terminable for convenience by our partners after a notice period has passed and the
partner has paid a termination fee. Certain of our contracts are terminable immediately upon the occurrence of certain events. For
example, some of our contracts may be terminated by the partner if we fail to achieve target performance metrics over a specified
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period. Certain of our contracts may be terminated by the partner immediately following repeated failures by us to provide specified
levels of service over periods ranging from six months to more than a year. Certain of our contracts may be terminated immediately by
the partner if we lose applicable licenses, go bankrupt, lose our liability insurance or receive an exclusion, suspension or debarment
from state or federal government authorities. Additionally, if a partner were to lose applicable licenses, go bankrupt, lose liability
insurance, become insolvent, file for bankruptcy or receive an exclusion, suspension or debarment from state or federal government
authorities, our contract with such partner could in effect be terminated. In addition, certain of our contracts may be terminated
immediately if we become insolvent or file for bankruptcy. If any of our contracts with our partners is terminated, we may not be able
to recover all fees due under the terminated contract, which may adversely affect our operating results. In addition, certain of our
contracts provide that if we fail to meet specified implementation targets, the contracts will terminate and we will be subject to
financial penalties. Separately, the contracts of New Century Health typically run for one-year terms. While they typically contain
year-to-year renewal provisions, we cannot assure that any or all of these contracts will be renewed in any particular year. We expect
that future contracts will contain similar provisions to those described in this paragraph.
The market for value-based health care in the United States continues to evolve, which makes it difficult to forecast demand for our
products and services.
The market for value-based health care in the United States is rapidly evolving. Our future financial performance will depend in part
on growth in this market and on our ability to adapt to emerging demands of this market. It is difficult to predict with any precision the
future growth rate and size of our target markets.
The rapidly evolving nature of the markets in which we operate, as well as other factors that are beyond our control, reduce our ability
to accurately evaluate our long-term outlook and forecast annual performance. We believe that demand for our products and services
has been driven in large part by price pressure in traditional FFS health care, a regulatory environment that is incentivizing value-
based care models, a rapid expansion of retail insurance, broader use of the Internet and advances in technology. Widespread
acceptance of the value-based care model is critical to our future growth and success. A reduction in demand for our products and
services caused by lack of acceptance, technological challenges, competing offerings or other factors would result in a lower revenue
growth rate or decreased revenue, either of which could negatively impact our business and results of operations. For example, a large
portion of New Century Health’s revenue is derived from customers in the managed care industry, including risk bearing providers
and national and regional managed care companies. Changes in this industry’s business practices could negatively impact New
Century Health. For example, if New Century Health’s managed care customers seek to provide services directly to their subscribers
instead of contracting with New Century Health for such services, New Century Health could be adversely affected.
The health care regulatory and political framework is uncertain and evolving.
Health care laws and regulations are rapidly evolving and may change significantly in the future, including as a result of the new
Biden administration, which could adversely affect our financial condition and results of operations. For example, in March 2010, the
ACA was adopted, which is a health care reform measure that aims to increase the number of Americans with health insurance and
reduce health care related costs. The ACA includes a variety of health care reform provisions and requirements, which became
effective at varying times through 2018 and substantially changed the way health care is financed by both governmental and private
insurers, which may significantly impact our industry and our business. During 2017, several attempts were made to amend the ACA,
although no amendment proposal gained the requisite support from the U.S. Senate to pass a repeal bill. As a result, in October 2017,
former President Trump issued an executive order relating to the ACA titled “Promoting Healthcare Choice and Competition Across
the United States,” which further directs federal agencies to modify how the ACA is implemented, and soon after announced the
termination of the cost-sharing subsidies that reimburse insurers under the ACA.
It is expected that the Biden administration will
repeal the Executive Order, but it is not known what other changes the new administration will implement through Congress or future
executive orders, and how those may impact our partners and our business. Because of the continued uncertainty about the ACA,
including the timing of and potential for further legal challenges, repeal or amendment of that legislation and future of the health
insurance exchanges, we cannot quantify or predict with any certainty the likely impact of the ACA on our business, financial
condition, operating results and prospects.
In addition, Congress, state legislatures and third-party payers may continue to review and assess alternative health care delivery and
payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional
fundamental changes in the health care delivery system, including with respect to Medicare and Medicaid programs. In January 2020,
CMS announced a new demonstration program that will allow states to adopt a block grant, capped-funding approach to Medicaid. We
cannot quantify or predict with any certainty the likely impact of the demonstration program, other changes in the law or new
interpretations of existing laws, on our methods and costs of doing business.
Additionally, expansion of enforcement activity could adversely affect our business and financial condition. Going forward, we expect
CMS and Congress to continue to closely scrutinize each component of the Medicare program as well as modify the terms and
requirements of the program. It is not possible to predict the outcome of this Congressional or regulatory activity, either of which
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could adversely affect us. Similarly, we cannot predict whether pending or future federal or state legislation or court proceedings will
change various aspects of the health care delivery system, including Medicaid and Medicare programs, nor can we predict the impact
those changes will have on our business operations or financial results, but the effects could be materially adverse.
In addition to these health care laws and regulations, we are subject to various other laws and regulations, including, among others,
other aspects of state insurance laws, the Stark Law relating to self-referrals, the whistleblower provisions of the False Claims Act,
anti-kickback laws, antitrust laws and the privacy and data protection laws. We have identified instances of noncompliance in the past
and cannot guarantee that we will not identify other instances in the future, or the outcome of any regulatory investigation into any
non-compliance. See “Part I-Item 1. Business-Health Care Laws and Regulations” for additional information. If we were to become
subject to litigation, liabilities or penalties under these or other laws or as part of a governmental review or audit, our business could
be adversely affected.
If we are unable to offer new and innovative products and services or our products and services fail to keep pace with advances in
industry standards, technology and our partners’ needs, our partners may terminate or fail to renew their relationships with us and
our revenue and results of operations may suffer.
Our success depends on providing high-quality products and services that health care providers use to improve clinical, financial and
operational performance. If we cannot adapt to rapidly evolving industry standards, technology and increasingly sophisticated and
varied partner needs, our existing technology could become undesirable or obsolete, which could harm our reputation. We must
continue to invest significant resources in our personnel and technology in a timely and cost-effective manner in order to enhance our
existing products and services and introduce new high-quality products and services that existing partners and potential new partners
will want. Our operating results would also suffer if our innovations are not responsive to the needs of our existing partners or
potential new partners, are not appropriately timed with market opportunity, are not effectively brought to market or significantly
increase our operating costs. If our new or modified product and service innovations are not responsive to partner preferences,
emerging industry standards or regulatory changes, are not appropriately timed with market opportunity or are not effectively brought
to market, we may lose existing partners or be unable to obtain new partners and our results of operations may suffer. In addition,
should any of our partners terminate their relationship with us after implementation has begun, we would not only lose our time, effort
and resources invested in that implementation, but we would also have lost the opportunity to leverage those resources to build a
relationship with other partners over that same period of time. In some cases, we price our services based on expectations of long-term
relationships and when the partner terminates the relationship earlier than we had expected, we lose the resources invested in that
relationship as well as the upside benefits we had anticipated.
We also engage third-party vendors to develop, maintain and enhance our technology solutions, and our ability to develop and
implement new technologies is therefore dependent on our ability to engage suitable vendors. We may also need to license software or
technology from third parties in order to maintain, expand or modify our technology-enabled services platform. However, there is no
guarantee we will be able to enter into such agreements on acceptable terms or at all. The functionality of our services platforms
depend, in part, on our ability to integrate with third-party applications and data management systems that our partners use and from
which they obtain data. These third parties may terminate their relationships with us, change the features of their applications and
platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications, data
management systems and application programming interfaces and access to those applications and platforms in an adverse manner.
We have made and entered, and may in the future make and enter acquisitions, investments and alliances and joint ventures, which
may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.
As our business continues to grow, we may continue to acquire or invest in companies, businesses, products or technologies that
complement our current products and services, enhance our market coverage or technical capabilities or offer growth opportunities.
This may include acquiring or investing in companies, businesses, products or technologies that are tangential to our current business
and in which we have limited or no prior operating experience. That and other acquisitions, investments, alliances or joint ventures,
have resulted and could result in new, material risks to our results of operations, financial condition, business and prospects. These
new risks could include increased variability in revenues and prospects associated with various risk sharing arrangements. In addition,
the market price for our Class A common stock could also be affected, following the consummation of any other transaction, by
factors that have not historically affected the market price for our Class A common stock.
We continuously evaluate potential acquisition targets and investments. However, there can be no assurance that any of these potential
acquisitions or investments will be consummated. Acquisitions, investments and alliances could numerous risks to our business which
could negatively impact and our financial condition and results of operations, including:
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difficulty converting platforms or integrating the purchased operations, products or technologies;
substantial unanticipated integration costs, delays and challenges that may arise in integration;
the loss of key customers who are in turn subject to risks and financial dislocation in their businesses;
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the loss of key employees, particularly those of the acquired operations;
difficulty retaining or developing the acquired business’ customers;
adverse effects on our existing business relationships with customers, suppliers, other partners, standing with regulators;
challenges related to the integration and operation of businesses that operate in new geographic areas and new markets or
lines of business;
challenges related to the integration and operation of businesses that operate in new geographic areas and new markets or
lines of business;
unanticipated financial losses in the acquired business, including the risk of higher than expected health care costs;
failure to realize the potential cost savings or other financial benefits or the strategic benefits of the acquisitions,
including failure to consummate any proposed or contemplated transaction; and
liabilities, including acquired litigation, and expenses from the acquired businesses for contractual disputes with
customers and other third parties, infringement of intellectual property rights, data privacy violations or other claims and
failure to obtain indemnification for such liabilities or claims, and distraction of our personnel in connection with any
related proceedings.
We may be unable to integrate the operations, products, technologies or personnel gained through acquisitions or investments or
integrate or complete any other such transaction without a material adverse effect on our business, financial condition and results of
operations. Transaction agreements may impose limitations on our ability, or the ability of the business to be acquired, to conduct
business. Events outside our control, including operating changes or regulatory changes, could also adversely affect our ability to
realize anticipated revenues, synergies, benefits and cost savings. In addition, revenues of acquired businesses or companies, prior to
and after consummation of a transaction, may be less than expected. Counterparties in transactions may have contracts with customers
and other business partners which may require consents from these parties in connection with a transaction. If these consents cannot be
obtained, the Company may suffer a loss of potential future revenue and may lose rights that are material to its business and the
business of any combined company. Any such disruptions could limit our ability to achieve the anticipated benefits of the transaction.
Any integration may be unpredictable, or subject to delays or changed circumstances, and we and any targets may not perform in
accordance with our expectations.
We have also entered into a number of joint ventures. Conflicts or disagreements between us and any joint venture partner may
negatively impact the benefits expected to be achieved by the joint venture or may ultimately threaten the ability of such joint venture
to continue. We are also subject to additional risks and uncertainties because we may be dependent upon and subject to the liability,
losses or reputational damage relating to joint venture partners that are not entirely under our control.
In connection with these acquisitions, investments, alliances or joint ventures, we could incur significant costs, debt, amortization
expenses related to intangible assets or large and immediate write-offs or other impairments or charges (as was the case with the $47.1
million impairment charge we incurred in connection with our investment in GlobalHealth during the year ended December 31, 2020,
which represented the total value of our investment), assume liabilities or issue stock (as we have done in prior transactions) that
would dilute our current stockholders’ ownership.
The financial benefits we expect to receive as a result of our sale of certain assets of Passport to Molina may not be realized.
On September 1, 2020, EVH Passport and Molina consummated the Molina Closing and the Passport Medicaid Contract was novated
to Molina. In the event certain conditions are not fulfilled, we may not realize the economic benefits we expect to derive from the
transaction. The amount of cash we ultimately receive in connection with the transactions consummated by the Molina APA, the wind
down of EVH Passport and related transactions could be adversely affected by a number of factors including litigation from third
parties, the outcome of ongoing protests against the Kentucky Medicaid awards for 2021 and the results of litigation related thereto,
the performance of Passport through 2020 and the results of Medicaid open enrollment in the Commonwealth of Kentucky. In
addition, our return of capital from EVH Passport, which is expected to be between $130 million and $170 million in total, is subject
to regulatory approval from the Kentucky Department of Insurance, and we cannot control or predict the timing of such capital return.
Our revenues and the growth of our business rely, in part, on the growth and success of our partners and certain revenues from our
engagements, which are difficult to predict and are subject to factors outside of our control, including governmental funding
reductions and other policy changes.
We enter into agreements with our partners under which a significant portion of our fees are variable, including fees which are
dependent upon the number of members that are covered by our partners’ health care plans each month, expansion of our partners and
the services that we provide, as well as performance-based metrics. The number of members covered by a partner’s health care plan is
often impacted by factors outside of our control, such as the actions of our partner or third parties. In addition, ongoing payment of
fees by our partners could be negatively impacted by the general financial condition of our partners. Accordingly, revenue under these
agreements is unpredictable. If the number of members covered by one or more of our partners’ plans were to be reduced by a material
amount, or if member enrollment numbers in new plans are lower than expected, which was the case with our Florida Medicaid
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partners, such decrease would lead to a decrease in our expected revenue, which could harm our business, financial condition and
results of operations. In addition, growth forecasts of our partners are subject to significant uncertainty and are based on assumptions
and estimates that may prove to be inaccurate. Even if the markets in which our partners compete meet the size estimates and growth
forecasted, their health plan membership could fail to grow at similar rates, if at all. In addition, a portion of the revenue under certain
of our service contracts is tied to the partners’ continued participation in specified payer programs over which we have no control. If a
partner ceases to participate or is disqualified from participation in any such program, this would lead to a decrease in our expected
revenue under the relevant contract.
In addition, the transition to value-based care may be challenging for our partners. For example, fully capitated or other provider risk
arrangements have had a history of financial challenges for providers. Our partners may also have difficulty in value-based care if
premium pricing is under pressure or if they incur selection bias in the health plans under which they assume risk and in so doing the
premium, capitation amount or other risk-sharing arrangement they undertake does not adequately reflect the health status of the
membership. Our partners may choose not to continue to capitalize affiliated health plans or subsidize losses to their reimbursement
rates. Furthermore, revenue under our partner contracts may differ from our projections because of the termination of the contract for
cause or at specified life cycle events, or because of fee reductions that are occasionally agreed to after the contract is initially signed.
Our partners derive a substantial portion of their revenue from third-party private and federal and state governmental payers, including
Medicaid programs. Revenue under certain of our agreements could be negatively impacted as a result of governmental funding
reductions impacting government-sponsored programs, changes in reimbursement rates, and premium pricing reductions, as well as
the inability of our partners to control and, if necessary, reduce health care costs, all of which are out of our control. Because certain of
our partners’ revenues are highly reliant on third-party payer reimbursement funding rates and mechanisms, overall reductions of rates
from such payers could adversely impact the liquidity of our partners, resulting in their inability to make payments to us on agreed
payment terms. These risks may be heightened by the COVID-19 pandemic. See “Risk factors-The health care regulatory and
political framework is uncertain and evolving” for additional information.
Failure to accurately underwrite performance-based contracts could result in a reduction in profitability for our Specialty Care
Management solution.
New Century Health, the brand name we use for our specialty care management solution, derives a portion of its revenue from
arrangements under which it assumes responsibility for a portion of the total cost of treatments (for oncology and cardiology patients)
in exchange for a fixed fee. These are typically referred to as “performance-based contracts”. If the Company is unable to accurately
underwrite the health care cost risk for New Century Health and control associated costs, the Company’s profitability could decline.
Moreover, costs of providing cancer care are very hard to predict, in part as a result of rapidly changing utilization of new and existing
drugs and changing diagnostic and therapeutic protocols. The competitive environment for New Century Health’s performance-based
products could result in pricing pressures which could cause New Century Health to reduce its rates. In addition, customer demands or
expectations as to margin levels could cause New Century Health to reduce its rates. A reduction in performance-based contract rates
which are not accompanied by a reduction in covered services or expected underlying care trend could result in a decrease of New
Century Health’s operating margins.
If we fail to effectively manage our growth and cost structure, our business and results of operations could be harmed.
We have expanded our operations significantly since our inception, organically as well as through acquisitions. If we do not
effectively manage our growth and maintain an efficient cost structure as we continue to expand, the quality of our products and
services could suffer. Our growth to date has increased the significant demands on our management, our operational and financial
systems and infrastructure and other resources. In order to successfully expand our business, we must effectively recruit, integrate and
motivate new employees, while maintaining the beneficial aspects of our corporate culture. We may not be able to hire new employees
quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully integrate our new employees, our
efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and
results of operations could be harmed. We must also continue to improve our existing systems for operational and financial
management, including our reporting systems, procedures and controls. These improvements require significant capital expenditures
and place increasing demands on our management. We may not be successful in managing or expanding our operations or in
maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, including the
timely processing of claims on behalf of our partners, our business and results of operations could be harmed.
Public health emergencies such as the COVID-19 pandemic have adversely affected, and could in the future, adversely affect our
business and the business of our customers and suppliers.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it,
could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or
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along with any associated economic and/or social instability or distress, have a material adverse impact on our results of operations,
cash flows and financial condition.
To date, due to the nature of the services we provide, market dynamics in our end markets and with our significant customers, our
operations have not been materially affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it
has caused in the U.S. and international markets. The extent to which COVID-19 ultimately impacts our business will depend on
future developments, which are highly uncertain and cannot be predicted with confidence. Factors that may determine the severity of
the impact include the duration of the outbreak, new information which may emerge concerning the severity of COVID-19, employee
mobility and productivity and the actions to contain COVID-19 or treat its impact (including federal, state and local directives to
remain at home or forced business closures), among others.
The COVID-19 pandemic may impact our business, financial condition, cash flows, or results of operations in a number of ways,
including the following:
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State Medicaid agencies may experience budget pressures as a result of the pandemic which could negatively impact
payments to certain of our Medicaid health plan customers and potentially cause us to incur additional bad debt expense.
The impact of the pandemic on certain partners could result in delayed or reduced payments to us.
As our employees and our partners’ employees work from home and access our system remotely, we may be subject to
heightened security and privacy risks, including the risks of cyberattacks and privacy incidents.
Volatility in the capital markets could have a negative impact on our ability to access those markets on acceptable terms,
or at all.
Any benefits to our business as a result of increased Medicaid membership or lower utilization may not be sustained in
or through future periods.
The inherent uncertainty surrounding COVID-19, due in part to rapidly changing governmental directives, public health challenges
and progress, and market reactions thereto, also makes it more challenging for our management to estimate the potential impact and
the future performance of our business. We cannot at this time predict the impact of the COVID-19 pandemic, but it could materially
adversely affect our business, including our financial position, results of operations and/or cash flows.
Our offshore support and professional services may prove difficult to manage or may not allow us to realize our cost reduction goals.
We use certain offshore resources to provide certain support and professional services, which requires technical and logistical
coordination. If we are unable to maintain acceptable standards of quality in support and professional services, our attempts to reduce
costs and drive growth through margin improvements in technical support and professional services may be negatively impacted,
which would adversely affect our results of operations. Our offshore resources, and their ability to provide support and professional
services to our domestic operations, are subject to domestic regulation at the federal, state and local levels. In certain cases, those
regulations restrict or prohibit us from using our offshore resources. As a result, we may not be able to reduce costs for our domestic
operations or fully realize our margin improvement goals.
While we continue to own a health plan, our inability to contain health care costs relating to our health plan business, implement
increases in premium rates on a timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider
agreements may adversely affect our business and profitability.
We have entered into an agreement to sell True Health, our health plan business, to Bright HealthCare. Closing of the transaction is
subject to customary closing conditions, and while we expect the transaction to close in the first half of 2021, we cannot assure you
that the closing will take place on that timeframe or at all. In the event that the transaction does not close, we will remain subject to
the risks described in this risk factor, and a significant reduction in enrollment in our health plan could materially impact our results.
The profitability of our health plan businesses, which includes our wholly owned True Health business, depends in large part on
accurately predicting health care costs, coding and risk adjustment and on our ability to manage future health care costs through
medical management, product design, negotiation of favorable provider contracts and underwriting criteria. Government-imposed
limitations on Medicare and Medicaid reimbursement have also caused the private sector to bear a greater share of increasing health
care costs. Changes in health care practices, demographic characteristics, inflation, new technologies, the cost of prescription drugs,
clusters of high cost cases, changes in the regulatory environment and numerous other factors affecting the cost of health care may
adversely affect our ability to predict and manage health care costs, as well as our business, financial condition and results of
operations.
In addition to the challenge of managing health care costs, we face pressure to contain premium rates. Our customers may renegotiate
their contracts to seek to contain their costs or may move to a competitor to obtain more favorable premiums. Further, federal and state
regulatory agencies may restrict our ability to implement changes in premium rates. Fiscal concerns regarding the continued viability
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of programs such as Medicare and Medicaid may cause declines in membership and eligibility, decreasing reimbursement rates,
including retroactive decreases in Medicaid reimbursement rates, and/or retrospective changes in membership and associated financial
responsibility, delays in premium payments or a lack of sufficient increase in reimbursement rates for government-sponsored
programs in which we participate. A limitation on our ability to increase or maintain our premium or reimbursement levels or a
significant loss of membership resulting from our need to increase or maintain premium or reimbursement levels could adversely
affect our business, cash flows, financial condition and results of operations.
The reserves that we establish for health insurance policy benefits and other contractual rights and benefits are based upon
assumptions concerning a number of factors, including trends in health care costs, expenses, general economic conditions and other
factors. In addition, claims reserves reflect estimates of the ultimate cost of claims that have been incurred but not reported, including
expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other
medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to
health care professionals and facilities. The process of estimating reserves involves a considerable degree of judgment by the
Company and, as of any given date, is inherently uncertain. To the extent the actual claims experience is unfavorable as compared to
our underlying assumptions, our incurred losses would increase and future earnings could be adversely affected. Our health plan
businesses are required to maintain regulatory capital levels and if our actual claims experience is unfavorable compared to our
assumptions we may be required to increase our regulatory capital levels. In addition, our health plans may enter new lines of
business. For example, in 2020, True Health launched a product on the individual exchange. Our assumptions and expectations around
the costs of entering and operating any such new lines of business may prove to be materially different from our expectations.
The profitability of our health plan business is dependent in part upon our ability to contract on favorable terms with hospitals,
physicians, claims processing service providers and other health care providers. Physicians, hospitals and other health care providers
may refuse to contract with us, and the failure to secure or maintain cost-effective health care provider contracts on competitive terms
may result in a loss of membership or higher medical costs, which could adversely affect our business. In addition, consolidation
among health care providers, ACO practice management companies, which aggregate physician practices for administrative efficiency
and marketing leverage, and other organizational structures that physicians, hospitals and other care providers choose may change the
way that these providers interact with us and may change the competitive landscape. Such organizations or groups of physicians may
compete directly with us, which may impact our relationship with these providers or affect the way that we price our products and
estimate our costs and may require us to incur costs to change our operations, and our business, cash flows, financial condition and
results of operations could be adversely affected.
Our inability to contract with providers, or if providers attempt to use their market position to negotiate more favorable contracts or
place us at a competitive disadvantage, or the inability of providers to provide adequate care, could adversely affect our business. In
addition, we do not have contracts with all providers that render services to our members and, as a result, do not have a pre-established
agreement about the amount of compensation those out-of-network providers will accept for the services they render, which can result
in significant litigation or arbitration proceedings, or provider attempts to obtain payment from our members for the difference
between the amount we have paid and the amount they have charged.
We depend on our senior management team, and the loss of one or more of our executive officers or key employees or an inability to
attract and retain highly skilled employees could adversely affect our business.
Our success depends largely upon the continued services of our key executive officers and recruitment of additional highly skilled
employees. From time to time, there may be changes in our senior management team resulting from the hiring or departure of
executives, which could disrupt our business. Hiring executives with needed skills or the replacement of one or more of our executive
officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the
achievement of our business objectives.
In addition, competition for qualified management in our industry is intense. Many of the companies with which we compete for
management personnel have greater financial and other resources than we do. We have not entered into employment agreements with
our executive officers. All of our employees are “at-will” employees, and their employment can be terminated by us or them at any
time, for any reason and without notice. The departure of key personnel could adversely affect the conduct of our business. In such
event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would
be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable
to us. In addition, volatility or lack of performance in our stock price may affect our ability to attract replacements should key
personnel depart. If we are not able to retain any of our key management personnel, our business could be harmed.
We have recorded a significant amount of goodwill, and we may never realize the full value of our intangible assets, causing us to
record impairments that may negatively affect our results of operations.
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The Company has four reporting units. Our total assets include substantial goodwill. At December 31, 2020, we had $354.7 million of
goodwill on our consolidated balance sheets. Goodwill is not amortized, but is reviewed at least annually for indications of
impairment, with consideration given to financial performance and other relevant factors.
While our annual goodwill impairment test is conducted at October 31, we have processes to monitor for interim triggering events.
Under GAAP, we review our goodwill for impairment when events or changes in circumstances indicate the carrying value may not
be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill may not
be recoverable include macroeconomic conditions, industry and market considerations, our overall financial performance including an
analysis of our current and projected cash flows, revenue and earnings, a sustained decrease in our share price and other relevant
entity-specific events including changes in strategy, customers or litigation.
A detailed discussion of our impairment testing is included in “Part II - Item 8. Financial Statements and Supplementary Data - Note
8.”
The Company recorded goodwill of $762.4 million as of December 31, 2018 in its Services segment and subsequently recorded
impairment charges of $199.8 million and $215.1 million during the three months ended December 31, 2019 and June 30, 2020,
respectively, as a result of factors relating to the Company’s investment in Passport. When other indications of goodwill impairment
exist, we may be required to recognize additional impairments in the future as a result of market conditions or other factors related to
our performance, including changes in our forecasted results, investment strategy, interest rates or assumptions used as part of the
goodwill impairment analysis. Any further impairment charges that we may record in the future could be material to our results of
operations.
We may need to obtain additional financing which may not be available or, if it is available, may result in a reduction in the
ownership of our stockholders.
We may need to raise additional funds in order to:
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finance unanticipated working capital requirements;
develop or enhance our technological infrastructure and our existing products and services;
fund strategic relationships, including joint ventures and co-investments;
fund additional implementation engagements; and
acquire complementary businesses, technologies, products or services.
Additional financing may not be available on terms favorable to us, or at all. If adequate funds are unavailable or are unavailable on
acceptable terms, our ability to fund our expansion strategy, take advantage of unanticipated opportunities, develop or enhance
technology or services or otherwise respond to competitive pressures could be significantly limited. If we raise additional funds by
issuing equity or convertible debt securities, the ownership of our then-existing stockholders may be reduced, and holders of these
securities may have rights, preferences or privileges senior to those of our then-existing stockholders. In addition, any indebtedness we
incur and restrictive covenants contained in the agreements related thereto could:
• make it difficult for us to satisfy our obligations, including interest payments on any debt obligations;
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limit our ability to obtain additional financing to operate our business;
require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash
flow to fund capital expenditures and working capital and other general operational requirements;
limit our flexibility to plan for and react to changes in our business and the health care industry;
place us at a competitive disadvantage relative to our competitors;
limit our ability to pursue acquisitions; and
increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a
downturn in our business or the economy.
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The occurrence of any one of these events could cause a significant decrease in our liquidity and impair our ability to pay amounts due
on any indebtedness, and could have a material adverse effect on our business, financial condition and results of operations.
We have experienced net losses in the past and we may not achieve profitability in the future.
We have incurred significant net losses in the past and our operating expenses may increase in the future as we continue to invest to
grow our business and build relationships with partners, develop our platforms and develop new solutions. These efforts may prove to
be more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher
expenses. In addition, as we continue to increase our partner base, we could incur increased losses due to mis-forecasted underwriting
in performance-based contracts or because significant costs associated with entering into partner agreements are generally incurred up
26
front, while revenue under certain of our partner agreements is recognized each period in the month in which the services are
delivered. As a result, we may need to raise additional capital through equity and debt financings in order to fund our operations. We
may also fail to improve the gross margins of our business as anticipated. If we are unable to effectively manage these risks and
difficulties as we encounter them, our business, financial condition and results of operations may suffer.
We are and may become subject to litigation, proceedings, government inquiries, reviews, audits or investigations which could have a
material adverse effect on our business, financial condition and results of operations.
We are and may become subject to litigation, proceedings, government inquiries, reviews, audits or investigations in the future,
including potential claims against us by our partners, with or without merit. For example, on August 8, 2019, a shareholder of the
Company filed a class action complaint against the Company, Frank Williams, Nicholas McGrane, Seth Blackley, Christie Spencer
and Steven Wigginton seeking unspecified remedies under the Securities Exchange Act of 1934. A second amended complaint,
which was substantially similar to the amended complaint, was filed on June 8, 2020. The Company filed a motion to dismiss in
response on June 22, 2020 and the briefing was completed on July 17, 2020; the parties are now waiting for the court’s decision. Some
of these matters and claims may result in significant defense costs and potentially significant judgments against us, some of which we
are not, or cannot be, insured against. We generally intend to defend ourselves vigorously; however, we cannot be certain of the
ultimate outcomes of any claims or other matters that may arise in the future. Resolution of these types of matters against us may
result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements
exceed insured levels, could adversely impact our earnings and cash flows, thereby having a material adverse effect on our business,
financial condition, results of operations, cash flow and per share trading price of our Class A common stock. Certain litigation,
proceedings, government inquiries, reviews, audits or investigations or the resolution of such matters may affect the availability or
cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased
risks that would be uninsured and adversely impact our ability to attract directors and officers.
Risks Related to Data Protection Privacy, Cybersecurity, Intellectual Property and Technology
We typically incur significant upfront costs in our partner relationships, and if we are unable to develop or grow these partner
relationships over time, we are unlikely to recover these costs and our operating results may suffer.
We devote significant resources to establish relationships with our partners. Some of our partners undertake a significant and
prolonged evaluation process, often to determine whether our products and services meet their unique health system needs, which has
in the past resulted in extended periods of time to establish a partner relationship. Our efforts involve educating our partners about the
use, technical capabilities and benefits of our products and services. Accordingly, our operating results will depend in substantial part
on our ability to deliver a successful partner experience and persuade our partners to grow their relationship with us over time. There
is no guarantee that we will be able to successfully convert a customer of our transformation services into a partner of our platform
and operations services. If we are unable to sell additional products and services to existing partners, enter into and maintain favorable
relationships with new partners or sufficiently grow our partners’ lives on platform, it could have a material adverse effect on our
business, financial condition and results of operations. As we grow, our customer acquisition costs could outpace our build-up of
recurring revenue, and we may be unable to reduce our total operating costs through economies of scale such that we are unable to
achieve profitability. For example, some of our partnerships require significant upfront investment including, in the case of new
markets, investments in infrastructure to meet readiness and operating requirements which have outpaced our revenue growth, which
was the case with our Florida Medicaid partners. Under the ASC 606 revenue standard, certain set up costs we incur during the
implementation phase may be deferred into the P&O phase, potentially along with associated revenues. If the economics of a
partnership change such that we are unlikely to fully recover those costs, we may be required to write off a portion or all of those
deferred costs and revenues and our operating results may suffer. In addition, we estimate the costs and timing for completing the
transformation phase of relevant partner relationships. These estimates reflect our best judgment. Any increased or unexpected costs or
unanticipated delays, including delays caused by factors outside our control, could cause our operating results to suffer.
If we do not continue to attract new partners and successfully capture new opportunities, we may not achieve our revenue projections,
and our results of operations would be harmed.
In order to grow our business, we must continually attract new partners and successfully capture new opportunities. Our ability to do
so depends in large part on the success of our sales and marketing efforts. Potential partners may seek out other options. Therefore, we
must demonstrate that our products and services provide a viable solution for potential partners. If we fail to provide high-quality
solutions and convince individual partners of our value proposition, we may not be able to retain existing partners or attract new
partners. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of the market for our
products and services due in part to the rapidly evolving nature of the health care and technology industries and the substantial
resources available to our existing and potential competitors. If the market for our products and services declines or grows more
slowly than we expect, if we fail to successfully convert new growth opportunities or if the number of individual partners that use our
27
solutions declines or fails to increase as we expect, our revenue, results of operations, financial condition, business and prospects
could be harmed.
As we enter into an increasing number and variety of risk sharing arrangements with partners, our revenues and profitability could be
limited and negatively impacted.
We may choose to incorporate certain risk sharing arrangements as part of our contractual arrangements with our partners, and we
expect to enter an increasing number and variety of risk sharing arrangements in the future. As an example, as part of our strategy to
support certain partners, we entered into upside and downside risk-sharing arrangements. Through our specialty care management
services, we take on members from payers through performance-based arrangements where we assume risks related to pricing of
contracts for the provision of oncology and cardiology services. We may incur losses under these arrangements if we are unable to
adjust our rates if faced with increased costs related to patient care or pharmaceutical products.
As the market evolves, we expect to engage in similar and new risk sharing strategies with our partners. As of December 31, 2020,
Evolent had approximately $4.7 million of restricted cash and restricted investments related to risk-sharing arrangements. These
arrangements have included and may include provision of letters of credit, loans, reinsurance arrangements, equity investments and
other extensions of capital, where we are and may be at risk of not recovering all or a portion of any such loan or other extension of
capital. These and any other potential risk sharing arrangements could limit and negatively impact our revenue, results of operations,
financial condition, business and prospects.
In addition, our failure to agree on satisfactory risk sharing solutions with potential partners could negatively impact our ability to
attract new partners. We may also be required to make additional capital contributions as we invest and enter into new joint ventures
and strategic alliances.
If the estimates and assumptions we use to determine the size of the target markets for our services are inaccurate, our future growth
rate may be impacted and our business would be harmed.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates
that may not prove to be accurate. Our estimates and forecasts relating to the size and expected growth of the markets for our services
may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and forecasted growth, our business
could fail to grow at similar rates, if at all.
Our estimates of the market opportunities for our services are based on the assumption that the strategic approaches we offer will be
attractive to potential partners. Potential partners may pursue different strategic options, or none at all. In addition, our assumptions
could be impacted by changes to health care laws and regulations. If our assumptions prove inaccurate, our business, financial
condition and results of operations could be adversely affected.
If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations will be
harmed.
We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with existing partners
and to our ability to attract new partners. The promotion of our brands may require us to make substantial investments and we
anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and
expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield
increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In
addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our
partners, or any adverse publicity or litigation involving or surrounding the Company or one of our joint venture partners, investors or
strategic alliance partners could make it substantially more difficult for us to attract new partners. Similarly, because our existing
partners often act as references for us with prospective new partners, any existing partner that questions the quality of our work or that
of our employees could impair our ability to secure additional new partners. Therefore, financial adversity of our partners’ affiliated
health plans may adversely affect our reputation. In addition, negative publicity resulting from any adverse government payer audit
could injure our reputation. If we do not successfully maintain and enhance our reputation and brand recognition, our business may
not grow and we could lose our relationships with partners, which would harm our business, results of operations and financial
condition.
Consolidation in the health care industry could have a material adverse effect on our business, financial condition and results of
operations.
Many health care industry participants and payers are consolidating to create larger and more integrated health care delivery systems
with greater market power. We expect regulatory and economic conditions to result in additional consolidation in the health care
28
industry in the future. As consolidation accelerates, the economies of scale of our partners’ organizations may grow. If a partner
experiences sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its demand
for our products and services. In addition, as health care providers consolidate to create larger and more integrated health care delivery
systems with greater market power, these providers may try to use their market power to negotiate fee reductions for our products and
services. Finally, consolidation may also result in the acquisition or future development by our partners of products and services that
compete with our products and services. Any of these potential results of consolidation could have a material adverse effect on our
business, financial condition and results of operations.
We face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not
maintain or expand our market share our business and operating results will be harmed.
The market for our products and services is fragmented, competitive and characterized by rapidly evolving technology standards,
customer needs and the frequent introduction of new products and services. Our competitors range from smaller niche companies to
large, well-financed and technologically-sophisticated entities.
We compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver
clinical, financial and operational performance improvement through the use of products and services, quality and reliability of
services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. Some of our
competitors are more established, benefit from greater brand recognition, have larger client bases and have substantially greater
financial, technical and marketing resources. Other competitors have proprietary technology that differentiates their product and
service offerings from ours. Our competitors are constantly developing products and services that may become more efficient or
appealing to our existing partners and potential partners. Additionally, some health care information technology providers have begun
to incorporate enhanced analytical tools and functionality into their core product and service offerings used by health care providers.
As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market
forces, undertake more extensive marketing campaigns for their brands, products and services and make more attractive offers to our
existing partners and potential partners.
We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other things, competition within
the industry, consolidation of health care industry participants, practices of managed care organizations, government action and
financial stress experienced by our partners. If our pricing experiences significant downward pressure, our business will be less
profitable and our results of operations will be adversely affected.
We cannot be certain that we will be able to retain our current partners or expand our partner base in this competitive environment. If
we do not retain current partners or expand our partner base, or if we have to renegotiate existing contracts, our business, financial
condition and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of
consolidation in both the health care information technology and health care industries. If one or more of our competitors or potential
competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely
affect our ability to compete effectively and could harm our business, financial condition and results of operations.
Our offerings could be subject to audits by CMS and other governmental payers and whistleblower claims under the False Claims Act.
We support provider-sponsored health plans with Medicare Advantage, Medicaid and Exchange products, as well as health systems
and physician groups participating in payer-delegated risk arrangements or in the CMS Next Generation ACO Model. We anticipate
that CMS and other governmental payers will continue to review and audit the results of our services including risk adjustment
offerings, with a focus on identifying possible false claims.
In addition, aspects of our review process and coding procedures could be subject to claims under the False Claims Act or Anti-
Kickback Statute. Negative results of any such audit or claim could have a material adverse effect on our business, financial condition,
results of operations or prospects and could damage our reputation.
Exclusivity and right of first refusal clauses in some of our partner and founder contracts may prohibit us from partnering with certain
other providers in the future, and as a result may limit our growth.
Some of our partner and founder contracts include exclusivity and right of first refusal clauses. Any founder contracts with exclusivity,
right of first refusal or other restrictive provisions may limit our ability to conduct business with certain potential partners, including
competitors of our founders. For example, under the UPMC IP Agreement, if we were to conduct business with certain precluded
providers, it would result in the loss of the license thereunder. Partner contracts with exclusivity or other restrictive provisions may
limit our ability to partner with or provide services to other providers or purchase services from other vendors within certain time
periods. These exclusivity or other restrictive provisions often apply to specific competitors of our health system partners or specific
29
geographic areas within a particular state or an entire state. Accordingly, these exclusivity clauses may prevent us from entering into
relationships with potential partners and could cause our business, financial condition and results of operations to be harmed.
We have also entered into a reseller, services and non-competition agreement with an affiliate of UPMC, pursuant to which we are
prohibited from providing products or services to certain third parties and in certain territories. These restrictions could cause our
business, financial condition and results of operations to be harmed if we found it advantageous to provide products or services to such
third parties or in such territories during the restricted period.
We are subject to privacy and data protection laws governing the transmission, security and privacy of health information, which may
impose restrictions on the manner in which we access personal data and subject us to penalties if we are unable to fully comply with
such laws.
As described below, we are required to comply with numerous federal and state laws and regulations governing the collection, use,
disclosure, storage and transmission of individually identifiable health information that we may obtain or have access to in connection
with the provision of our services. These laws and regulations, including their interpretation by governmental agencies, are subject to
frequent change and could have a negative impact on our business.
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HIPAA expanded protection of the privacy and security of personal health information and required the adoption of
standards for the exchange of electronic health information. Among the standards that the Department of Health and
Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique
identifiers for providers, employers, health plans and individuals, security, electronic signatures, privacy and
enforcement. Privacy regulations under HIPAA also provide patients with rights related to understanding and controlling
how their protected health information is used and disclosed. As a provider of services to entities subject to HIPAA, we
are directly subject to certain provisions of the regulations as a “Business Associate.” We are also directly subject to the
HIPAA privacy and security regulations as a “Covered Entity” with respect to True Health. If we are unable to properly
protect the privacy and security of protected health information entrusted to us, we could be found to have breached our
contracts with our customers and be subject to investigation by the U.S. Department of Health and Human Services
Office for Civil Rights (“OCR”). In the event the OCR finds that we have failed to comply with applicable HIPAA
privacy and security standards, we could face civil and criminal penalties that could have a material adverse effect on us.
In addition, OCR performs compliance audits of Business Associates in order to proactively enforce the HIPAA privacy
and security standards. OCR has become an increasingly active regulator and has signaled its intention to continue this
trend. OCR has the discretion to impose penalties without being required to attempt to resolve violations through
informal means; further, OCR may require companies to enter into resolution agreements and corrective action plans
which impose ongoing compliance requirements. OCR enforcement activity can result
liability and
reputational harm, and responses to such enforcement activity can consume significant internal resources.
The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the
“Stimulus Bill,” effective February 22, 2010, set forth health information security breach notification requirements and
increased penalties for violation of HIPAA. The HITECH Act requires individual notification for all breaches, media
notification of breaches for over 500 individuals and at least annual reporting of all breaches to the Department of Health
and Human Services. Failure to comply with the HITECH Act could result in fines and penalties that could have a
material adverse effect on us.
Numerous other federal and state laws may apply that restrict the use and protect the privacy and security of individually
identifiable information, as well as employee personal information. These include state medical privacy laws, state social
security number protection laws and federal and state consumer protection laws. These various laws in many cases are
not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies, creating
complex compliance issues for us and our partners and potentially exposing us to additional expense, adverse publicity
and liability, any of which could adversely affect our business.
Federal and state consumer protection laws are increasingly being applied by the FTC and states’ attorneys general to
regulate the collection, use, storage and disclosure of personal or individually identifiable information, through websites
or otherwise, and to regulate the presentation of website content.
in financial
There is ongoing concern from privacy advocates, regulators and others regarding data protection and privacy issues, and the number
of jurisdictions with data protection and privacy laws have been increasing. Also, there are ongoing public policy discussions
regarding whether the standards for de-identified, anonymous or pseudonymized health information are sufficient, and the risk of re-
identification sufficiently small, to adequately protect patient privacy. These discussions may lead to further restrictions on the use of
such information. There can be no assurance that these initiatives or future initiatives will not adversely affect our ability to access and
use data or to develop or market current or future services.
The security measures that we and our third-party vendors and subcontractors have in place to ensure compliance with privacy and
data protection laws may not protect our facilities and systems from security breaches, acts of vandalism or theft, computer viruses,
30
misplaced or lost data, programming and human errors or other similar events. Under the HITECH Act, as a business associate we
may also be liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate
protections through our agreements with our subcontractors, we still have limited control over their actions and practices. A breach of
privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including
criminal and civil liability, against us. Our failure to comply may result in criminal and civil liability because the potential for
enforcement action against business associates is now greater. Enforcement actions against us could be costly and could interrupt
regular operations, which may adversely affect our business. While we have not received any notices of violation of the applicable
privacy and data protection laws and believe we are in compliance with such laws, there can be no assurance that we will not receive
such notices in the future.
Data loss or corruption due to failures or errors in our systems or service disruptions at our data centers may adversely affect our
reputation and relationships with existing partners, which could have a negative impact on our business, financial condition and
results of operations.
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could
result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our partners
regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is
introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our
existing software. Despite testing by us, we may discover defects or errors in our software. In addition, we may encounter defects or
errors in connection with the integration of software and technology we acquire. Any defects or errors could expose us to risk of
liability to partners and the government and could cause delays in the introduction of new products and services, result in increased
costs and diversion of development resources, require design modifications, decrease market acceptance or partner satisfaction with
our products and services or cause harm to our reputation.
Furthermore, our partners might use our software together with products from other companies. As a result, when problems occur, it
might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these
errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts,
impact our reputation and lead to significant partner relations problems.
Our business is subject to online security risks, and if we are unable to safeguard the security and privacy of confidential data, we
may face significant liabilities and our reputation and business will be harmed.
Our services involve the collection, storage and analysis of confidential information, including intellectual property and personal
information of employees, health providers and others, as well as protected health information of our partners’ patients. Because of the
extreme sensitivity of this information, the security features of our computer, network, and communications systems infrastructure are
very important. In certain cases such information is provided to third parties, for example, to the service providers who provide
hosting services for our technology platform, and we may be unable to control the use of such information or the security protections
employed by such third parties. We may be required to expend significant capital and other resources to protect against security
breaches or to alleviate problems caused by security breaches. Despite our implementation of security measures designed to help
ensure data security and compliance with applicable laws and rules, our facilities and systems, and those of our third-party providers,
may be vulnerable to cyber-attacks, security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data,
programming and/or human errors, power outages, hardware failures or other similar events. Furthermore, our increased use of mobile
and cloud technologies, including as a result of the shift to work-from-home arrangements as a result of the COVID-19 pandemic, has
heighted these cybersecurity and privacy risks, including risks from cyber-attacks such as phishing, spam emails, hacking, social
engineering, and malicious software. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve
such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could
lose sales and partners, which could have a material adverse effect on our business, operations, and financial results.
A cyber-attack that bypasses our, or our third-party providers’, security systems successfully could require us to expend significant
resources to remediate any damage, and prevent future occurrences, interrupt our operations, damage our reputation and our
relationship with our partners, expose us or other third parties to a risk of loss or misuse of confidential information, reduce demand
for our products and services or subject us to significant liability through litigation as well as regulatory action. While we maintain
insurance covering certain security and privacy damages and claim expenses we may not carry insurance or maintain coverage
sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any
event, insurance coverage would not address the reputational damage that could result from a security incident.
We may experience cybersecurity and other breach incidents that may remain undetected for an extended period. In addition,
techniques used to obtain unauthorized access to information or to sabotage information technology systems change frequently. As a
result, the costs of attempting to protect against cybersecurity risks and the costs of responding to cyber-attacks are significant. This
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could require us to expend significant resources to continue to modify or enhance our protective measures and to remediate any
damage.
New data security laws and regulations are being implemented rapidly and are evolving, and we may not be able to timely comply
with such requirements, and such requirements may not be compatible with our current processes. Changing our processes could be
time consuming and expensive, and failure to timely implement required changes could subject us to liability for non-compliance.
If we are unable to obtain, maintain and enforce intellectual property protection for our technology and products or if the scope of our
intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and products
substantially similar to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
Our business depends on proprietary technology and content, including software, databases, confidential information and know-how,
the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret and copyright
laws and confidentiality procedures and contractual provisions to protect our intellectual property rights in our proprietary technology
and content. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent
and other intellectual property filings that could be expensive and time-consuming. Effective trademark, trade-secret and copyright
protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of
defending our rights. These measures, however, may not be sufficient to offer us meaningful protection. If we are unable to protect our
intellectual property and other proprietary rights, our competitive position and our business could be harmed, as third parties may be
able to commercialize and use technologies and software products that are substantially the same as ours without incurring the
development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged,
invalidated, circumvented, infringed or misappropriated, our trade secrets and other confidential information could be disclosed in an
unauthorized manner to third parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current
market trends or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of
certain offerings or other competitive harm.
Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’
products and services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have
taken to protect our proprietary rights may not be adequate to prevent infringement or misappropriation of our intellectual property.
We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to
meaningfully protect our intellectual property rights could result in harm to our ability to compete and reduce demand for our
technology and products. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our
market positions and business opportunities. Also, some of our products and services rely on technologies and software developed by
or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar
relationships in the future on reasonable terms or at all.
We may also be required to protect our proprietary technology and content in an increasing number of jurisdictions, a process that is
expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property
protection may not be available to us in every country, and the laws of some foreign countries may not be as protective of intellectual
property rights as those in the United States. Additional uncertainty may result from changes to intellectual property legislation
enacted in the United States and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies.
Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with
a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material
adverse effect on our business, financial condition and results of operations.
If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of
interest and our business may be adversely affected.
The registered or unregistered trademarks or trade names that we own or license may be challenged, infringed, circumvented, declared
generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these
trademarks and trade names, which we need in order to build name recognition with potential partners. In addition, third parties may in
the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing
common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use
these trademarks to commercialize our technologies or products in certain relevant countries. If we are unable to establish name
recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely
affected.
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Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights,
the outcome of which would be uncertain and could have a material adverse effect on our business, financial condition and results of
operations.
Our commercial success depends on our ability to develop and commercialize our services and use our proprietary technology without
infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may
cause our business, operating results and financial condition to suffer. As the market for health care in the United States expands and
more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of
which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we
may face allegations that we, our partners, our licensees or parties indemnified by us have infringed or otherwise violated the patents,
trademarks, copyrights or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain
a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual
property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. We
may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former
employers or other third parties. It may be necessary for us to initiate litigation to defend ourselves in order to determine the scope,
enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of
whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming,
divert management’s attention and financial resources and can be costly to evaluate and defend. Results of any such litigation are
difficult to predict and may require us to stop commercializing or using our products or technology, obtain licenses, modify our
services and technology while we develop non-infringing substitutes or incur substantial damages, settlement costs or face a temporary
or permanent injunction prohibiting us from marketing or providing the affected products and services. If we require a third-party
license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees or grant cross-
licenses to intellectual property rights for our products and services. We may also have to redesign our products or services so they do
not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and
time, during which our technology and products may not be available for commercialization or use. Even if we have an agreement to
indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not
obtain a third-party license to the infringed technology on reasonable terms or at all, or obtain similar technology from another source,
our revenue and earnings could be adversely impacted.
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual
property. We are not currently subject to any claims from third parties asserting infringement of their intellectual property rights.
Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially
greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause
us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if
securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Class A
common stock. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a
material adverse effect on our ability to raise the funds necessary to continue our operations. Assertions by third parties that we violate
their intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of
operations.
Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.
We may use open source software in connection with our products and services. Companies that incorporate open source software into
their products have, from time to time, faced claims challenging the use of open source software and/or compliance with open source
license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or
claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software
containing open source software to publicly disclose all or part of the source code to such software and/or make available any
derivative works of the open source code, which could include valuable proprietary code of the user, on unfavorable terms or at no
cost. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to
disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could
inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary
source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results
of operations and could help our competitors develop products and services that are similar to or better than ours.
If we are unable to protect the confidentiality of our trade secrets, know-how and other proprietary information, the value of our
technology and products could be adversely affected.
We may not be able to protect our trade secrets, know-how and other proprietary information adequately. Although we use reasonable
efforts to protect this proprietary information and technology, our employees, consultants and other parties may unintentionally or
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willfully disclose our information or technology to competitors. Enforcing a claim that a third-party illegally obtained and is using any
of our proprietary information or technology is expensive and time-consuming, and the outcome is unpredictable. In addition, courts
outside the United States are sometimes less willing to protect trade secrets, know-how and other proprietary information. We rely, in
part, on non-disclosure, confidentiality and invention assignment agreements with our employees, consultants and other parties to
protect our trade secrets, know-how and other intellectual property and proprietary information. These agreements may not be self-
executing, or they may be breached and we may not have adequate remedies for such breach. Moreover, third parties may
independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how and other
proprietary information.
We depend on certain technologies that are licensed to us. We do not control the intellectual property rights covering these
technologies and any loss of our rights to these technologies or the rights licensed to us could prevent us from developing and/or
commercializing our products.
We are a party to a number of license agreements under which we are granted rights to intellectual property that is important to our
business, and we expect that we may need to enter into additional license agreements in the future. We rely on these licenses to use
various proprietary technologies that may be material to our business, including without limitation those technologies licensed under
an intellectual property and development services license agreement between us and UPMC, or the UPMC IP Agreement, and a
technology license agreement between us and UPMC, or the UPMC Technology Agreement. Under the UPMC IP Agreement, certain
of UPMC’s proprietary analytics models and know-how are licensed to us on a nonexclusive basis from UPMC; pursuant to the
UPMC Technology Agreement, UPMC’s proprietary technology platform, associated know-how and the Identifi® trademark are
licensed to us on an irrevocable, non-exclusive basis from UPMC; in each case, subject to certain ongoing territorial, time and use
restrictions. Our rights to use these technologies and know-how and employ the software claimed in the licensed technologies are
subject to the continuation of and our compliance with the terms of those licenses. Our existing license agreements impose, and we
expect that future license agreements will impose on us, various exclusivity obligations. If we fail to comply with our obligations
under these agreements, the applicable licensor may have the right to terminate our license, in which case we may not be able to
develop or commercialize the products or technologies covered by the license.
Disputes may arise between us and our licensors regarding intellectual property rights subject to a license agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not
subject to the license agreement;
our obligations with respect to the use of the licensed technology in relation to our services and technologies, and which
activities satisfy those obligations;
whether our activities are in compliance with the restrictions placed upon our rights to use the licensed technology by our
licensors; and
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our
licensors and us and our partners.
If disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing
arrangements on acceptable terms, we may be unable to obtain equivalent replacement licensing arrangements or to successfully
develop and commercialize the affected products and technologies.
The risks described elsewhere pertaining to our intellectual property rights also apply to the intellectual property rights that we license,
and any failure by us or our licensors to obtain, maintain and enforce these rights could have a material adverse effect on our business.
In some cases, we do not have control over the prosecution, maintenance or enforcement of the intellectual property rights that we
license, and may not have sufficient ability to consult and input into the prosecution and maintenance process with respect to such
intellectual property, and our licensors may fail to take the steps we feel are necessary or desirable in order to obtain, maintain and
enforce the licensed intellectual property rights and, as a result, our ability to retain our competitive advantage with respect to our
products and technologies may be materially affected.
Any restrictions on our use of, or ability to license, data, or our failure to license data and integrate third-party technologies, could
have a material adverse effect on our business, financial condition and results of operations.
We depend upon licenses from third parties for some of the technology and data used in our applications, and for some of the
technology platforms upon which these applications are built and operate, including under the UPMC IP Agreement and the UPMC
Technology Agreement. We expect that we may need to obtain additional licenses from third parties in the future in connection with
the development of our products and services. In addition, we obtain a portion of the data that we use from government entities, public
records and from our partners for specific partner engagements. We believe that we have all rights necessary to use the data that is
incorporated into our products and services. However, we cannot assure you that our licenses for information will allow us to use that
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information for all potential or contemplated applications and products. In addition, certain of our products depend on maintaining our
data and analytics platform, which is populated with data disclosed to us by our partners with their consent. If these partners revoke
their consent for us to maintain, use, de-identify and share this data, consistent with applicable law, our data assets could be degraded.
In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive
reason to do so, if legislation is passed restricting the use of the data or if judicial interpretations are issued restricting use of the data
that we currently use in our products and services. In addition, data providers could fail to adhere to our quality control standards in
the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to
withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract
with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and
services to our partners would be materially adversely impacted, which could have a material adverse effect on our business, financial
condition and results of operations.
We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content
generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source
software. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult
to replace once integrated into our own proprietary applications. Most of these licenses can be renewed only by mutual consent and
may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to
obtain, maintain or comply with any of these licenses could delay development until equivalent technology can be identified, licensed
and integrated, which would harm our business, financial condition and results of operations.
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by
these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited
to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our
own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition
and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed technology in the future, we
might not be able to modify or adapt our own solutions.
We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing
services to our partners, and any failure or interruption in the services provided by these third parties or our own systems could
expose us to litigation and negatively impact our relationships with partners, adversely affecting our brand and our business.
Our ability to deliver our products and services, 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-party
suppliers, including bandwidth and telecommunications equipment providers, to provide our services. 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:
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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.
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Any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of
or by third-party providers’ systems or our own systems to handle current or higher volume of use could significantly harm our
business. We exercise limited control over our third-party suppliers, 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.
We rely on third-party vendors to host and maintain our technology platform.
We rely on third-party vendors to host and maintain our technology platform, including Identifi®. Our ability to offer our services and
operate our business is therefore dependent on maintaining our relationships with third-party vendors and entering into new
relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to
enter into agreements with vendors in the future could harm our business, results of operations and financial condition. Despite
precautions taken at our vendors’ facilities, the occurrence of a natural disaster, a decision to close the facilities without adequate
notice or other unanticipated problems, including relating to the COVID-19 pandemic, could result in lengthy interruptions in our
service. These service interruption events could cause our platform to be unavailable to our partners and impair our ability to deliver
services and to manage our relationships with new and existing partners, which in turn could materially affect our results of
operations.
If our vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such
vendors are terminated, our operations could be significantly disrupted. Certain vendor agreements may be unilaterally terminated by
the licensor for convenience, and if such agreements are terminated, we may not be able to enter into similar relationships in the future
on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services
to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to
meet the changing needs of our business.
We have previously identified material weaknesses in our internal control over financial reporting. Although the material weaknesses
were remediated, if we identify additional material weaknesses in the future, we and our auditor may conclude that our internal
control over financial reporting is not effective and we may be unable to produce timely and accurate financial statements, any of
which could adversely impact our investors’ confidence and our stock price.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a
reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or
detected on a timely basis.
Management identified material weaknesses in its internal control over financial reporting as of December 31, 2019 related to the
areas below.
Information and Communication - We did not maintain adequate user access role definitions within certain instances of one of our
claims processing systems inherited in an acquisition that supported claims for True Health New Mexico that are included in claims
expense and certain claims for specialty care businesses that are included in our cost of revenue (the “System”) because of inadequate
segregation of duties. This was a deficiency in the design of the control.
Control Activities - We did not maintain adequate controls over the set-up and modifications of claims data in the System. We lacked
evidence of the operation of controls over claims data received from certain third-party service providers. These were deficiencies in
the design and operation of the controls.
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None of the control deficiencies resulted in any adjustments to our 2019 annual or interim consolidated financial statements, but as a
result of these material weaknesses, our management concluded as of December 31, 2019 that our internal control over financial
reporting was not effective, and also that our disclosure controls and procedures were not effective. In addition, our independent
registered public accounting firm, which audits our annual financial statements, issued an adverse opinion on the effectiveness of
internal control over financial reporting as of December 31, 2019. We concluded that these material weaknesses had been remediated
as of December 31, 2020.
Our efforts to design and implement an effective control environment may not be sufficient to identify or prevent future material
weaknesses or significant deficiencies from occurring. Any newly identified material weakness could result in a misstatement of our
financial statements or disclosures that would result in a material misstatement of our annual or interim consolidated financial
statements that would not be prevented or detected. A control system, no matter how well designed and operated, can provide only
reasonable assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and all instances of fraud will be detected. In addition, if we identify future material weaknesses in our internal controls over financial
reporting or if we are unable to comply with the demands that are placed upon us as a public company, including the requirements of
Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them
within the timeframes required by the SEC. We also could become subject to investigations by the NYSE, the SEC or other regulatory
authorities.
Risks relating to our structure
We are required to pay certain of our pre-IPO investors for certain tax benefits we may claim in the future, and these amounts are
expected to be material.
Under an exchange agreement we entered into at the time of our IPO, we granted TPG, The Advisory Board and Ptolemy Capital
(together, the “Investor Stockholders”) an exchange right that allowed for receipt of newly-issued shares of the Company’s Class A
common stock in exchange (a “Class B Exchange”) for an equal number of shares of the Company’s Class B common stock (which
were subsequently canceled) and an equal number of Evolent Health LLC’s Class B common units. Class B common units received by
the Company from relevant Investor Stockholders were simultaneously exchanged for an equivalent number of Class A units of
Evolent Health LLC, and Evolent Health LLC cancelled the Class B common units it received in the Class B Exchanges, resulting in
an increase in the Company’s economic interest in Evolent Health LLC.
As of December 31, 2019, all of the Class B common units held by the Investor Stockholders and certain other stockholders had been
exchanged (together with an equal number of shares) for our Class A common stock. These exchanges resulted in increases in the tax
basis of our share of the assets of Evolent Health LLC that otherwise would not have been available to the Company. In addition, we
expect that certain NOLs will be available to us as a result of the transactions as described in “Part II - Item 8. Financial Statements
and Supplementary Data - Note 14 - “Tax Receivables Agreement.” These increases in tax basis and NOLs may reduce the amount of
tax that we would otherwise be required to pay in the future, although the Internal Revenue Service (“IRS”) may challenge all or a part
of the tax basis increases and NOLs, and a court could sustain such a challenge.
We have entered into the TRA, related to the tax basis step-up of the assets of Evolent Health LLC and certain NOLs of the former
members of Evolent Health LLC, with the Investor Stockholders and certain of our other investors (the “TRA Holders”). Pursuant to
the TRA, we will pay the TRA Holders 85% of the amount of the cash savings, if any, in U.S. federal, state and local and non-U.S.
income tax that we realize as a result of increases in tax basis resulting from exchanges of Class B common units for shares of our
Class A common stock (calculated assuming that any post-IPO transfer of Class B common units (other than the exchanges) had not
occurred) as well as certain other benefits attributable to payments under the TRA itself.
The TRA also requires us to pay 85% of the amount of the cash savings, if any, in U.S. federal, state and local and non-U.S. income
tax that we realize as a result of the utilization of the NOLs of Evolent Health Holdings and an affiliate of TPG attributable to periods
prior to our IPO and the deduction of any imputed interest attributable to our payment obligations under the TRA.
The payments that we make under the TRA could be substantial. Assuming no material changes in relevant tax law and based on our
current operating plan and other assumptions, including our estimate of the tax basis of our assets as of the date of the Offering
Reorganization and the estimated tax basis step-ups resulting from each completed exchange, we estimate that the total amount that we
would be required to pay under the TRA could be approximately $101.7 million. This estimated amount includes approximately $16.1
million of potential future payments under the TRA related to the future utilization of the pre-IPO NOLs described above and
approximately $85.6 million of potential future payments related to the tax basis step-up of the assets of Evolent Health LLC in
connection with the exchanges that occurred in connection with our completed secondary offerings and private sales.
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The actual amount we will be required to pay under the TRA may be materially greater than these hypothetical amounts, as potential
future payments will vary as a consequence of our tax position, the relevant tax basis analysis, our ability to generate sufficient future
taxable income in order to be able to benefit from the aforementioned tax attributes, the character and timing of our taxable income
and the income tax rates applicable at the time we realize cash savings attributable to our recognition and utilization of the
aforementioned tax attributes. Payments under the TRA are not conditioned on our existing investors’ continued ownership of any of
our equity.
We will not be reimbursed for any payments made under the TRA in the event that any tax benefits are disallowed.
If the IRS successfully challenges the tax basis increases resulting from the Class B Exchanges or the existence or amount of the pre-
IPO NOLs at any point in the future after payments are made under the TRA, we will not be reimbursed for any payments made under
the TRA (although future payments under the TRA, if any, would be netted against any unreimbursed payments to reflect the result of
any such successful challenge by the IRS). As a result, in certain circumstances, we could be required to make payments under the
TRA in excess of our cash tax savings.
We may not be able to realize all or a portion of the tax benefits that resulted from the exchanges of Class B common units for our
Class A common stock from the utilization of NOLs previously held by Evolent Health Holdings and an affiliate of TPG and from
payments made under the TRA.
Our ability to realize the tax benefits that we expect to be available as a result of the increases in tax basis created by the Class B
Exchanges and by the payments made pursuant to the TRA, and our ability to utilize the pre-IPO NOLs of Evolent Health Holdings
and an affiliate of TPG and the interest deductions imputed under the TRA all depend on a number of assumptions, including that we
earn sufficient taxable income each year during the period over which such deductions are available and that there are no adverse
changes in applicable law or regulations. If our actual taxable income is insufficient or there are adverse changes in applicable law or
regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could
be negatively affected. Please refer to the discussion in “Part II - Item 8. Financial Statements and Supplementary Data - Note 14 - Tax
Receivables Agreement” for additional information.
In certain cases, payments by us under the TRA may be accelerated or significantly exceed the tax benefits we realize in respect of the
tax attributes subject to the TRA.
The TRA provides that upon certain changes of control, or if, at any time, we elect an early termination of the TRA or are in material
breach of our obligations under the TRA, we would be required to make an immediate payment equal to the present value of the
anticipated future tax benefits to certain current or former shareholders. Such payment would be based on certain valuation
assumptions and deemed events set forth in the TRA, including the assumption that we have sufficient taxable income to fully utilize
such tax benefits. The benefits would be payable even though, in certain circumstances, no tax basis step-up deductions and no NOLs
are actually used at the time of the accelerated payment under the TRA. Accordingly, payments under the TRA may be made years in
advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we
realize in respect of the tax attributes subject to the TRA. In these situations, our obligations under the TRA could have a substantial
negative impact on our liquidity. We may not be able to finance our obligations under the TRA and any indebtedness we incur may
limit our subsidiaries’ ability to make distributions to us to pay these obligations. In addition, our obligations under the TRA could
have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes
of control that could be in the best interests of holders of our Class A common stock.
The agreements between us and certain of our pre-IPO investors were made in the context of an affiliated relationship and may
contain different terms than comparable agreements with unaffiliated third parties.
The contractual agreements that we have with certain of our pre-IPO investors were negotiated in the context of an affiliated
relationship in which representatives of such pre-IPO investors and their affiliates comprised a significant portion of our board of
directors. As a result, the financial provisions, and the other terms of these agreements, such as covenants, contractual obligations on
our part and on the part of such pre-IPO investors and termination and default provisions, may be less favorable to us than terms that
we might have obtained in negotiations with unaffiliated third parties in similar circumstances, which could have a material adverse
effect on our business, financial condition and results of operations.
Risks Relating to Our Convertible Notes
The conditional conversion feature of the 2025 Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the 2025 Notes is triggered, holders of such notes will be entitled to convert such
notes at any time during specified periods at their option. If one or more holders elect to convert their 2025 Notes, unless we elect to
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satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering
any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which
could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under
applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2025 Notes, as applicable, as a current
rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the 2024 Notes and the 2025 Notes, could
have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, (“ASC 470-20”), an entity must
separately account for the liability and equity components of the convertible debt instruments (such as the 2024 Notes and the 2025
Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.
The effect of ASC 470-20 on the accounting for the 2024 Notes and the 2025 Notes is that the equity component is required to be
included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity
component would be treated as original issue discount for purposes of accounting for the debt component of the 2024 Notes and the
2025 Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a
result of the amortization of the discounted carrying value of the 2024 Notes and the 2025 Notes to their face amount over the term of
the 2024 Notes and the 2025 Notes, respectively. We may report lower net income in our financial results because ASC 470-20 will
require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could
adversely affect our reported or future financial results, the trading price of our Class A common stock and the trading prices of the
2024 Notes and the 2025 Notes.
In addition, under certain circumstances, convertible debt instruments (such as the 2024 Notes and the 2025 Notes) that may be settled
entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable
upon conversion of the 2024 Notes and the 2025 Notes are not included in the calculation of diluted earnings per share except to the
extent that the conversion value of the 2024 Notes and the 2025 Notes exceeds their principal amount. Under the treasury stock
method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that
would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the
accounting standards in the future will continue to permit the use of the treasury stock method. For example, in August 2020, the
Financial Accounting Standards Board published Accounting Standards Update (“ASU”) 2020-06, which simplifies the accounting for
certain financial instruments, including convertible instruments. We have not yet completed our assessment of ASU 2020-06,
however, if we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 2024 Notes
and the 2025 Notes, then our diluted earnings per share would be adversely affected.
Risks relating to ownership of our Class A common stock
We expect that our stock price will be volatile and may fluctuate or decline significantly.
The trading price of our Class A common stock has been and may continue to be volatile and subject to wide price fluctuations in
response to various factors, including:
economic and political conditions or events;
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• market conditions in the broader stock market in general, or in our industry in particular, including as a result of
COVID-19 related impacts;
actual or anticipated fluctuations in our quarterly financial reports and results of operations;
our ability to satisfy our ongoing capital needs and unanticipated cash requirements;
indebtedness incurred in the future;
introduction of new products and services by us or our competitors;
business developments of our partners;
issuance of new or changed securities analysts’ reports or recommendations;
sales of large blocks of our stock;
additions or departures of key personnel;
regulatory developments; and
litigation and governmental investigations.
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These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may
limit or prevent investors from readily selling their shares of Class A common stock, including any shares of Class A common stock
they receive upon conversion of our convertible notes, and may otherwise negatively affect the liquidity of our Class A common stock.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action
litigation against the company that issued the stock. We are, and from time to time may become, subject to such litigation, and we
39
could incur substantial costs defending a lawsuit. Such a lawsuit could also divert the time and attention of our management from our
business.
The trading market for our Class A common stock will also be influenced by the research and reports that industry or securities
analysts publish about us or our business. If one or more of the analysts who cover us downgrades our stock, or if our results of
operations do not meet their expectations, our stock price could decline.
We are subject to securities class action litigation and an adverse outcome in such litigation could have an adverse effect on our
financial condition.
On August 8, 2019, a shareholder of the Company filed a class action complaint against the Company, asserting claims under Section
10(b) and 20(a) of the Exchange Act, in the United States District Court, Eastern District of Virginia, Alexandria Division. An
amended complaint was filed on January 10, 2020. The case, Plymouth County Retirement System v. Evolent Health, Inc., Frank
Williams, Nicholas McGrane, Seth Blackley, Christie Spencer and Steven Wigginton, alleges that Evolent’s executives made false or
misleading statements regarding its business with Passport. A second amended complaint, which was substantially similar to the
amended complaint, was filed on June 8, 2020. The Company filed a motion to dismiss in response on June 22, 2020 and the briefing
was completed on July 17, 2020; the parties are now waiting for the court’s decision. We and the individuals dispute these claims and
intend to defend the matter vigorously. This litigation could result in substantial costs and a diversion of management’s resources and
attention, which could harm our business and the value of our common stock.
The market price of our Class A common stock could decline due to the large number of shares of Class A common stock issuable
upon conversion of our convertible notes, or by sales or issuances of substantial amounts of our Class A common stock.
The market price of our Class A common stock could decline as a result of sales of a large number of the shares of our Class A
common stock issuable upon the conversion of our convertible notes, or the perception that such sales could occur. These sales, or the
possibility that these sales may occur, may also make it more difficult for us to raise additional capital by selling equity or equity-
linked securities in the future, at a time and price that we deem appropriate. As of February 22, 2021, 86.1 million shares of our Class
A common stock were outstanding. Up to a maximum of 13.3 million shares of our Class A common stock is reserved for issuance
upon the conversion of our convertible notes. Similarly, sales or issuances of substantial amounts of our Class A common stock in the
public market by us or by our stockholders into the public market could cause the market price of our Class A common stock to
decrease significantly.
Some provisions of Delaware law, our second amended and restated certificate of incorporation and our third amended and restated
by-laws and certain of our contracts may deter third parties from acquiring us.
Among other things, our second amended and restated certificate of incorporation and our third amended and restated by-laws:
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divide our board of directors into three staggered classes of directors that are each elected to three-year terms;
prohibit stockholder action by written consent;
authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the
number of outstanding shares of capital stock, making a takeover more difficult and expensive;
prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders
to elect director candidates;
provide that special meetings of the stockholders may be called only by or at the direction of the board of directors, the
chairman of our board or the chief executive officer;
require advance notice to be given by stockholders for any stockholder proposals or director nominees;
require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to amend
certain provisions of our second amended and restated certificate of incorporation and any provision of our third
amended and restated by-laws; and
require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to remove
directors and only for cause.
In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations,
for a period of three years following the time that the stockholder becomes an “interested stockholder.” We have elected in our second
amended and restated certificate of incorporation not to be subject to Section 203 of the DGCL. Nevertheless, our second amended
and restated certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they
provide that each of TPG, UPMC and The Advisory Board and their transferees will not be deemed to be “interested stockholders,”
and accordingly are not subject to such restrictions.
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These and other provisions could have the effect of discouraging, delaying or preventing a transaction involving a change in control of
our company or could make it more difficult for stockholders to elect directors of their choosing or to cause us to take other corporate
actions that they desire. Provisions in certain of our contracts may also deter third parties from acquiring us. In addition, certain
partners would have the right to terminate if we are acquired by certain competitors.
Our second amended and restated certificate of incorporation and stockholders’ agreement contain provisions renouncing our
interest and expectation to participate in certain corporate opportunities identified by or presented to certain of our pre-IPO
investors.
UPMC and its affiliates may engage in activities similar to ours or lines of business or have an interest in the same areas of corporate
opportunities as we do. Our second amended and restated certificate of incorporation and stockholders’ agreement provide that UPMC
and its affiliates do not have any duty to refrain from (1) engaging, directly or indirectly, in the same or similar business activities or
lines of business as us, including those business activities or lines of business deemed to be competing with us, or (2) doing business
with any of our clients, customers or vendors. In the event that UPMC or any of its affiliates acquires knowledge of a potential
business opportunity which may be a corporate opportunity for us, they have no duty to communicate or offer such corporate
opportunity to us. Our second amended and restated certificate of incorporation and stockholders’ agreement also provide that, to the
fullest extent permitted by law, UPMC and its affiliates will not be liable to us for breach of any fiduciary duty or otherwise, by reason
of directing such corporate opportunity to another person, or otherwise not communicating information regarding such corporate
opportunity to us, and we have waived and renounced any claim that such business opportunity constituted a corporate opportunity
that should have been presented to us. These potential conflicts of interest could have a material adverse effect on our business,
financial condition, results of operations or prospects if attractive business opportunities are allocated by UPMC to itself or its
affiliates instead of to us.
Our second amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive
forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’
ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our second amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the
State of Delaware is the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action
asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (c)
any action asserting a claim against us arising pursuant to any provision of the DGCL, our second amended and restated certificate of
incorporation or our third amended and restated by-laws, (d) any action to interpret, apply, enforce or determine the validity of our
second amended and restated certificate of incorporation or third amended and restated by-laws or (e) any other action asserting a
claim against us that is governed by the internal affairs doctrine. We refer to each of these proceedings as a covered proceeding. In
addition, our second amended and restated certificate of incorporation provides that if any action the subject matter of which is a
covered proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors, which
we refer to as a foreign action, the claiming party will be deemed to have consented to (1) the personal jurisdiction of the specified
Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above
and (2) having service of process made upon such claiming party in any such enforcement action by service upon such claiming
party’s counsel in the foreign action as agent for such claiming party. Any person or entity purchasing or otherwise acquiring any
interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. These provisions
may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if
a court were to find these provisions of our second amended and restated certificate of incorporation inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving
such matters in other jurisdictions, which could adversely affect our business and financial condition.
We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future to fund the development and growth of our
business. We do not intend to pay any dividends to holders of our Class A common stock. As a result, capital appreciation in the price
of our Class A common stock, if any, will be your only source of gain on an investment in our Class A common stock. See “Part II -
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividends”
for a discussion of our dividend policy.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
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Our corporate headquarters and executive officers are located in Arlington, Virginia, where we occupy approximately 91,000 square
feet of office space. We also lease offices throughout the United States and in Pune, India. We lease all of our facilities and we do not
own any real property. As provided in “Part II – Item 8. Financial Statements and Supplementary Data - Note 11 - Leases,” the total
rental expense on operating leases, net of sublease income, was $21.2 million for the year ended December 31, 2020.
Item 3. Legal Proceedings
For information regarding legal proceedings, see “Part II – Item 8. Financial Statements and Supplementary Data - Note 10 -
Commitments and Contingencies - Litigation Matters.”
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Market and Dividend Information
Market Information
Our Class A common stock is traded on the New York Stock Exchange under the symbol “EVH.”
Holders
As of February 22, 2021, there were 48 holders of record of our Class A common stock. The number of record holders does not
include individuals or entities who beneficially own shares and whose shares are held of record by a broker, bank, or other nominee,
but does include each such broker, bank, or other nominee as one record holder.
Dividends
We have not declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends on our Class
A common stock for the foreseeable future. The timing and amount of future cash dividends, if any, is periodically evaluated by our
board of directors and would depend on, among other factors, our current and expected earnings, financial condition, projected cash
flows and anticipated financing needs.
Performance Graph
The following graph compares the cumulative total stockholder return on our Class A common stock for the last 5 years ended
December 31, 2020, to the cumulative total returns of the NASDAQ Health Care Index and the NYSE Composite Index over the same
period. This graph assumes an investment of $100 at the closing price of the markets on December 31, 2015, in our Class A common
stock, the NASDAQ Health Care Index and the NYSE Composite Index, and assumes the reinvestment of dividends, if any.
The comparisons shown in the following graph are based upon historical data. We caution that the stock price performance shown in
the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our Class A common
stock.
Comparison of Cumulative Total Return
$240
$210
$180
$150
$120
$90
$60
$30
1 2/3 1/1 5
3/3 1/1 6
6/3 0/1 6
9/3 0/1 6
1 2/3 1/1 6
0 3/3 1/1 7
0 6/3 0/1 7
0 9/3 0/1 7
1 2/3 1/1 7
0 3/3 1/1 8
0 6/3 0/1 8
0 9/3 0/1 8
1 2/3 1/1 8
0 3/3 1/1 9
0 6/3 0/1 9
0 9/3 0/1 9
1 2/3 1/1 9
0 3/3 1/2 0
0 6/3 0/2 0
0 9/3 0/2 0
1 2/3 1/2 0
Evolent Health, Inc.
NASDAQ Health Care
NYSE Composite
43
Recent Sales of Unregistered Securities, Purchases of Equity Securities by the Issuer or Affiliated Purchases or Other Stockholder
Matters
Not applicable.
Item 6. Selected Financial Data
Omitted.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to
help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to,
and should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial
statements presented in “Part II – Item 8. Financial Statements and Supplementary Data” as well as “Part I - Item 1A. Risk Factors.”
Background and Recent Events
INTRODUCTION
Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC,
and its only business is to act as sole managing member of Evolent Health LLC. Substantially all of our operations are conducted
through Evolent Health LLC and its consolidated subsidiaries. The financial results of Evolent Health LLC are consolidated in the
financial statements of Evolent Health, Inc.
Evolent Health’s Response to COVID-19
On March 11, 2020, the World Health Organization (the “WHO”) declared the novel strain of coronavirus (COVID-19) a global
pandemic and recommended containment and mitigation measures worldwide. While response to the COVID-19 outbreak continues to
rapidly evolve, it has led to aggressive actions to reduce the spread of the disease that have seriously disrupted activities in large
segments of the economy. We are continuing to monitor the COVID-19 outbreak and its impact on our business.
Because of the nature of the services we provide, market dynamics in our end markets and with our significant customers, to date the
COVID-19 pandemic has not materially impacted our financial condition or results of operations or our outlook. As of December 31,
2020 we had cash and cash equivalents of $340.5 million and as of the date the financial statements were available to be issued we
believe our current cash balance is sufficient to meet our liquidity needs for the next twelve months. The COVID-19 crisis has also
adversely impacted global access to capital and caused significant volatility in financial markets. Significant deterioration of the U.S.
and global economies could have a significant adverse impact on our investment income, the value of our investments, or future
liquidity needs. Although the impact of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of
the pandemic on our partners and the global economy is uncertain and will depend on various factors, including the scope, severity
and duration of the pandemic. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many
of our partners which could, in turn, adversely impact our business, financial condition and results of operations.
Evolent’s focus throughout this pandemic has been the health and safety of its employees and their families, as well as ensuring that
we continue to furnish high quality service to our partners. Evolent has deployed a multi-faceted response to COVID-19, overseen by
its Emergency Preparedness Team, led by the General Counsel and Chief Compliance Officer, that focuses on maintaining its
workforce in a manner that does not disrupt service delivery or operations. Evolent is closely monitoring and overseeing any issues of
noncompliance or deficiencies with client operational service level agreements and continuing to review contractual business
requirements in light of state and federal mandates, emergency laws and orders, and available financial support opportunities. Evolent
is also mindful of the impact COVID-19 has on its vendors and subcontractors, and we will continue to work with them regarding our
collective obligations to Evolent’s customers. We require a COVID-19 Business Continuity Attestation from subcontractors and
vendors, confirming that operational and financial obligations will be met and aiming to ensure that privacy and security risks or
incidents can be mitigated and disclosed in a timely manner.
Summary of Impact of COVID-19
In evaluating the impact of COVID-19 on our Services business, we considered, among other factors, the nature of the services we
provide, end market trends and outlook and customer-specific trends. In evaluating our health plan businesses, we focused on possible
changes in membership and medical utilization trends.
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Services Business
Our two most significant service offerings in terms of revenue are specialty care management and administrative health services.
Because both of these services offerings provide critical services to our clients and their members and have relatively long lead times
to implement such services, we currently do not anticipate any material near-term disruption to the relevant contracts as a result of the
pandemic.
The three key end-markets we serve are Medicaid, Medicare and Commercial.
Across 2020 we saw changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The
pandemic has resulted in a significant increase in unemployment in the United States. Historically, Medicaid enrollment has increased
during periods of rising unemployment as individuals lose access to employer sponsored health care and turn to government sponsored
health care. In addition, with respect to Medicaid, many states (including Florida, Kentucky and Illinois) put in place new rules during
the pandemic eliminating the ability of Medicaid health plans to dis-enroll non-paying members, as well as waiving certain eligibility
requirements, which together we expect will result in higher membership during the period of the pandemic. It is possible to see an
opposite trends in the commercial market, where employees who are made redundant lose access to employer sponsored health care.
We do not expect to see meaningful changes in membership in the Medicare market as a result of COVID-19. In aggregate, as more
than 50% of the lives on our platform are currently in Medicaid and we generally earn revenue with respect to those lives based on a
per member per month model, we expect to see a net benefit in our business from increased membership in that market in the near-
term. We cannot predict the magnitude of this potential benefit, or how long it will last.
With respect to medical utilization, following the declaration of the pandemic by the WHO, many state-wide mandates deferred non-
essential medical procedures to allow hospitals to focus on providing care to COVID-19 patients. Across all markets, our partners
experienced declines in non-essential care throughout the year ended December 31, 2020, offset in part by increased costs for care of
COVID-19 patients. We continue to monitor medical utilization trends closely as the pandemic progresses. Beginning late in the first
quarter after declaration of the pandemic and continuing across the year, we have seen a modest benefit in our business from lower
utilization trends. However, we cannot predict with any certainty the net impact of lower utilization on our business, as it is possible
we will experience a surge in utilization if and when consumer behavior changes (for example if the novel coronavirus is controlled by
a vaccine or other measures).
Our two largest customers in terms of revenue, EVH Passport/UHC and Cook County Health and Hospitals Systems, together
accounted for approximately 37.1% and 28.2% of revenue for the year ended December 31, 2020 and 2019, respectively, and both
participate in the Medicaid market. During the year ended December 31, 2020, we saw a modest increase in the membership at Cook
County Health and Hospitals Systems; further increases in unemployment in Illinois could result in higher Medicaid enrollment in the
future. In addition, during the year ended December 31, 2020 we saw modestly lower claims volume at both clients tied to State
mandates curtailing non-essential care.
Health Plans
Our True Health plan serves approximately 17,000 members in the small and large group market in New Mexico as well as 6,700
members in the individual and federal employee markets in New Mexico. At the end of December 2020, the membership in group
plans was not meaningfully changed relative to the year ended December 31, 2019. Beginning at the end of the three months ended
March 31, 2020, we observed a decline in medical utilization tied to a state-wide mandate prohibiting non-essential care in the period
from March 13, 2020, resulting in slightly lower than expected claims expenses. In our two Medicaid equity method investees
(Lighthouse Health Plan and Miami Children’s Health Plan in Florida) and our wholly-owned Medicaid plan (EVH Passport), we saw
modest increases in membership during the year ended December 31, 2020 however reduced medical utilization resulted in reduced
claims expenses in the same period. While we cannot estimate the magnitude of reduced medical utilization and its impact on our
business, we expect this trend to continue until the COVID-19 pandemic moderates.
Overall, we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have
on our business, results of operations, liquidity, or capital resources. We are actively monitoring the ongoing situation and may take
further actions that change our operations if required by law or that we determine are in the best interests of our employees or partners.
Transactions
The Company has undertaken several transactions, some of which may impact year-to-year comparisons. The following is a
discussion of certain of those transactions.
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Passport
On December 30, 2019, UHC, Passport Health Solutions, LLC (“PHS I”), the Company and EVH Passport, closed a transaction
whereby EVH Passport acquired substantially all of the assets and assumed substantially all of the liabilities of UHC, including the
Passport Medicaid Contract. The purchase price paid by EVH Passport consisted of $70.0 million in cash and a 30% equity interest in
EVH Passport issued to the Sponsors; however, $16.2 million of the foregoing cash purchase price was held back until such time as
PHS I delivers to EVH Passport certain owned real property and improvements.
On September 1, 2020, EVH Passport and Molina completed the Molina Closing and the Passport Medicaid Contract was novated to
Molina. As a result, EVH Passport began to wind down its business. In connection with the Molina Closing, Molina deposited $20.0
million in cash in escrow, which was subsequently released to EVH Passport in January 2021. Prior to the Molina Closing, the
Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity under the equity method of
accounting. As a result of the Molina Closing, the Company concluded that a reconsideration event occurred whereby EVH Passport
was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport; accordingly, the
Company consolidated EVH Passport as of September 1, 2020 in its consolidated financial statements. The Company accounted for
the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the consolidation did not meet the
criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of EVH Passport in the
Company’s consolidated financials, EVH Passport redeemed the Sponsors’ equity interests in EVH Passport in accordance with the
terms of EVH Passport's Stockholders' Agreement , and, as a result, EVH Passport became a wholly owned subsidiary of the
Company. The Company expects a return of capital from EVH Passport, expected to be between $130 million and $170 million in
total, which is subject to regulatory approval from the Kentucky Department of Insurance.
Refer to “Part II - Item 8. Financial Statements - Note 4” for additional discussion regarding the Passport transactions.
GlobalHealth
As of March 31, 2020, the Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response to the COVID-19
pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 15, 2020. It would otherwise be
placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to
increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of
the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13,
2020. As a result of this transaction, we recorded a non-cash impairment charge of approximately $47.1 million, representing the total
value of our investment, in impairment of equity method investments on the consolidated statements of operations for the three
months ended March 31, 2020.
Convertible Debt Issuance, Extinguishment of Debt and Repayment of Notes
In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the
“2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and
certain new investors. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million
aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate
principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes.
The closing of the private placement of the 2024 Notes occurred on August 19, 2020.
The exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an
aggregate cash payment to noteholders of $2.5 million, which is included in loss on extinguishment of debt, net on the consolidated
statement of operations.
In August 2020, we also repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on
extinguishment of debt. Refer to “Part II - Item 8. Financial Statements - Note 9” for additional discussion relating to the convertible
debt issuance, extinguishment of debt and partial repayment of 2021 Notes.
Agreement for the Sale of True Health New Mexico
On January 11, 2021, Evolent LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered into the
SPA with Bright HealthCare, pursuant to which EH Holdings expects to sell all of its equity interest in True Health to Bright
HealthCare for a purchase price of $22.0 million plus excess risk based capital, subject to satisfaction of customary closing
conditions, including regulatory approvals. The purchase price is subject to a customary purchase price adjustment following the True
Health Closing based in part on actual medical claims experience. Refer to “Part II - Item 8. Financial Statements - Note 26” for
additional discussion regarding the True Health sale.
46
Repayment and Termination of Existing Credit Agreement
On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares
Capital Corporation. The total amount paid to Ares Corporation under the Credit Agreement in connection with the prepayment was
$98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. In addition to the
payment of the Credit Agreement, the Company settled the outstanding warrants associated with the debt for $13.7 million. Refer to
“Part II - Item 8. Financial Statements - Note 9” for additional discussion relating to the repayment of the Credit Agreement.
Repositioning Plan
We continually assess opportunities to improve operational effectiveness and efficiency to better align our expenses with revenues,
while continuing to make investments in our solutions, systems and people that we believe are important to our long-term goals.
Across 2020, we divested or agreed to divest a majority of our health plan assets, including the assets of EVH Passport, which
represented a significant revenue stream for the Company. In parallel with these divestitures, we contracted with a third-party vendor
to review our operating model and organizational design in order to improve our profitability, create value through our solutions and
invest in strategic opportunities in future periods.
In the fourth quarter of 2020, we committed to certain operational efficiency and profitability actions that we are taking in order to
accomplish these objectives (“Repositioning Plan”). These actions included making organizational changes across our Services
segment as well as other profitability initiatives expected to result in reductions in force, re-aligning of resources as well as other
potential operational efficiency and cost-reduction initiatives. The Repositioning Plan is expected to continue through the fourth
quarter of 2021.
The Company recorded approximately $1.3 million of repositioning costs in selling, general and administrative expenses during the
year ended December 31, 2020. The following tables provide a summary of our total costs associated with the Repositioning Plan,
included in the line item within our consolidated statements of operations, for the year ended December 31, 2020, by major type of
cost:
Severance and termination benefits
Office space consolidation
Professional services
Total
Business Overview
Incurred For the Year
Ended December 31,
2020
Total Amount Expected
to be Incurred in the
Repositioning Plan
Cumulative Amount
Incurred through
December 31, 2020
$
$
— $
—
1,275
1,275 $
2,500 $
2,100
4,200
8,800 $
—
—
1,275
1,275
We are a market leader in the new era of value-based care, in which leading health systems and physician organizations, which we
refer to as providers, as well as health plans, which we refer to as payers, are moving their business models from traditional FFS
reimbursement to an increasingly integrated clinical and financial responsibility for populations. We refer to our provider and payer
customers as partners. We consider value-based care to be the necessary convergence of health care payment and delivery. We believe
the pace of this convergence is accelerating, driven by price pressure in traditional FFS health care, a market environment that is
incentivizing value-based care models, growth in consumer-focused insurance programs, such as Medicare Advantage and managed
Medicaid, and innovation in data and technology.
We were founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh,
Pennsylvania, and The Advisory Board Company. We provide integrated, technology-enabled services to our national network of
leading health systems, physician organizations and national and regional payers across Medicare, Medicaid and commercial markets.
During 2020, we managed our operations and allocate resources across two reportable segments, our Services segment and our True
Health Segment. The Company’s Services segment provides our customers two clinical solutions: (i) total cost of care services and (ii)
specialty care management services, and one administrative solution: comprehensive health plan administration services. These
services enable payers and providers to manage patient health in a more cost-effective manner. The Company’s contracts are
structured as a combination of monthly member service fees, percentage of plan premiums, shared medical savings arrangements and/
or other performance-based arrangements including taking responsibility for all or substantially all of the cost of care. Our True Health
47
segment consists of a commercial health plan we operate in New Mexico that focuses on individual and family as well as small and
large businesses.
The Company made organizational changes, including re-evaluating its reportable segments, as a result of the entry into the agreement
to sell True Health on January 11, 2021. Effective during the first quarter of 2021, the Company will bifurcate its Services segment
into two reportable segments as follows:
•
•
Evolent Health Services, which houses our Administrative Simplification solution and certain supporting population health
infrastructure; and
Clinical Solutions, which includes our specialty management and physician-oriented total cost of care solutions, along with
the New Century Health and Evolent Care Partners brands.
All of our revenue is recognized in the United States and substantially all of our long-lived assets are located in the United States.
We have incurred operating losses since our inception, as we have invested heavily in resources to support our growth. We intend to
continue to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities. We
also expect to continue to incur operating losses for the foreseeable future and if we are unable to achieve our revenue growth and cost
management objectives, we may not be able to achieve profitability.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial
condition. In applying these critical accounting policies in preparing our financial statements, management must use critical
assumptions, estimates and judgments concerning future results or other developments, including the likelihood, timing or amount of
one or more future events. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing
basis, we evaluate our assumptions, estimates and judgments based upon historical experience and various other information that we
believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see “Part II - Item
8. Financial Statements and Supplementary Data - Note 2.”
Goodwill
We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of
identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment,
with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting
unit level. The Company has four reporting units and our annual goodwill impairment review occurs during the fourth quarter of each
year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more
likely than not reduce the fair value of a reporting unit below its carrying amount.
Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would
lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the
Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative
goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared
to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no
further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by
which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated
statements of operations and comprehensive income (loss).
A description of our 2020 goodwill impairment test follows below.
The Company performed an interim goodwill impairment assessment in one of our three reporting units in the Services segment as of
March 31, 2020 due to the decline in the Company’s stock price during the first quarter of 2020 and lack of excess of fair value over
the carrying value considering the $199.8 million impairment charge taken in the fourth quarter of 2019. The Company concluded that
the fair value of its reporting unit was more than its carrying value as of March 31, 2020. In addition, the Company performed an
interim goodwill impairment assessment as of May 31, 2020 and concluded that the fair value of one of our three reporting units in the
Services segment was less than its carrying value by $215.1 million as of May 31, 2020. The decrease in fair value was due to our
largest customer, EVH Passport, not obtaining a renewal of its Kentucky managed Medicaid contract, which was its sole business. The
non-renewal of EVH Passport’s contract caused a reduction in the Company’s cash flow projections.
As a result of the impairment charges in the fourth quarter of 2019 and second quarter of 2020, the Company elected to forego the
qualitative assessment and proceed directly to the quantitative assessment of the goodwill impairment test for the specific reporting
48
unit that incurred those impairment charges. This election does not preclude Management from performing the qualitative assessment
in any subsequent period. For the remaining reporting units, after assessing the totality of events and circumstances including the
results of our previous valuations, the minimal impacts of the Passport loss and COVID-19, the Company does not believe that an
event occurred or circumstances changed during the period under consideration that would, more likely than not, reduce the fair value
of any reporting unit below their carrying amount. Therefore, the Company concluded that the quantitative assessment was not
required.
In performing our October 31, 2020 impairment test for one of the three reporting units in the Services segment, we estimated the fair
value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the
estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans
and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments
about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates.
As of December 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its annual
goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting units was less than the
reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2020. The Company
determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as of
December 31, 2020. As of December 31, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a
non-cash goodwill impairment charge earlier in the year was $214.3 million.
Revenue Recognition
Services
Our services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. Revenue
is recognized when control of the services is transferred to our customers. We use the following 5-Step model, outlined in Accounting
Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), to determine revenue recognition
on our contracts with customers:
•
•
•
•
•
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations
Recognize revenue when (or as) the entity satisfies a performance obligation
Transformation Services Revenue
Transformation services consist of strategic assessments, or Blueprint contracts, and implementation services whereby we assist the
customer in launching its population health or health plan programs, or implement certain platform and operations services. In certain
cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for
clients who are exiting a line of business or population. The transformation services are usually completed within 12 months. We
generally receive a fixed fee for transformation services and recognize revenue over time using an input method based on hours
incurred compared to the total estimated hours required to satisfy our performance obligation.
Platform and Operations Services Revenue
Platform and operations services generally include multi-year arrangements with customers to provide various population health,
health plan operations, specialty care management and claims processing services on an ongoing basis, as well as transition or run-out
services to customers receiving primarily third-party administration (“TPA”) services. Revenue is recognized when control of the
services is transferred to our customers.
We use the following 5-step model outlined in ASC 606 to determine revenue recognition for our services segment from our contracts
with customers:
•
•
•
•
•
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations
Recognize revenue when (or as) the entity satisfies a performance obligation
49
Contracts with Multiple Performance Obligations
Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both
transformation services and platform and operations services as these services are distinct from one another. When a contract has
multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone
selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to
satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into
consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives
when determining the standalone selling price.
Principal vs Agent
We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the
principal or agent in the arrangement, we review each third-party relationship on a contract by contract basis. We are an agent when
our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before
it is provided and recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring
control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.
True Health
Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. True Health
also derives revenue from reinsurance premiums assumed from NMHC under the terms of the Reinsurance Agreement. The portion of
premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as
premiums received in advance. These amounts are generally classified as short-term deferred revenue on our Consolidated Balance
Sheets.
Income Taxes
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and
any valuation allowance recorded against our net deferred tax assets. We estimate our actual current tax expense, including permanent
charges and benefits, and temporary differences resulting from differing treatment of items, such as deferred revenue for tax and book
accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our
consolidated balance sheets.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income by considering both positive and
negative evidence relating to their recoverability. If we believe that recovery of these deferred tax assets is not more likely than not,
we establish a valuation allowance. To the extent that we increase a valuation allowance in a period, we include an expense in the
consolidated statement of operations in the period in which such determination is made.
In assessing the need for a valuation allowance, we considered all available evidence, including recent operating results, projections of
future taxable income, our ability to utilize loss and credit carryforwards, and the feasibility of tax planning strategies. A significant
piece of objective positive evidence evaluated for jurisdictions in a net deferred tax asset position was cumulative pre-tax income over
the three years ended December 31, 2020. In addition, we considered that loss and credit carryforwards have not expired unused and
the majority of our loss and credit carryforwards will not expire prior to 2031.
As of December 31, 2020, we have determined that it is more likely than not that we will realize the benefit related to our deferred tax
assets, except for a valuation allowance related to the realization of existing US deferred tax assets.
Deferred tax liabilities, net of deferred tax assets, as of December 31, 2020 were $0.7 million, net of our valuation allowance of $89.9
million.
We account for uncertainty in income taxes by recognizing a tax position only when it is more likely than not that the tax position,
based on its technical merits, will be sustained upon ultimate settlement with the applicable tax authority. The tax benefit to be
recognized is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with
the applicable tax authority that has full knowledge of all relevant information.
Our gross unrecognized benefits are $0.7 million as of December 31, 2020. Our evaluation of uncertain tax positions is based on
factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and
new audit activity. If actual settlements differ from these estimates, or we adjust these estimates in future periods, we may need to
recognize additional tax benefits or charges that could materially impact our financial position and results of operations.
50
We are a holding company and our assets consist of our direct ownership in Evolent Health LLC, for which we are the managing
member. Prior to the Class B unit exchanges on December 26, 2019, Evolent Health LLC was classified as a partnership for U.S.
federal and applicable state and local income tax purposes and, as such, was not subject to U.S. federal, state and local income taxes.
Taxable income or loss generated by Evolent Health LLC was allocated to holders of its units, including us, on a pro rata basis.
Accordingly, we were subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of
Evolent Health LLC. As a result of the 2019 Class B units exchanges, we became the sole owner of Evolent Health LLC and its entity
classification changed from a partnership to an entity disregarded as separate from its owner for U.S. federal, state and local income
tax purposes. Following the Class B units exchanges, any taxable income or loss generated by Evolent Health LLC is reportable and
taxable on the Company’s federal, state and local income tax returns. Evolent Health LLC has direct ownership in corporate
subsidiaries, which were subject to U.S. and foreign taxes with respect to their own operations during 2019.
Reserve for Claims and Performance-based Arrangements
Reserves for performance-based arrangements and claims for our services and True Health segments reflect actual payments under
performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected
development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care
expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care
professionals and facilities. The Company uses actuarial principles and assumptions that are consistently applied in each reporting
period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is
consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.
The process of estimating reserves involves a considerable degree of judgment by the Company and, as of any given date, is inherently
uncertain. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and adjustments
are reflected in current results of operations in the period in which they are identified as experience develops or new information
becomes known.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to
change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost,
including trade receivables, certain non-trade receivables, customer advances and certain off-balance sheet credit exposures, by
replacing the existing “incurred loss” framework with an expected credit loss recognition model. The new standard results in earlier
recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is
effective for entities with fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We
adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a
cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). In our previous accounting
policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based on specific
identification. Under the new accounting standard, we utilize several factors to develop historical losses, including aging schedules,
customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and
In addition, for customer advances and certain off-balance sheet credit
supportable forecasts in measurement of the allowance.
exposures, we evaluate the allowance through a discounted cash flow approach. Refer to Note 6 for additional disclosures related to
current expected credit losses.
51
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 services segment derives revenue from three sources: (i) transformation services, (ii) platform and operations services and (iii)
premiums earned.
Transformation Services Revenue
Transformation services consist of implementation services whereby we assist the customer in launching its population health or
health plan programs. In certain cases, transformation services can also include revenue associated with our support of certain one-
time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually
completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an
input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.
Platform and Operations Services Revenue
Platform and Operations services are typically multi-year arrangements with customers to provide various clinical and administrative
solutions. Our clinical solutions are designed to lower the medical expenses of our partners and include our total cost of care and
specialty care management services; our administrative solutions are designed to provide comprehensive health plan operations and
claims processing services, and also include transition or run-out services to customers receiving primarily TPA services. Contracts to
provide these services may be developed on an integrated basis. For purposes of revenue disaggregation, we classify contracts
including both clinical and administrative solutions into the category corresponding to the majority of services provided under those
contracts.
Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is
customized to meet the specialized needs of our customers and members. Generally, we will apply the series guidance to the
performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for
these services that typically includes a monthly payment that is calculated based on a specified per member per month rate, multiplied
by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums.
Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and
other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and
best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a
significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from platform and operations
services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In
accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.
Contracts with Multiple Performance Obligations
Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both
transformation services and platform and operations services as these services are distinct from one another. When a contract has
multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone
selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to
satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into
consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives
when determining the standalone selling price.
Premiums Earned
Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. The portion
of premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as
premiums received in advance. True Health also derived revenue from reinsurance premiums assumed from NMHC under the terms of
the reinsurance agreements, prior to their termination in the fourth quarter of 2019.
52
During the third quarter of 2019, the Company terminated the reinsurance agreement with NMHC effective in the fourth quarter of
2019, approximately one and a half months prior to its scheduled end.
In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions
are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that
is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.
Cost of Revenue (exclusive of depreciation and amortization)
Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist
primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support
and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments
to providers and payments for pharmaceutical treatments and other health care expenditures through performance-based arrangements.
Subsequent to the consolidation of EVH Passport on September 1, 2020, our cost of revenue includes the consolidated impact of the
runout of EVH Passport’s operations, consisting principally of updates to EVH Passport’s claims reserve based on actual claims
payments.
Claims Expenses
Our claims expenses consist of the direct medical expenses incurred by our health plan, including expenses incurred related to the
reinsurance agreement. Claims expenses are recognized in the period in which services are provided and include amounts that have
been paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have been incurred
but not paid by us as of the reporting date. Claims expenses include, among other items, fee-for-service claims, pharmacy benefits,
various other related medical costs and expenses related to our reinsurance agreement. We use judgment to determine the appropriate
assumptions for determining the required estimates.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of employee-related expenses (including compensation, benefits and stock-
based compensation) for selling and marketing, corporate development, finance, legal, human resources, corporate information
technology, professional fees and other corporate expenses associated with these functional areas. Selling, general and administrative
expenses also include costs associated with our centralized infrastructure and research and development activities to support our
network development capabilities, claims processing services, including PBM administration, technology infrastructure, clinical
program development and data analytics.
Depreciation and amortization expense
Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value of
Evolent Health LLC’s assets and liabilities for the Offering Reorganization, amortization of intangible assets recorded as part of our
various business combinations and asset acquisitions and depreciation of property and equipment, including the amortization of
capitalized software.
53
Evolent Health, Inc. Consolidated Results
For the Year Ended
December 31,
2020
2019
Change Over Prior
Period
$
%
For the Year Ended
December 31,
2019
2018
Change Over Prior
Period
$
%
$
11,990
$ 15,203
$
(3,213)
(21.1)%
$ 15,203
$ 32,916
$
(17,713)
(53.8)%
893,066
905,056
659,438
674,641
233,628
230,415
35.4%
34.2%
659,438
674,641
500,190
533,106
117,377
1,022,433
171,742
846,383
(54,365)
(31.7)%
176,050
20.8%
171,742
846,383
93,957
627,063
159,248
141,535
77,785
219,320
31.8%
26.5%
82.8%
35.0%
701,373
87,951
513,059
135,774
188,314
36.7%
(47,823)
(35.2)%
513,059
135,774
327,825
70,889
185,234
64,885
56.5%
91.5%
222,600
257,046
(34,446)
(13.4)%
257,046
235,418
21,628
9.2%
61,475
60,913
562
0.9%
60,913
44,515
16,398
36.8%
698
215,100
(9,600)
199,800
10,298
15,300
107.3%
7.7%
(9,600)
199,800
—
—
(9,600)
199,800
(100.0)%
100.0%
(in thousands, except
percentages)
Revenue
Services:
Transformation services
Platform and operations
services
Total Services
True Health:
Premiums
Total revenue
Expenses
Cost of revenue (exclusive of
depreciation and amortization
expenses presented separately
below)
Claims expenses
Selling, general and
administrative expenses
Depreciation and amortization
expenses
Loss (gain) on disposal of
assets and consolidation
Goodwill impairment
Change in fair value of
contingent consideration and
indemnification asset
Total operating expenses
1,293,057
1,152,995
140,062
Operating loss
$ (270,624)
$(306,612)
$ 35,988
12.1%
11.7%
1,152,995
674,543
478,452
$(306,612)
$ (47,480)
$ (259,132)
(545.8)%
3,860
(3,997)
7,857
196.6%
(3,997)
(4,104)
107
2.6%
70.9%
Transformation services
revenue as a % of total revenue
Platform and operations
services revenue as a % of total
revenue
Premiums as a % of total
revenue
Cost of revenue as a % of
services revenue
Claims expenses as a % of
premiums
Selling, general and
administrative expenses as a %
of total revenue
1.2 %
1.8 %
1.8 %
5.2 %
87.3 %
77.9 %
11.5 %
20.3 %
77.5 %
76.0 %
74.9 %
79.1 %
77.9 %
79.8 %
20.3 %
15.0 %
76.0 %
61.5 %
79.1 %
75.4 %
21.8 %
30.4 %
30.4 %
37.5 %
Comparison of the Results for the Year Ended December 31, 2020 to 2019
Revenue
Total revenue increased by $176.1 million, or 20.8%, to $1.0 billion for the year ended December 31, 2020, as compared to 2019.
Transformation services revenue decreased by $3.2 million, or 21.1%, to $12.0 million for year ended December 31, 2020, as
compared to 2019, due primarily to the timing of implementation activities. Transformation services revenue accounted for 1.2% and
1.8% of our total revenue for the years ended December 31, 2020 and 2019, respectively.
Platform and operations services revenue increased by $233.6 million, or 35.4%, to $893.1 million for the year ended December 31,
2020, as compared to 2019 primarily as a result of membership growth with existing partners, cross-sell of new services to existing
54
partners and new partner additions. We expect our platform and operations growth rate in 2021 to be negatively impacted by the wind-
down of EVH Passport’s operations. Platform and operations services revenue accounted for 87.3% and 77.9% of our total revenue for
years ended December 31, 2020 and 2019, respectively.
We had 3.6 million lives on full platform and approximately 6.2 million lives on our New Century Technology & Services Suite as of
December 31, 2020. Lives on platform are calculated by summing members on our value-based care and comprehensive health plan
administrative platform, as well as members covered for oncology specialty care services and members covered for cardiology
specialty care services. Members covered for more than one category are counted in each category. Management uses lives on
platform as a supplemental performance measure because we believe that it provides insight into the unit economics of our services.
We believe that this measure is also useful to investors because it allows further insight into the period over period operational
performance. We had 37 and 39 operating partners as of December 31, 2020 and 2019, respectively.
Premiums decreased by $54.4 million, or 31.7%, to $117.4 million, for year ended December 31, 2020, as compared to 2019. The
decrease is primarily attributable to the termination of the quota-share reinsurance agreement with NMHC signed in the fourth quarter
of 2018. Under this reinsurance agreement, NMHC ceded 90% of its gross premiums to the Company and the Company indemnified
NMHC for 90% of its claims liability. The agreement qualified for reinsurance accounting due to the deemed risk transfer, and
therefore we recorded the gross premiums assumed on our consolidated statements of operations and comprehensive income (loss).
Effective in the fourth quarter of 2019, the Company terminated the reinsurance agreement with NMHC and True Health revenues
decreased as a result. Premiums accounted for 11.5% and 20.3% of our total revenue for years ended December 31, 2020 and 2019,
respectively. Refer to “Part II - Item 8. Financial Statements - Note 10” in this Form 10-K for further discussion of the reinsurance
agreement.
On January 11, 2021, Evolent Health LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, agreed to
sell True Health to Bright Health Management, Inc. Though we cannot predict the certainty or timing of closing, we expect the
transaction to close in the first half of 2021, subject to satisfaction of customary closing conditions, including regulatory approvals.
Following the closing of this transaction, we will not report any premiums revenues.
Cost of Revenue
Cost of revenue increased by $188.3 million, or 36.7%, to $701.4 million for the year ended December 31, 2020, as compared to the
year ended December 31, 2019. Cost of revenue increased by approximately $182.8 million period over period as a result of growth of
our revenue generating services and additional payments related to performance-based arrangements, an increase of $5.8 million in
professional fees due to the nature and timing of our projects, offset, in part by a decrease of $4.4 million in our technology services,
TPA fees, personnel costs and other costs period over period. Cost of revenue for the year ended December 31, 2020 includes
approximately $(11.9) million associated with the wind-down of EVH Passport, inclusive of a reduction in Passport’s claims reserve.
Approximately $1.8 million and $2.7 million of total personnel costs was attributable to stock-based compensation expense for the
years ended December 31, 2020 and 2019, respectively. Cost of revenue represented 77.5% and 76.0% of total services revenue for
the years ended December 31, 2020 and 2019, respectively. Our cost of revenue increased as a percentage of our total services revenue
due to a change in the mix of our service offerings towards lower gross margin services, principally New Century Health, during 2020;
however, we expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the
composition of our growth.
Claims Expenses
Claims expenses attributable to our True Health segment were $88.0 million for the year ended December 31, 2020, as compared to
$135.8 million in 2019. The decrease is primarily attributable to the quota-share reinsurance agreement with NMHC signed in the
fourth quarter of 2018 that terminated in the fourth quarter of 2019 and savings from cancellation of non-essential services such as
elective and non-emergency medical services as a result of COVID-19. Claims expenses represented 74.9% and 79.1% of premiums
for the year ended December 31, 2020, as compared to 2019, respectively. We expect future claims expenses to decrease as a
percentage of premiums revenue due to the termination of the reinsurance agreement. Refer to “Part II - Item 8. Financial Statements -
Note 10” in this Form 10-K for further discussion of the reinsurance agreement.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased by $34.4 million, or 13.4%, to $222.6 million for the year ended December
31, 2020, as compared to the year ended December 31, 2019. During the year ended December 31, 2020, personnel costs decreased by
$31.8 million period over period due to a reduction in employee headcount. Approximately $12.8 million and $12.9 million of total
personnel costs were attributable to stock-based compensation expense for the years ended December 31, 2020 and 2019, respectively.
Ceded expenses under the reinsurance agreement were $14.0 million for the year ended December 31, 2019. Technology costs
increased by $5.5 million period over period as a result of the growing customer base and service offerings. Legal and professional
fees increased by $6.1 million and other costs decreased by $17.4 million for the year ended December 31, 2020, as compared to 2019,
55
respectively, due to the nature and timing of our projects. Transaction, transition and severance costs accounted for approximately $9.0
million and $17.4 million of total selling, general and administrative expenses for the years ended December 31, 2020 and 2019,
respectively. Selling, general and administrative expenses represented 21.8% and 30.4% of total revenue for the year ended December
31, 2020, as compared to 2019, respectively. While our selling, general and administrative expenses are expected to grow as our
business grows, we expect them to continue to decrease as a percentage of our total revenue over the long term due to cost saving
initiatives introduced in the year ended December 31, 2020.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $0.6 million, or 0.9%, to $61.5 million for the year ended December 31, 2020, as
compared to 2019. The increase was due primarily to additional depreciation and amortization expenses related to assets acquired
through business combinations and asset acquisitions during 2019 and the increase in amortization expense for internal-use software.
We expect depreciation and amortization expenses to increase in future periods as we continue to capitalize internal-use software and
amortize intangible assets resulting from asset acquisitions and business combinations (including possible future transactions).
Goodwill Impairment
During the year ended December 31, 2020, we recorded a non-cash impairment charge of $215.1 million on our consolidated
statements of operations as we determined that the implied fair value of goodwill of one of the three reporting units in the Services
segment was less than the carrying amount. During the year ended December 31, 2019, we recorded a non-cash impairment charge of
$199.8 million in the same reporting unit. Both of these charges related to the value of our investment in EVH Passport. See “Part II -
Item 8. Financial Statements - Note 8” for further details of the impairment charge to goodwill.
Gain (Loss) on Disposal of Assets and Consolidation
During 2019, the Company, through a non-wholly owned consolidated subsidiary, entered into an agreement with an unrelated party
to provide services and support to providers, independent physician associations, and other provider groups. During the year ended
December 31, 2020, the Company sold its interest in the subsidiary and recorded a $6.4 million loss in gain (loss) on disposal of assets
and consolidation on the consolidated statements of operations. The Company did not have any continuing involvement with the entity
after the consummation of this transaction.
On September 1, 2020, EVH Passport and Molina consummated the Molina Closing, and the Passport Medicaid Contract was novated
to Molina. As a result, the Company concluded that a reconsideration event occurred whereby EVH Passport was determined to be a
voting interest entity and that Evolent had a controlling financial interest in EVH Passport; accordingly, the Company consolidated
EVH Passport as of September 1, 2020 and recorded a $5.7 million bargain purchase gain in gain (loss) on disposal of assets and
consolidation in its consolidated financial statements.
Loss on extinguishment of debt, net
In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024
Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment
resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment to noteholders of $2.5 million,
which is included in loss on extinguishment of debt, net on the consolidated statement of operations.
In August 2020, we also repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on
extinguishment of debt.
Change in Fair Value of Contingent Consideration and Indemnification Asset
We recorded a (gain) loss on change in fair value of contingent consideration and indemnification asset of $3.9 million and $(4.0)
million for the years December 31, 2020 as compared to 2019, respectively. This variance is the result of changes in the fair values of
contingent liabilities incurred from entering in the warrant agreements compared to the liabilities acquired as a result of business
combinations and asset acquisitions during 2016, 2018 and 2019. See “Part II - Item 8. Financial Statements - Note 18” in this Form
10-K for the information related to the fair value of our warrant agreements.
56
Comparison of the Results for the Year Ended December 31, 2019 to 2018
Revenue
Total revenue increased by $219.3 million, or 35.0%, to $846.4 million for the year ended December 31, 2019, as compared to 2018.
Transformation services revenue decreased by $17.7 million, or 53.8%, to $15.2 million for the year ended December 31, 2019, as
compared to 2018, due primarily to the fact that our offering has become more product-oriented, thereby resulting in lower average
transformation services revenue per newly added partner. As a result, we expect future transformation services revenue to continue to
decrease as a percentage of total revenue. Transformation services revenue accounted for 1.8% and 5.2% of our total revenue for the
years ended December 31, 2019 and 2018, respectively.
Platform and operations services revenue accounted for 77.9% and 79.8% of our total revenue for the years ended December 31, 2019
and 2018, respectively. Platform and operations services revenue increased by $159.2 million, or 31.8%, to $659.4 million for the year
ended December 31, 2019, as compared to 2018, primarily as a result of additional revenue from our acquisition of New Century
Health during the fourth quarter of 2018, new partner additions, cross-sell, an increase in our average PMPM fee and an aggregate
enrollment growth of 35.5% in lives on platform. We ended the quarter with 39 operating partners as of December 31, 2019, as
compared to 35 as of December 31, 2018.
Premiums increased by $77.8 million, or 82.8%, to $171.7 million, for the year ended December 31, 2019, as compared to the same
period in 2018. The increase is primarily attributable to the quota-share reinsurance agreement with NMHC signed in the fourth
quarter of 2018. Under this reinsurance agreement, NMHC ceded 90% of its gross premiums to the Company and the Company
indemnified NMHC for 90% of its claims liability. The agreement qualified for reinsurance accounting due to the deemed risk
transfer, and therefore we recorded the gross premiums assumed on our consolidated statements of operations and comprehensive
income (loss). Refer to “Part II - Item 8. Financial Statements - Note 10” in this Form 10-K for further discussion of the reinsurance
agreement. Premiums accounted for $171.7 million and $94.0 million, or 20.3% and 15.0% of our total revenue for the year ended
December 31, 2019 and 2018, respectively. Effective in the fourth quarter of 2019, the Company terminated the reinsurance agreement
with NMHC and we expect future True Health revenues to be diminished as a result.
Cost of Revenue
Cost of revenue increased by $185.2 million, or 56.5%, to $513.1 million for the year ended December 31, 2019, as compared to 2018.
Cost of revenue increased by approximately $222.3 million period over period as a result of business combinations completed in the
fourth quarter of 2018 and additional payments related to performance-based arrangements. The increase was partially offset by a
decrease in our professional fees of $9.0 million due to the nature and timing of our projects, and a decrease of $28.0 million in our
technology services, TPA fees, personnel costs and other costs period over period. Approximately $2.7 million and $1.5 million of
total personnel costs was attributable to stock-based compensation expense for the years ended December 31, 2019 and 2018,
respectively. Cost of revenue represented 76.0% and 61.5% of total services revenue for the years ended December 31, 2019 and
2018, respectively. Our cost of revenue increased as a percentage of our total services revenue as we integrated new businesses
acquired during 2018; however, we expect our cost of revenue to decrease as a percentage of total services revenue going forward
subject to the composition of our growth.
Claims Expenses
Claims expenses attributable to our True Health segment, including $72.6 million of expenses assumed from the Reinsurance
Agreement, were $135.8 million for the year ended December 31, 2019, as compared to $70.9 million for the prior year. Claims
expenses consist of claims paid during the period and the change in reserve for incurred but unreported claims. The increase is
primarily attributable to the quota-share reinsurance agreement with NMHC signed in the fourth quarter of 2018. Claims expenses
represented 79.1% of premiums for the year ended December 31, 2019. We expect future claims expenses to decrease as a percentage
of premiums revenue due to the termination of the new reinsurance agreement. Refer to “Part II - Item 8. Financial Statements - Note
10” in this Form 10-K for further discussion of the reinsurance agreement.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased by $21.6 million, or 9.2%, to $257.0 million for the year ended December 31,
2019, as compared to 2018. During the year ended December 31, 2019, we incurred additional selling, general and administrative
expenses due partially to growth in our business resulting from business combinations completed in 2018. Technology costs,
personnel costs and lease costs increased by $2.6 million, $8.0 million and $3.6 million, respectively, period over period, as a result of
the growing customer base and service offerings. Approximately $12.9 million and $16.1 million of total personnel costs were
attributable to stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively. Ceded expenses
57
under the reinsurance agreement were $14.0 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively.
Legal fees and other costs increased by $0.5 million and $0.8 million for the year ended December 31, 2019, as compared to 2018,
respectively, while our professional fees decreased by $7.6 million due to the nature and timing of our projects. One-time transaction,
transition and severance costs accounted for approximately $17.4 million and $4.4 million of total selling, general and administrative
expenses for the years ended December 31, 2019 and 2018, respectively. Selling, general and administrative expenses represented
30.4% and 37.5% of total revenue for the years ended December 31, 2019 and 2018, respectively. While our selling, general and
administrative expenses are expected to grow as our business grows, we expect them to continue to decrease as a percentage of our
total revenue over the long term.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $16.4 million, or 36.8%, to $60.9 million for the year ended December 31, 2019, as
compared to 2018. The increase was due primarily to additional depreciation and amortization expenses related to assets acquired
through business combinations and asset acquisitions during late 2018 and the increase in amortization expense for internal-use
software. We expect depreciation and amortization expenses to increase in future periods as we continue to capitalize internal-use
software and amortize intangible assets resulting from asset acquisitions and business combinations (including possible future
transactions).
Gain on disposal of assets
On May 24, 2019, the Company entered into a joint venture arrangement in respect of GlobalHealth. The Company determined that it
has significant influence over the entity, but that it does not have control over the entity. Accordingly, the investment is accounted for
under the equity method of accounting and the Company is allocated its proportional share of the entity’s earnings and losses for each
reporting period. During the year ended December 31, 2019, we recorded a non-cash gain on disposal of assets of $9.6 million upon
the consummation of the GlobalHealth transaction.
Goodwill impairment
During the fourth quarter of 2019, we recorded a non-cash impairment charge of $199.8 million on our consolidated statements of
operations as we determined that the implied fair value of goodwill was less than the carrying amount. See “Part II - Item 8. Financial
Statements and Supplementary Data - Note 8” for further details of the impairment charge to goodwill.
Change in fair value of contingent consideration and indemnification asset
We recorded a gain on change in fair value of contingent consideration and indemnification asset of $4.0 million and $4.1 million for
the years ended December 31, 2019 and 2018, respectively. This variance is the result of changes in the fair values of mark-to-market
contingent liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018 and 2019. See “Part II -
Item 8. Financial Statements and Supplementary Data - Note 18” in this Form 10-K for further details regarding the fair value of our
mark-to-market contingent liabilities.
Discussion of Non-Operating Results
Interest Income
Interest income consists of interest from investing cash in money market funds, interest from both our short-term and long-term
investments, interest earned on the capital-only reinsurance agreement with NMHC and interest from the implementation loan and
amounts contributed to UHC in the form of an advance for regulatory capital requirements under an agreement with UHC. We
recorded interest income of $3.2 million, $4.0 million and $3.4 million for years ended December 31, 2020, 2019 and 2018,
respectively. Interest income decreased during 2020 as a result of lower interest income generated from the capital-only reinsurance
agreement with NMHC which was terminated in the fourth quarter of 2019. Interest income increased during 2019 as a result of
additional interest income generated from interest payments received on the Implementation Loan and the capital-only
reinsurance agreement with NMHC.
58
Interest Expense
Our interest expense is primarily attributable to our 2021 Notes, 2024 Notes, 2025 Notes and Credit Agreement with Ares Capital
Corporation.
The Company issued its 2021 Notes in December 2016. Holders of the 2021 Notes are entitled to cash interest payments at a rate equal
to 2.00% per annum. In addition, we incurred $4.6 million of debt issuance costs in connection with the 2021 Notes, which we are
amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes.
The Company issued its 2024 Notes in August 2020. As part of the issuance of the 2024 Notes, the Company consummated an
exchange offer pursuant to which it issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million
aggregate principal of its 2021 Notes. Holders of the 2024 Notes are entitled to cash interest payments at a rate equal to 3.50% per
annum. In addition, the 2024 Notes contain a cash conversion option, which resulted in a debt discount of $38.1 million, allocated to
equity. The amount allocated to equity, along with $3.0 million of debt issuance costs in connection with the 2024 Notes, will be
amortized to non-cash interest expense using the effective interest method over the contractual term of the 2024 Notes.
The Company issued its 2025 Notes in October 2018. Holders of the 2025 Notes are entitled to cash interest payments at a rate equal
to 1.50% per annum. The 2025 Notes contain a cash conversion option, which resulted in a debt discount of $71.8 million, allocated to
equity. The amount allocated to equity, along with $3.4 million of issuance costs, will be amortized to non-cash interest expense using
the effective interest method over the contractual term of the 2025 Notes.
The Company entered into the Credit Agreement in December 2019 with Ares Credit Corporation in connection with the Company’s
acquisition of certain assets of UHC. Ares Capital Corporation was entitled to cash interest payments. The interest rate for each loan
under the Senior Credit Facilities was calculated, at the option of the Borrower, at either the eurodollar rate plus 8.00%, or the base
rate plus 7.00%. A commitment fee of 1.00% per annum was payable by the Borrower quarterly in arrears on the unused portion of the
DDTL Facility. As of December 31, 2020, the Company had $75.0 million outstanding under its Credit Agreement. On January 8,
2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares Capital Corporation.
We recorded interest expense (including amortization of deferred financing costs) of approximately $28.3 million, $14.5 million and
$5.5 million for years ended December 31, 2020, 2019 and 2018, respectively. See “Part II - Item 8. Financial Statements - Note 9” in
this Form 10-K for further details.
Impairment of Equity Method Investments
As of March 31, 2020, the Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response to the COVID-19
pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 15, 2020. It would otherwise be
placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to
increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of
the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13,
2020. As a result of this transaction, we recorded a non-cash impairment charge of approximately $47.1 million, representing the total
value of our investment, in impairment of equity method investments on the consolidated statements of operations for the three months
ended March 31, 2020.
59
Gain (Loss) from Equity Method Investees
The Company has acquired economic interests in several entities that are accounted for under the equity method of accounting. The
Company is allocated its proportional share of the investees’ earnings and losses each reporting period. The Company’s proportional
share of the gains (losses) from these investments was approximately $10.0 million, $(9.5) million and $(4.7) million for the years
ended December 31, 2020, 2019 and 2018, respectively.
Loss on Extinguishment of Debt
In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024
Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. There was no cash consideration in these exchanges outside
of an aggregate cash payment of $2.5 million paid to exchanging noteholders. These exchanges were accounted for as an
extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment of $2.5 million
paid to exchanging noteholders. See “Part II - Item 8. Financial Statements - Note 9” in this Form 10-K for additional discussion of
our exchange of 2021 Notes.
Provision (Benefit) for Income Taxes
The Company recorded $(3.6) million, $(21.5) million and less than $0.1 million in income tax expense (benefit) for the years ended
December 31, 2020, 2019 and 2018, respectively, which resulted in effective tax rates of 1.0%, 6.7% and (0.1)%, respectively. The
difference between our effective tax rate and our statutory rate is primarily due to the impacts from the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”).
Net Loss Attributable to Non-controlling Interests
For the years ended December 31, 2019 and 2018, our results reflected net losses of $3.6 million and $1.5 million, respectively,
attributable to non-controlling interests, which represented 1.2% and 3.2% of the operating losses. See “Part II - Item 8. Financial
Statements - Note 17” in this Form 10-K for additional discussion of our non-controlling interests.
60
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Liquidity and Capital Resources
Since its inception, the Company has incurred operating losses and net cash outflows from operations. The Company incurred
operating losses of $270.6 million and $306.6 million for the twelve months ended December 31, 2020 and 2019, respectively. Net
cash and restricted cash from (used in) operating activities was $(16.2) million and $(42.6) million for the twelve months ended
December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company had $340.5 million of cash and cash equivalents and $21.7 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 the next twelve months as of the date these financial statements were available to be 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.
Cash Flows
The following summary of cash flows (in thousands) has been derived from our financial statements included in “Part II - Item 8.
Financial Statements and Supplementary Data:”
Net cash and restricted cash used in operating activities
Net cash and restricted cash from (used in) investing activities
Net cash and restricted cash from (used in) financing activities
Operating Activities
2020
For the Year Ended December 31,
2019
$ (16,225) $ (42,645) $ (20,651)
(160,375)
(181,634)
274,024
(35,545)
261,072
(11,862)
2018
Cash flows used in operating activities of $16.2 million in the year ended December 31, 2020 were due primarily to our net loss of
$334.2 million, partially offset by non-cash items, including an impairment of goodwill of $215.1 million, an impairment of an equity
method investment of $47.1 million, depreciation and amortization expenses of $61.5 million, stock-based compensation expense of
$14.6 million and a loss on the disposal of assets and consolidation of $0.7 million. Our operating cash inflows were affected by the
timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts receivables and contract cost
assets and decreases in claims reserves contributed approximately $94.5 million to our cash outflows. Those cash outflows were
partially offset by an increase in accounts payable, accrued expenses and accrued compensation and employee benefits contributed of
approximately $23.5 million.
Cash flows used in operating activities of $42.6 million in the year ended December 31, 2019 were due primarily to our net loss of
$305.6 million, partially offset by non-cash items, including goodwill impairment of $199.8 million, depreciation and amortization
expenses of $60.9 million, stock-based compensation expense of $15.6 million and a decrease in deferred tax liability of $23.1 million.
Our operating cash outflows were affected by the timing of our customer and vendor payments. An increase in contract cost assets
combined with accounts payable and accrued liabilities contributed approximately $50.4 million to our cash outflows. Those cash
outflows were partially offset by decreases in accounts receivable combined with increases in accrued compensation and employee
benefits and claims reserves of approximately $49.1 million.
Cash flows used in operating activities of $20.7 million in the year ended December 31, 2018 were due primarily to our net loss of
$54.2 million, partially offset by non-cash items, including depreciation and amortization expenses of $44.5 million and stock-based
compensation expense of $17.6 million. Our operating cash outflows were affected by the timing of our customer and vendor
payments. A decrease in accrued compensation and employee benefits, combined with increases in accounts receivable, prepaid
expenses and contract cost assets, contributed approximately $65.0 million to our cash outflows. Those cash outflows were partially
offset by increases in accounts payable, accrued liabilities, claims reserves and other long-term liabilities of approximately $32.0
million.
61
Investing Activities
Cash flows from investing activities of $261.1 million in the year ended December 31, 2020 were primarily attributable to cash flows
from the impact of the initial consolidation of EVH Passport of $159.8 million, maturities and sales of investments primarily held by
EVH Passport of $143.4 million, offset, in part by investments in internal-use software and purchases of property and equipment of
$29.5 million, disposal of non-strategic assets of $2.3 million and purchases of investments of $11.2 million.
Cash flows used in investing activities of $181.6 million in the year ended December 31, 2019 were primarily attributable to purchases
of property and equipment of $35.5 million, cash paid for asset acquisitions, business combinations and equity method investments of
$96.1 million, amounts advanced to satisfy regulatory capital requirements of $46.4 million and purchases of investments of $11.1
million, partially offset by a customer’s repayment of advance to satisfy regulatory capital requirements of $5.4 million.
Cash flows used in investing activities of $160.4 million in the year ended December 31, 2018 primarily relate to cash paid for asset
acquisitions or business combinations of $130.2 million, investments in internal-use software and purchases of property and
equipment of $39.6 million, purchases of investments of $10.0 million and investments in equity method investees of $9.4 million.
These amounts were partially offset by the $20.0 million principal repayment of the implementation funding loan and net maturities of
restricted investments of $7.9 million.
Financing Activities
Cash flows used in financing activities of $11.9 million in the year ended December 31, 2020 were primarily related to a $20.0 million
redemption of the Sponsors equity in EVH Passport in accordance with the terms of EVH Passport’s Stockholders’ Agreement as part
of the EVH Passport wind-down and repurchase of our 2021 Notes of $16.6 million, $1.9 million of taxes withheld and paid for vests
of restricted stock units and a $6.0 million decrease in working capital balances held on behalf of our partners for claims processing
services offset, in part by $30.1 million from proceeds of convertible debt. The change in working capital balances held on behalf of
partners for claims processing are pass-through amounts and can fluctuate materially from period to period depending on the timing of
when the claims are processed.
Cash flows used in financing activities of $35.5 million in the year ended December 31, 2019 were primarily related to a $104.3
million increase in working capital balances held on behalf of our partners for claims processing as well as $2.6 million of taxes
withheld and paid for vests of restricted stock units, offset, in part by net proceeds of $62.6 million from borrowings under the credit
agreement.
Cash flows provided by financing activities of $274.0 million in the year ended December 31, 2018 were primarily related to net
proceeds of $167.2 million from the issuance of convertible notes. In addition, there was a $96.2 million increase in working capital
balances held on behalf of our partners for claims processing. Stock option exercises during the year resulted in additional proceeds of
$11.9 million, which were partially offset by $1.2 million of taxes withheld and paid for vests of restricted stock units.
Contractual Obligations
Our estimated contractual obligations (in thousands) as of December 31, 2020, were as follows:
Operating leases for facilities
Purchase obligations related to vendor contracts
Debt interest and termination payments
Debt principal repayment (1)
Warrant settlement (2)
Total contractual obligations
$
2021
12,244
9,444
17,071
101,737
13,730
$ 154,226
2022-2023
19,260
$
4,235
13,369
—
—
36,864
$
2024-2025
16,998
$
—
9,279
289,551
—
$ 315,828
2026+
47,760
—
—
—
—
47,760
$
$
$
Total
96,262
13,679
39,719
391,288
13,730
$ 554,678
1.
Debt principal repayments in 2021 includes voluntary prepayment of the Credit Agreement principal of $75.0 million and the remaining $26.7 million of 2021
Notes. Refer to “Part II - Item 8. Financial Statements - Note 26” for additional discussion relating to the repayment of the Credit Agreement and 2021 Notes.
2. Warrant settlement in 2021 includes voluntary settlement of the Ares warrant agreements. Refer to “Part II - Item 8. Financial Statements - Note 26” for additional
discussion relating to the settlement of the warrant agreements.
During the year ended December 31, 2020, the only material change outside the ordinary course of business in the contractual
obligations set forth above was the addition of the principal and interest payments related to the 2024 Notes and the exchange and
repurchase of 2021 Notes. Refer to the discussion in “Part II - Item 8. Financial Statements - Note 9” for additional information on
our long-term debt.
62
Restricted Cash and Restricted Investments
Restricted cash and restricted investments of $21.7 million is carried at cost and includes cash held on behalf of other entities for
pharmacy and claims management services of $12.1 million, collateral for letters of credit required as security deposits for facility
leases of $3.5 million, amounts held with financial institutions for risk-sharing arrangements of $4.7 million and other restricted
balances of $1.3 million as of December 31, 2020. See “Part II - Item 8. Financial Statements - Note 2” for further details of the
Company’s restricted cash balances.
Uses of Capital
Our principal uses of cash are in the operation and expansion of our business. The Company does not anticipate paying a cash
dividend on our Class A common stock in the foreseeable future.
Off-balance Sheet Arrangements
OTHER MATTERS
Through December 31, 2020, the Company had not entered into any off-balance sheet arrangements, other than the operating leases
and notes receivable noted above, and did not have any holdings in variable interest entities, other than the unconsolidated variable
interest entities discussed in “Part II - Item 8. Financial Statements - Note 16” within this Form 10-K.
Related Party Transactions
In the ordinary course of business, we enter into transactions with related parties. Information regarding transactions and amounts with
related parties is discussed in “Part II - Item 8. Financial Statements - Note 19” within this Form 10-K.
Other Factors Affecting Our Business
In general, our business is subject to a changing social, economic, legal, legislative and regulatory environment. Although the eventual
effect on us of the changing environment in which we operate remains uncertain, these factors and others could have a material effect
on our results of operations, liquidity and capital resources. Factors that could cause actual results to differ materially from those set
forth in this section are described in “Part I - Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language.”
63
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market prices and rates.
Interest Rate Risk
As of December 31, 2020, the Company had cash and cash equivalents and restricted cash and restricted investments of $362.2
million, which consisted of bank deposits with FDIC participating banks of $355.2 million, bank deposits in international banks of
$0.5 million, cash equivalents deposited in a money-market fund of $5.9 million, and $0.6 million of restricted investments that are
classified as held-to-maturity investments. In addition, we have unrestricted investments of $14.8 million, which are classified as held-
to-maturity investments.
Changes in interest rates affect the interest earned on our cash and cash equivalents (including restricted cash). Our investments
(including restricted investments) are classified as held-to-maturity and therefore are not subject to interest rate risk. We do not enter
into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate
risk exposure.
As of December 31, 2020, we had $316.3 million of aggregate principal amount of convertible notes outstanding, which are fixed rate
instruments and not subject to fluctuations in interest rates. As of December 31, 2020, we also had $75.0 million of aggregate principal
amount in a secured term loan, which was a floating rate instrument and subject to fluctuations in interest rates. The secured term loan
was repaid in full on January 8, 2021. Refer to the discussion in “Part II - Item 8. Financial Statements - Note 9” for additional
information on our long-term debt.
Foreign Currency Exchange Risk
Beginning in 2018, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than
the U.S. dollar, primarily the Indian Rupee. In general, we are a net payor of currencies other than the U.S. dollar. Accordingly,
changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating
results as expressed in U.S. dollars. At this time, we have not entered into, but in the future we may enter into, derivatives or other
financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities
would have on our results of operations. We recognized foreign currency translation loss of $44 thousand for the year ended
December 31, 2020.
64
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
66
71
72
73
75
77
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Evolent Health, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evolent Health, Inc. and subsidiaries (the "Company") as of
December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), changes in
shareholders' equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes
(collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Goodwill — Reporting Unit Within the Services Segment — Refer to Note 8 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each of its reporting units to the
respective carrying value for each of those reporting units at least annually. In addition to the annual impairment evaluation, the
Company evaluates goodwill for impairment if an event occurs or circumstances change during the period that indicates that the fair
value of a reporting unit may be below its carrying value. The Company performed an interim goodwill impairment assessment as of
March 31, 2020 due to the decline in the Company’s stock price during the first quarter of 2020 and lack of excess of fair value over
the carrying value given the impairment charge taken in the fourth quarter of 2019. The Company concluded that the fair value of its
reporting unit was more than its carrying value as of March 31, 2020. In addition, the Company performed an interim goodwill
impairment assessment as of May 31, 2020 and concluded that the fair value of one of its reporting units in the Services segment was
less than its carrying value by $215.1 million as of May 31, 2020. The decrease in fair value was due to EVH Passport not obtaining a
renewal of the Passport Medicaid Contract. The non-renewal of the Passport Medicaid Contract caused a reduction in the Company’s
cash flow projections and, therefore, an impairment was recognized during the second quarter of 2020. The Company also performed a
goodwill impairment assessment on its annual measurement date and determined that no further impairment of goodwill was required.
The Company used a discounted cash flow valuation approach (“income approach”) to estimate the fair values as of March 31, 2020,
May 31, 2020 and October 31, 2020, which required management to make significant estimates and assumptions related to discount
66
rates and forecasts of future revenues and expenses. Changes in these assumptions have a significant impact on either the fair value,
the amount of any goodwill impairment charge, or both. The goodwill balance was $354.7 million as of December 31, 2020, of which
$349.0 million was allocated to the Services segment.
Given the significant judgments made by management of the Company to estimate the fair values of one of its reporting units in the
Services segment and the sensitivity of assumptions used to estimate the fair values, performing audit procedures to evaluate the
reasonableness of management’s estimates and assumptions related to the revenue growth rates, operating margins, the discount rates,
and the implied control premium required a high degree of auditor judgment and an increased extent of effort, including the need to
involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s assumptions for the interim and annual assessment periods related to revenue growth
rates, operating margins, selection of the discount rate, and the implied control premium for one of the Company’s reporting units in
the Services segment included the following, among others:
• We tested the effectiveness of controls over management’s goodwill impairment evaluations, including controls over
management’s assumptions related to revenue growth rates, operating margins, selection of the discount rate, and the
implied control premium.
• We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual
results to management’s historical forecasts.
• We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts
to:
– Historical revenues and operating margins.
–
–
Internal communications to management and the Board of Directors.
Forecasted information included in the Company’s press releases, analyst and industry reports for the Company
and certain of its peer companies.
• We evaluated the impact of changes in management’s forecasts each quarter and from the October 31, 2020 annual
measurement date to December 31, 2020.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the (i) valuation methodology, (ii)
discount rate, and (iii) implied control premium by:
–
Testing the source information underlying the determination of the discount rate and the mathematical accuracy
of the calculation.
– Developing a range of independent estimates and comparing those to the discount rate selected by management
–
and the implied control premium.
Evaluating the Company’s reconciliation between fair value of the reporting units and the Company’s market
capitalization by considering factors such as implied control premiums in the health service industry and other
industries, and market trends.
Reserve for Claims — Refer to Note 22 to the financial statements
Critical Audit Matter Description
The Company records reserves for the ultimate cost of claims that have been incurred but not reported (IBNR), including expected
development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care
expenses and services payable. The Company uses actuarial principles and assumptions that are consistently applied in each reporting
period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. The liability is
primarily calculated using completion factors developed by comparing the claim incurred date to the date claims were paid. Key
assumptions include current payment experience, trend factors, and completion factors. Completion factors are impacted by several
key items including changes in 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates,
3) membership, and 4) the mix of products. The Company uses historical completion factors combined with an analysis of current
trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims
incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach
implicitly assumes that historical completion rates will be a useful indicator for the current period.
For more recent months, and for newer lines of business where there is insufficient paid claims history to develop completion factors,
the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflect expected claim payment
patterns and other relevant operational considerations or authorization analysis. For each reporting period, the Company compares key
assumptions used to establish the reserves for claims to actual experience. When actual experience differs from these assumptions,
reserves for claims are adjusted through current period net
the Company evaluates expected future
developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the
Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting
income. Additionally,
67
future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion
factors and medical cost trends. The reserve for claims as of December 31, 2020 was $188.7 million.
We identified the IBNR reserve as a critical audit matter because the development of the IBNR reserve involves significant estimation
by management. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our
actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the reserve for claims included the following, among others:
• We tested the effectiveness of controls related to the reserve for claims, including management’s controls over the
development and reporting of the IBNR reserve.
• We tested the underlying data that served as the basis for the actuarial analysis, including claims lag triangles and
membership data, to test that the inputs to the actuarial estimate were complete and accurate.
• With the assistance of our actuarial specialists, we evaluated the reasonableness of the actuarial methods and
assumptions used by management to estimate the IBNR reserve by:
– Developing an independent estimate of the IBNR reserve and comparing our estimate to management’s
estimates.
– Comparing management’s September 30, 2020 assumptions of expected development and ultimate cost of
claims to actuals incurred during the fourth quarter of 2020 to identify potential bias in the determination of the
reserve for claims.
Investments In and Advances to Equity Method Investees — Passport — Refer to Notes 4 and 16 to the financial statements
Critical Audit Matter Description
The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. The
Company evaluates its interests in these entities to determine whether they meet the definition of a variable interest entity (VIE) or a
voting interest entity (VOE) and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary
beneficiary, which is the party that has both 1) the power to direct the activities that most significantly impact the economic
performance of the VIE and 2) a variable interest that could potentially be significant to the VIE. To determine whether a variable
interest that the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative
factors regarding the nature, size and form of the Company's involvement with the VIE. The Company uses the equity method to
account for investments in companies if the investment provides the Company with the ability to exercise significant influence over
operating and financial policies of the investee. The Company will reconsider whether an entity is a VIE upon the occurrence of
certain types of events.
On December 30, 2019, the Company completed the acquisition of an approximately 70 percent ownership interest in EVH Passport
which was determined to be a VIE and accounted for under the equity method. On September 1, 2020, the Company agreed to the sale
of certain assets of EVH Passport and the novation of the Passport Medicaid Contract. As a result of the transaction, the Company
concluded that a VIE reconsideration event occurred whereby EVH Passport was determined to be a VOE and that the Company had a
controlling financial interest in EVH Passport; accordingly, the Company consolidated EVH Passport’s net assets of as of September
1, 2020 in its consolidated financial statements.
We identified the Company’s investment in EVH Passport as a critical audit matter given the complexity in the accounting literature
related to consolidation; particularly, the judgment required to determine 1) whether a VIE reconsideration event had occurred, 2)
whether EVH Passport was a VOE as of September 1, 2020 and 3) whether the Company had control over EVH Passport based on the
reconsideration event. Specifically, a high level of judgment and an increased level of effort was required, including the need to
involve professionals in our firm with consolidation accounting expertise.
How the Critical Audit Matter Was Addressed in the Audit
• We tested the effectiveness of controls related to the VIE reconsideration event of EVH Passport.
• With the assistance of professionals in our firm with expertise in consolidation accounting, we evaluated the
appropriateness of the Company’s reconsideration of the EVH Passport investment as a VOE rather than a VIE and
whether the Company had a controlling financial interest. In addition, we evaluated the consolidation model that was
used.
• We evaluated the Company’s analysis by performing procedures including, but not limited to:
– Obtaining and reading the asset purchase agreement between the Company, EVH Passport, and Molina.
–
Engaging in conversations with management about the activities related to Passport during the wind down phase
of EVH Passport based on EVH Passport not being awarded the Passport Medicaid Contract.
68
/s/ Deloitte & Touche LLP
McLean, Virginia
February 25, 2021
We have served as the Company's auditor since 2019.
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Evolent Health, Inc.
Opinion on the Financial Statements
We have audited the consolidated statements of operations and comprehensive income (loss), of changes in shareholders’
equity (deficit) and of cash flows of Evolent Health, Inc. and its subsidiaries (the “Company”) for the year ended
December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash
flows of the Company for the year ended December 31, 2018 in conformity with accounting principles generally accepted
in the United States of America.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
revenue from contracts with customers in 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 28, 2019
We served as the Company’s or its predecessor’s auditor from 2012 to 2019, which includes periods before the Company
became subject to SEC reporting requirements.
70
EVOLENT HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash and restricted investments
Accounts receivable, net (1)
Prepaid expenses and other current assets (1)
Investments, at amortized cost
Contract assets
Total current assets
Restricted cash and restricted investments
Investments, at amortized cost
Investments in and advances to equity method investees
Property and equipment, net
Right-of-use assets - operating
Customer advance for regulatory capital requirements, net of allowances (1)
Prepaid expenses and other noncurrent assets, net of allowances (1)
Contract assets
Contract cost assets
Intangible assets, net
Goodwill
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable (1)
Accrued liabilities (1)
Short-term debt, net of discount
Operating lease liability - current
Accrued compensation and employee benefits
Deferred revenue
Reserve for claims and performance-based arrangements (1)
Total current liabilities
Long-term debt, net of discount
Other long-term liabilities
Operating lease liabilities - noncurrent
Deferred tax liabilities, net
Total liabilities
Commitments and Contingencies (See Note 10)
Shareholders' Equity (Deficit)
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 85,894,450 and 84,588,629
shares issued, respectively
Additional paid-in-capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 1,537,582 and 0 shares issued, respectively
Total shareholders' equity attributable to Evolent Health, Inc.
Non-controlling interests
Total shareholders' equity (deficit)
Total liabilities and shareholders' equity (deficit)
(1) See Note 19 for amounts attributable to unconsolidated related parties included in these line items.
See accompanying Notes to Consolidated Financial Statements
71
December 31,
2020
2019
$
340,490
14,437
125,986
61,034
3,858
329
546,134
7,270
10,919
6,498
86,240
57,799
—
5,832
—
26,687
268,072
354,734
$ 1,370,185
$
101,008
20,080
75,667
28,488
1,807
1,751
228,801
8,260
16,751
122,618
85,155
72,173
40,000
6,253
999
36,482
308,459
572,064
$ 1,498,015
$
$
32,068
84,507
26,557
7,357
48,278
14,327
188,685
401,779
263,343
22,209
62,526
728
750,585
37,488
33,343
—
6,269
34,691
19,828
61,150
192,769
293,667
11,732
68,858
1,942
568,968
859
1,229,320
(278)
(589,178)
(21,123)
619,600
—
619,600
$ 1,370,185
846
1,173,708
(234)
(251,962)
—
922,358
6,689
929,047
$ 1,498,015
EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Revenue
Transformation services (1)
Platform and operations services (1)
Premiums
Total revenue
For the Year Ended December 31,
2018
2019
2020
$
$
11,990
893,066
117,377
1,022,433
$
15,203
659,438
171,742
846,383
32,916
500,190
93,957
627,063
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented
separately below) (1)
Claims expenses
Selling, general and administrative expenses (1)
Depreciation and amortization expenses
(Gain) loss on disposal of assets and consolidation
Goodwill impairment
Change in fair value of contingent consideration and indemnification asset
Total operating expenses
Operating loss
Interest income
Interest expense
Impairment of equity method investments
Gain (loss) from equity method investees
Loss on extinguishment of debt, net
Other income (expense), net
Loss before income taxes and non-controlling interests
Provision (benefit) for income taxes
Net loss
Net loss attributable to non-controlling interests
701,373
87,951
222,600
61,475
698
215,100
3,860
1,293,057
(270,624)
3,164
(28,337)
(47,133)
10,039
(4,789)
(119)
(337,799)
(3,553)
(334,246)
—
Net loss attributable to common shareholders of Evolent Health, Inc.
$
(334,246) $
513,059
135,774
257,046
60,913
(9,600)
199,800
(3,997)
1,152,995
(306,612)
3,987
(14,534)
—
(9,465)
—
(492)
(327,116)
(21,536)
(305,580)
(3,609)
(301,971) $
327,825
70,889
235,418
44,515
—
—
(4,104)
674,543
(47,480)
3,440
(5,484)
—
(4,736)
—
109
(54,151)
40
(54,191)
(1,533)
(52,658)
Loss per common share
Basic and diluted
Weighted-average common shares outstanding
Basic and diluted
Comprehensive loss
Net loss
Other comprehensive loss, net of taxes, related to:
$
(3.94) $
(3.67) $
(0.68)
84,928
82,364
77,338
$
(334,246) $
(305,580) $
(54,191)
Foreign currency translation adjustment
Total comprehensive loss
Total comprehensive loss attributable to non-controlling interests
(44)
(334,290)
—
(52)
(305,632)
(3,609)
(182)
(54,373)
(1,533)
Total comprehensive loss attributable to common shareholders of Evolent Health,
Inc.
$
(334,290) $
(302,023) $
(52,840)
(1) See Note 19 for amounts attributable to unconsolidated related parties included in these line items.
See accompanying Notes to Consolidated Financial Statements
72
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B
EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows Used In Operating Activities
Net loss
Adjustments to reconcile net loss to net cash and restricted cash used in operating
activities:
Change in fair value of contingent consideration and indemnification asset
Loss (gain) on disposal of assets and consolidation
(Gain) loss from equity method investees
Depreciation and amortization expenses
Goodwill impairment
Impairment of equity method investments
Stock-based compensation expense
Deferred tax (benefit) provision
Amortization of contract cost assets
Amortization of deferred financing costs
Loss on extinguishment of debt
Interest from customer advance for regulatory capital requirements
Other current operating cash inflows (outflows), net
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets
Prepaid expenses and other current and noncurrent assets
Contract cost assets
Accounts payable
Accrued liabilities
Accrued compensation and employee benefits
Deferred revenue
Reserve for claims and performance-based arrangements
Right-of-use operating assets
Operating lease liabilities
Other long-term liabilities
Net cash and restricted cash used in operating activities
Cash Flows From (Used In) Investing Activities
Cash paid for asset acquisitions or business combinations
Customer advance for regulatory capital requirements
Principal repayment of implementation funding loan and regulatory and capital
requirements
Disposal of non-strategic assets
Amount received from escrow in asset acquisition
Investments in and advances to equity method investees
Impact to cash and cash equivalents and restricted cash from initial consolidation of
Passport
Purchases of investments
Maturities and sales of investments
Investments in internal-use software and purchases of property and equipment
Purchase and maturities of restricted investments
Net cash and restricted cash from (used in) investing activities
For the Year Ended December 31,
2019
2020
2018
$ (334,246) $ (305,580) $
(54,191)
3,860
698
(10,039)
61,475
215,100
47,133
14,606
(1,132)
21,195
14,780
4,789
(1,869)
2,744
(47,017)
7,340
(11,400)
3,547
8,801
11,143
(8,943)
(36,108)
11,934
(2,782)
8,166
(16,225)
(300)
—
1,000
(2,287)
—
—
159,755
(11,170)
143,441
(29,473)
106
261,072
(3,997)
(9,600)
9,465
60,913
199,800
—
15,618
(23,124)
5,723
9,370
—
(1,300)
(264)
6,326
791
(23,057)
(5,480)
(21,852)
9,246
(756)
33,555
(20,811)
27,724
(5,355)
(42,645)
(8,575)
(46,400)
5,400
—
—
(87,480)
—
(11,125)
2,575
(35,534)
(495)
(181,634)
(4,104)
—
4,736
44,515
—
—
17,609
44
2,703
2,455
—
—
448
(24,503)
(14,746)
(11,179)
7,598
12,180
(14,571)
(1,819)
8,964
—
—
3,210
(20,651)
(130,241)
—
20,000
—
500
(9,360)
—
(10,010)
349
(39,550)
7,937
(160,375)
Cash Flows From (Used In) Financing Activities
Changes in working capital balances related to claims processing on behalf of partners
(6,044)
(104,268)
96,153
See accompanying Notes to Consolidated Financial Statements
75
Amount received from escrow in asset acquisition
Proceeds from issuance of long-term debt, net of offering costs
Distributions to Sponsors
Repurchase of 2021 Notes and lender fees
Issuance of warrant liability
Proceeds from stock option exercises
Taxes withheld and paid for vesting of restricted stock units
Net cash and restricted cash from (used in) financing activities
Effect of exchange rate on cash and cash equivalents and restricted cash
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash as of beginning-of-period
Cash and cash equivalents and restricted cash as of end-of-period
$
For the Year Ended December 31,
2019
2020
2018
—
30,062
(20,000)
(16,606)
—
2,577
(1,851)
(11,862)
65
233,050
128,531
361,581
$
500
62,648
—
—
7,092
1,092
(2,609)
(35,545)
30
(259,794)
388,325
128,531
$
—
167,178
—
—
—
11,929
(1,236)
274,024
(36)
92,962
295,363
388,325
See accompanying Notes to Consolidated Financial Statements
76
Note 1. Organization
EVOLENT HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware and through its subsidiaries supports leading health
systems and physician organizations as well as health plans to move their business models from traditional fee for service
reimbursement to value-based care, which we consider to be an integrated clinical and financial responsibility for populations. The
Company operates through two segments.
The Company’s Services segment (“Services”) includes clinical and administrative solutions designed to help our partners manage and
administer patient health in a more cost-effective manner. We have two clinical solutions: (i) total cost of care management and (ii)
specialty care management services, and one administrative solution: comprehensive health plan administrative services. From time to
time, we package our solutions under various go-to-market brand names to create product differentiation. Our partners may engage us
to provide one type of solution, or multiple types of solutions, depending on specific needs. True Health is our second segment. True
Health is a physician led health plan offering individual, small group, large group, ASO and Federal Employee Health Benefit health
insurance products to New Mexico consumers.
Since its inception, the Company has incurred losses from operations. As of December 31, 2020, the Company had unrestricted cash
and cash equivalents of $340.5 million. The Company believes it has sufficient liquidity for the next twelve months as of the date the
financial statements were available to be issued.
The Company’s headquarters is located in Arlington, Virginia.
Evolent Health LLC Governance
Our operations are conducted through Evolent Health LLC and subsequent to the offering reorganization at the time of our initial
public offering (the “Offering Reorganization”), the financial results of Evolent Health LLC were consolidated in the financial
statements of Evolent Health, Inc. Evolent Health, Inc. is a holding company whose only business is to act as sole managing member
of Evolent Health LLC. As such, it controls Evolent Health LLC’s business and affairs and is responsible for the management of its
business.
Issuances of Common Units
Evolent Health LLC may only issue Class A common units to us, as the sole managing member of Evolent Health LLC. Class B
common units may be issued only to persons or entities we permit. Such issuances of Class B common units shall be made in
exchange for cash or other consideration. Class B common units may not be transferred as Class B common units except to certain
permitted transferees and in accordance with the restrictions on transfer set forth in the third amended and restated operating
agreement of Evolent Health LLC. Any such transfer must be accompanied by the transfer of an equal number of shares of our Class B
common stock. As of December 31, 2020 and 2019, there are no Class B common units outstanding.
Note 2. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principles
Basis of Presentation
The consolidated financial statements of the Company are prepared in accordance with U.S. GAAP. Our consolidated financial
statements include the accounts of all subsidiaries.
Summary of Significant Accounting Policies
Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are
summarized below.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting
the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to
change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used
for, but not limited to, the valuation of assets (including intangibles assets, goodwill and long-lived assets), liabilities, consideration
related to business combinations and asset acquisitions, revenue recognition (including variable consideration), estimated selling
77
prices for performance obligations in contracts with multiple performance obligations, reserves for claims and performance-based
arrangements, credit losses, depreciable lives of assets, impairment of long-lived assets, stock-based compensation, deferred income
taxes and valuation allowance, contingent liabilities, purchase price allocation in taxable stock transactions and useful lives of
intangible assets.
Principles of Consolidation
The consolidated financial statements include the accounts of Evolent Health, Inc. and its subsidiaries. All intercompany accounts and
transactions are eliminated in consolidation.
Operating Segments
Operating segments are defined as components of a business that may recognize revenue and incur expenses for which discrete
financial information is available that is evaluated, on a regular basis, by the chief operating decision maker (“CODM”) to decide how
to allocate resources and assess performance. The Company operates through two segments: (1) Services, and (2) True Health. Our
Services segment consists of two clinical solutions: (i) total cost of care services and (ii) specialty care management services, and one
administrative solution: comprehensive health plan administration services. Our True Health segment consists of a commercial health
plan we operate in New Mexico that historically focused on small and large businesses. In 2020, True Health diversified its services to
offer coverage for individuals and families as well as the Federal Employee Health Benefits Program. Refer to Note 21 for a
discussion of our operating results by segment and Note 26 for a discussion of a subsequent change in operating segments.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company holds
materially all of our cash in bank deposits with FDIC participating banks, at cost, which approximates fair value. Cash and cash
equivalents held in money market funds are carried at fair value, which approximates cost.
Restricted Cash and Restricted Investments
Restricted cash and restricted investments include cash and investments used to collateralize various contractual obligations (in
thousands) as follows:
Collateral for letters of credit for facility leases (1)
Collateral with financial institutions (2)
Claims processing services (3)
Other
Total restricted cash and restricted investments
Current restricted investments
Current restricted cash
Total current restricted cash and restricted investments
Non-current restricted investments
Non-current restricted cash
Total non-current restricted cash and restricted investments
December 31,
2020
2019
3,510
4,743
12,127
1,327
21,707
$
$
— $
14,437
14,437
616
6,654
7,270
$
$
$
3,610
5,742
18,171
817
28,340
704
19,376
20,080
113
8,147
8,260
$
$
$
$
$
$
(1) Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note 11 for further discussion of our lease
commitments.
(2) Represents collateral held with financial institutions for risk-sharing and other arrangements. As of both December 31, 2020 and December 31, 2019, approximately
$4.7 million, of the collateral amounts were held in a FDIC participating bank account. As December 31, 2019, approximately $1.0 million, of the collateral amount
was held in a trust account and invested in money market funds related to risk-sharing arrangements. The amounts invested in money market funds are considered
restricted cash and are carried at fair value, which approximates cost. See Note 18 for discussion of fair value measurement and Note 10 for discussion of our risk-
sharing arrangements.
(3) Represents cash held by the Company related to claims processing services on behalf of partners. These are pass-through amounts and can fluctuate materially from
period to period depending on the timing of when the claims are processed.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance
sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands).
78
Cash and cash equivalents
Restricted cash and restricted investments
Restricted investments included in restricted cash and restricted investments
As of December 31,
2019
2020
$ 340,490
$ 101,008
21,707
28,340
(616)
(817)
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows
$ 361,581
$ 128,531
Accounts Receivable and Allowances
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible
amounts. We make estimates for the allowance for doubtful accounts and allowance for unbilled receivables based upon our
assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our
customers, current economic conditions, and other factors that may affect our ability to collect from customers.
Property and Equipment, Net
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property
and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease
term. The following summarizes the estimated useful lives by asset classification:
Computer hardware
Computer software
Furniture and equipment
Internal-use software development costs
Leasehold improvements
3 years
1 year
3-7 years
5 years
Shorter of useful life or remaining lease term
When an item is sold or retired, the cost and related accumulated depreciation or amortization is eliminated and the resulting gain or
loss, if any, is recorded in gain (loss) on disposal of assets and consolidation on our consolidated statements of operations and
comprehensive income (loss).
We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and
used, impairments are recognized when the carrying amount of a long-lived asset group is not recoverable and exceeds fair value. The
carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset group. An impairment loss is measured as the amount by which the carrying amount
of a long-lived asset group exceeds its fair value.
Software Development Costs
The Company capitalizes the cost of developing internal-use software, consisting primarily of personnel and related expenses
(including stock-based compensation and employee taxes and benefits) for employees and third parties who devote time to their
respective projects. Internal-use software costs are capitalized during the application development stage – when the research stage is
complete and management has committed to a project to develop software that will be used for its intended purpose. Any costs
incurred during subsequent efforts to significantly upgrade and enhance the functionality of the software are also capitalized.
Capitalized software costs are included in property and equipment, net on our consolidated balance sheets. Amortization of internal-
use software costs are recorded on a straight-line basis over their estimated useful life and begin once the project is substantially
complete and the software is ready for its intended purpose.
Research and Development Costs
Research and development costs consist primarily of personnel and related expenses (including stock-based compensation and
employee taxes and benefits) for employees engaged in research and development activities as well as third-party fees. All such costs
are expensed as incurred. We focus our research and development efforts on activities that support our technology infrastructure,
clinical program development, data analytics and network development capabilities. Research and development costs are recorded
within selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss) and
were $15.1 million, $19.8 million and $18.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
79
Notes Receivable
Notes receivable are carried at the face amount of each note plus accrued interest receivable, less received payments and net of
allowances. The Company does not typically carry notes receivable in the course of its regular business, but contributed $40.0 million
in the form of an advance for regulatory capital requirements (the “Passport Note”) for EVH Passport/UHC during the second quarter
of 2019. Refer to Note 4 for a discussion of our Passport Note.
Business Combinations
Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of
acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets
acquired and liabilities assumed based on their estimated fair values at the acquisition date. Our estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ
from estimates. Critical estimates used to value certain identifiable assets include, but are not limited to, expected long-term revenues,
future expected operating expenses, cost of capital, and appropriate discount rates.
The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired
entity is recorded as goodwill. Goodwill is assigned to the reporting unit that benefits from the synergies arising from the business
combination. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the
measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final
determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded
on the Company's consolidated statements of operations and comprehensive income (loss).
For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date
and adjusts the liability, if needed, to fair value at each reporting period. Changes in the fair value of contingent consideration, other
than measurement period adjustments, are recognized as operating income or expense. Acquisition-related expenses and post-
acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Equity Method Investments
For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the
entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of
accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the
investee. The Company also considers whether there are any indicators of other-than-temporary impairment of its investments
accounted for under the equity method. These investments are included in investments in and advances to equity method investees on
the consolidated balance sheets with income or loss included in gain (loss) from equity method investees on the consolidated
statements of operations and comprehensive income (loss).
Impairment of Equity Method Investments
The Company considers certain factors to determine if there is a decrease in its investment fair value for its equity method investments
that is other than temporary. The equity method investments will be written down to fair value if there is evidence of a loss in value
which is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent
investee equity transactions, discounted cash flow analysis and recent operating results. If the fair value of the investment is below the
carrying amount, management considers several factors when determining whether other-than-temporary impairment has occurred.
The estimation of fair value and whether other-than-temporary impairment has occurred requires the application of significant
judgment and future results may vary from current assumptions. Refer to Note 16 for additional discussion regarding impairments on
equity method investments.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of
identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment,
with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting
unit level. The Company has four reporting units and our annual goodwill impairment review occurs during the fourth quarter of each
year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more
likely than not reduce the fair value of a reporting unit below its carrying amount.
80
Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would
lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the
Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative
goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared
to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no
further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by
which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated
statements of operations and comprehensive income (loss). See Note 8 for additional discussion regarding the goodwill impairment
tests conducted during 2020 and 2019.
Intangible Assets, Net
Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective
estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets
are used.
The following summarizes the estimated useful lives by asset classification:
Corporate trade name
Customer relationships
Technology
Provider network contracts
10 - 20 years
10 - 25 years
5 years
4 - 5 years
Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying
value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and
eventual disposition of that asset or group exceed the carrying value at the evaluation date.
If the undiscounted cash flows are not
sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-
lived asset or group over its fair value. See Note 8 for additional discussion regarding our intangible assets.
Reserves for Claims and Performance-based Arrangements
Reserves for performance-based arrangements and claims for our Services and True Health segments reflect estimates of payments
under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected
development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care
expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care
professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed to NMHC
under a reinsurance agreement for 2019 as discussed further in Note 10. The reinsurance agreement was terminated in December
2019. The Company uses actuarial principles and assumptions that are consistently applied in each reporting period and recognizes the
actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial
standards of practice that the liabilities be adequate under moderately adverse conditions.
The process of estimating reserves involves a considerable degree of judgment by the Company and, as of any given date, is inherently
uncertain. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and adjustments
are reflected in current results of operations in the period in which they are identified as experience develops or new information
becomes known. See Note 22 for additional discussion regarding our reserves for claims and performance-based arrangements.
Long-term Debt
Convertible notes and amounts borrowed under our credit agreement are carried at cost, net of debt discounts and issuance costs, as
long-term debt on the consolidated balance sheets. The debt discounts and issuance costs are amortized to interest expense on the
consolidated statements of operations and comprehensive income (loss) using the straight-line method over the contractual term of the
note if that method is not materially different from the effective interest rate method. Cash interest payments are due either quarterly or
semi-annually in arrears and we accrue interest expense monthly based on the annual coupon rate. See Note 9 for further discussion
regarding our convertible notes and credit agreement.
Leases
As discussed in Note 3, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, effective January 1, 2019. The following
reflects our updated policy for leases.
81
The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business
operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease.
If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most
leases include one or more options to renew or may have a termination option. The Company determines whether these options are
reasonably certain to be exercised at the inception of the lease. The rent expense is recognized on a straight-line basis in the
consolidated statements of operations and comprehensive income (loss) over the terms of the respective leases. Leases with an initial
term of 12 months or less are not recorded on the consolidated balance sheets.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Further,
the Company treats all lease and non-lease components as a single combined lease component for all classes of underlying assets.
The Company also enters into sublease agreements for some of its leased office space. Rental income attributable to subleases is
immaterial and is offset against rent expense over the terms of the respective leases.
Refer to Note 11 for additional lease disclosures.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, in order to clarify the principles of
recognizing revenue. The Company adopted the standard effective January 1, 2018, using the modified retrospective method for only
contracts that were not completed at the date of initial application.
Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services.
Transformation services consist of implementation services whereby we assist the customer in launching its population health or
health plan programs, or implement certain platform and operations services. In certain cases, transformation services can also include
revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or
population. Platform and operations services generally include multi-year arrangements with customers to provide various population
health, health plan operations, specialty care management and claims processing services on an ongoing basis, as well as transition or
run-out services to customers receiving primarily TPA services. Revenue is recognized when control of the services is transferred to
our customers.
We use the following 5-step model, outlined in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with
Customers (“ASC 606”), to determine revenue recognition for our Services segment from our contracts with customers:
•
•
•
•
•
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations
Recognize revenue when (or as) the entity satisfies a performance obligation
Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. True Health
also derived revenue in 2019 from reinsurance premiums assumed from NMHC under the terms of the reinsurance agreement (as
defined in Note 10). The portion of premiums that will be earned in the future or are received prior to the effectiveness of the policy
are deferred and reported as premiums received in advance. These amounts are generally classified as deferred revenue on our
consolidated balance sheets.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist
primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support
and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments
to providers and payments for pharmaceutical treatments and other health care expenditures through capitated arrangements.
Claims Expenses
Our claims expenses consist of the direct medical expenses incurred by our True Health segment. Claims expenses are recognized in
the period in which services are provided and include amounts that have been paid by us through the reporting date, as well as
estimated medical claims and benefits payable for costs that have been incurred but not paid by us as of the reporting date. Claims
expenses include, among other items, fee-for-service claims, pharmacy benefits, various other related medical costs and expenses
82
related to our reinsurance agreement. We use judgment to determine the appropriate assumptions for determining the required
estimates.
Stock-based Compensation
The Company sponsors a stock-based incentive plan that provides for the issuance of stock-based awards to employees, vendors and
non-employee directors of the Company or its consolidated subsidiaries. Our stock-based awards generally vest over a four-year
period and stock options expire 10 years from the date of grant.
We expense the fair value of stock-based awards granted under our incentive compensation plans. Fair value of stock options is
determined using a Black-Scholes options valuation methodology. The fair value of the awards is expensed over the performance or
service period, which generally corresponds to the vesting period, on a straight-line basis and is recognized as an increase to additional
paid-in capital. Stock-based compensation expense is reflected in cost of revenue and selling, general and administrative expenses in
our consolidated statements of operations and comprehensive income (loss). Additionally, and if applicable, we capitalize personnel
expenses attributable to the development of internal-use software, which include stock-based compensation costs. We recognize share-
based award forfeitures as they occur.
Income Taxes
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement
and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the use of estimates
are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In
evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets
and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be
utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. We recognize interest and penalties accrued on any unrecognized tax
exposures as a component of income tax expense, when applicable. As of December 31, 2020 and 2019, our identified balance of
uncertain income tax positions would not have a material impact to the consolidated financial statements. We are subject to taxation in
various jurisdictions in the U.S. and India and remain subject to examination by taxing jurisdictions for the year 2011 and all
subsequent periods due to the availability of NOL carryforwards.
We are a holding company and our assets consist of our direct ownership in Evolent Health LLC, for which we are the managing
member. Prior to the Class B unit exchanges on December 26, 2019, Evolent Health LLC was classified as a partnership for U.S.
federal and applicable state and local income tax purposes and, as such, was not subject to U.S. federal, state and local income taxes.
Taxable income or loss generated by Evolent Health LLC was allocated to holders of its units, including us, on a pro rata basis.
Accordingly, we were subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of
Evolent Health LLC. As a result of the 2019 Class B units exchanges, we became the sole owner of Evolent Health LLC and its entity
classification changed from a partnership to an entity disregarded as separate from its owner for U.S. federal, state and local income
tax purposes. Following the Class B units exchanges, any taxable income or loss generated by Evolent Health LLC is reportable and
taxable only on the Company’s federal, state and local income tax returns. Evolent Health LLC has direct ownership in corporate
subsidiaries, which were subject to U.S. and foreign taxes with respect to their own operations during 2019.
Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to Class A common shareholders by the weighted-
average number of Class A common shares outstanding.
For periods of net income, and when the effects are not anti-dilutive, we calculate diluted earnings per share by dividing net income
available to Class A common shareholders by the weighted average number of Class A common shares plus the weighted average
number of Class A common shares assuming the conversion of our convertible notes, as well as the impact of all potential dilutive
common shares, consisting primarily of common stock options and unvested restricted stock awards using the treasury stock method
and our exchangeable Class B common stock. For periods of net loss, shares used in the diluted earnings (loss) per share calculation
represent basic shares as using potentially dilutive shares would be anti-dilutive.
Fair Value Measurement
83
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. Our consolidated balance sheets include various financial instruments
(primarily cash not held in money-market funds, restricted cash, accounts receivable, accounts payable, accrued expenses and other
liabilities) that are carried at cost and that approximate fair value.
See Note 18 for further discussion regarding fair value measurement.
Foreign Currency
The Company formed a subsidiary in India during the first quarter of 2018. The functional currency of our international subsidiary is
the Indian Rupee. We translate the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets
and liabilities, and monthly average rates of exchange for revenue and expenses. Translation gains and losses are recorded in
accumulated other comprehensive income (loss) as a component of shareholders' equity. Foreign currency translation gains and losses
did not have a material impact on our consolidated statements of operations and comprehensive income (loss) for the years ended
December 31, 2020, 2019, and 2018.
Note 3. Recently Issued Accounting Standards
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, in order to establish the
principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This update
introduces a new standard on accounting for leases, including a lessee model that brings most leases on the balance sheet. The new
standard also aligns many of the underlying principles of the new lessor model with those in ASC 606. ASU 2016-02 is effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued
ASU 2018-11, which is intended to make targeted improvements to ASU 2016-02. The amendments in ASU 2018-11 provide entities
with an additional (and optional) transition method to adopt the new leases standard using an effective date method rather than the
earliest comparative period. The requirements of ASU 2018-11 are effective on the same date as the requirements of ASU 2016-02.
We adopted ASU 2016-02 as of January 1, 2019, using the modified retrospective approach. Further, we elected the package of
practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry
forward the historical lease classification. Adoption of the new standard resulted in the recording of additional right-of-use assets and
lease liabilities of approximately $51.4 million and $47.4 million, respectively, on our consolidated balance sheet as of January 1,
2019. The standard had no impact on our results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Services Contract. The amendments in this ASU align
the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all
implementation costs incurred after the date of adoption. We adopted the requirements of ASU 2018-15 effective January 1, 2019.
There was no material impact to our consolidated balance sheets or results of operations as of or for the year ended December 31,
2019.
In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to
SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment
Company Reporting Modernization and Miscellaneous Updates (SEC Update). ASU 2019-07 clarifies or improves the disclosure and
presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating
redundancies and making the codification easier to apply. The disclosure and presentation amendments included in ASU 2019-07,
which were effective upon issuance of the standard and were to be applied prospectively, did not have a material impact on our
consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to
change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost,
including trade receivables, certain non-trade receivables, contract assets, held-to-maturity securities, customer advances and certain
off-balance sheet credit exposures, by replacing the existing “incurred loss” framework with an expected credit loss recognition
model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and
supportable forecasts. The standard is effective for entities with fiscal years beginning after December 15, 2019, including interim
periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified
84
retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated
deficit). Results for reporting periods beginning January 1, 2020 reflect the adoption of ASU 2016-13, while prior period amounts
were not adjusted and continue to be reported in accordance with our historical accounting practices. In our previous accounting policy
for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based solely on specific
identification. Under the new accounting standard, we maintain our specific identification process but utilize several factors to develop
historical losses reserves, including aging schedules, customer creditworthiness, and historical payment experience, which are then
adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer
advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. For
held-to-maturity investment securities, we evaluate (i) historical information adjusted for current conditions and reasonable and
supportable forecasts and (ii) qualitative factors to determine whether the zero-loss expectation exception applies. Refer to Note 6 for
additional disclosures related to current expected credit losses.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13
amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosures. This ASU is
effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. We adopted the
requirements of this standard effective January 1, 2020 and determined it did not have a material impact on our consolidated financial
statements and related disclosures.
Note 4. Transactions
Passport
On May 28, 2019, UHC, Passport Health Solutions, LLC (“PHS I”), the Company and EVH Passport entered into an Asset Purchase
Agreement (the “Passport APA”), which provided for the sale of substantially all of the assets of UHC and PHS I, including UHC’s
Kentucky Medicaid contract (the “Passport Medicaid Contract”), to EVH Passport for a purchase price of $70.0 million in cash and
the issuance of a 30% interest in EVH Passport (the “Passport Purchase Price”) to The University of Louisville, the University of
Louisville Physicians, University Medical Center, the Jewish Heritage Fund for Excellence, Norton Healthcare, Inc. and the
Louisville/Jefferson County Primary Care Association (collectively, the “Sponsors”).
On June 18, 2019, the Company contributed $40.0 million to UHC in the form of an advance for regulatory capital requirements under
an agreement with UHC (the “Passport Note”). The Passport Note carried a fixed interest rate of 6.5% per annum. Additionally, on
June 6, 2019, the Company and UHC entered into an Indemnity Agreement (the “Indemnity Agreement”), with an insurance company
(the “Surety”). The Surety issued a performance bond in the amount of $25.0 million to secure UHC’s performance under its Medicaid
Contract. Pursuant to the Indemnity Agreement, the Company and UHC were jointly and severally liable to the Surety in the
maximum amount of the bond, plus certain costs of the Surety, in the event of losses arising under the bond. The bond’s original
expiry date was June 30, 2020 and during the three months ended June 30, 2020, was extended to December 31, 2020. The bond was
released in October 2020.
On December 30, 2019, UHC, PHS I, the Company and EVH Passport consummated the transactions contemplated by the Passport
APA (the “Passport Closing”). At the Passport Closing, $16.2 million of the cash Passport Purchase Price was held back until such
time as PHS I delivers to EVH Passport certain owned real property and improvements free and clear of all encumbrances. In addition,
at the Passport Closing, EVH Passport and UHC entered into an agreement that provided for the administration and assumption of the
financial risks by EVH Passport of UHC’s dual eligible special needs business (the “DNP Business”) until such time as EVH Passport
became certified as a Medicare Advantage Organization and the D-SNP Business could be transferred to EVH Passport. On October
1, 2020, the D-SNP Business was transferred from UHC to EVH Passport. At the Passport Closing, EVH Passport assumed UHC’s
obligations under the Passport Note and the Indemnity Agreement.
On July 16, 2020, EVH Passport, Evolent Health LLC and Molina Healthcare, Inc. (“Molina”) entered into an Asset Purchase
Agreement (the “Molina APA”), which contemplated the sale by EVH Passport to Molina of certain assets, including certain
intellectual property rights of EVH Passport and EVH Passport’s rights under the Passport Medicaid Contract. On September 1, 2020,
EVH Passport and Molina consummated the transactions contemplated by the Molina APA (the “Molina Closing”), and the Passport
Medicaid Contract was novated to Molina. As a result, EVH Passport began to wind down its business.
In connection with the
Molina Closing, Molina deposited $20.0 million in cash in escrow, which was subsequently released to EVH Passport in January
2021. In addition, at the Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption of the
financial risks by Molina of the D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare
Advantage Organization and the D-SNP Business is transferred Molina. The Company and EVH Passport continued to administer the
D-SNP Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business is
officially transferred to Molina.
85
Prior to the Molina Closing, the Company accounted for its investment in EVH Passport as an unconsolidated variable interest entity
under the equity method of accounting. As a result of the transaction, the Company concluded that a reconsideration event occurred
whereby EVH Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH
Passport; accordingly, the Company consolidated EVH Passport as of September 1, 2020 in its consolidated financial statements. The
Company accounted for the transaction as an asset acquisition, as the Company concluded that assets acquired as a result of the
consolidation did not meet the criteria to be classified as a business under GAAP. Following the Molina Closing and consolidation of
EVH Passport in the Company’s consolidated financials, on November 16, 2020, EVH Passport redeemed the Sponsors’ equity
interests in EVH Passport for $20.0 million in cash in accordance with the terms of EVH Passport’s Stockholders’ Agreement, and, as
a result, EVH Passport became a wholly owned subsidiary of the Company.
As part of the consolidation, the Company recorded assets primarily consisting of cash and cash equivalents and restricted cash and
cash equivalents of $159.8 million, available for sale securities of $88.6 million, receivables related to unsettled sales of securities of
$43.0 million and other assets of $50.2 million and total liabilities primarily comprised of reserve for claims and performance-based
arrangements of $164.8 million and accrued liabilities of $50.0 million. Subsequent to winddown activities, any remaining cash will
be distributed to the Company subject to regulatory approval from the Kentucky Department of Insurance. In addition, the Passport
Note was eliminated upon consolidation, and as of December 31, 2020, the outstanding principal balance of the $40.0 million Passport
Note was repaid in full by EVH Passport including approximately $3.6 million of accrued interest.
Gain (Loss) on Disposal of Assets and Consolidation
On September 1, 2020, as a result of the Molina Closing, the Company concluded that a reconsideration event occurred whereby EVH
Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in EVH Passport;
accordingly, the Company consolidated EVH Passport as of September 1, 2020 and recorded a $5.7 million bargain purchase gain in
gain (loss) on disposal of assets and consolidation in its consolidated financial statements.
During 2019, the Company, through a non-wholly owned consolidated subsidiary, entered into an agreement with an unrelated party
to provide services and support to providers, independent physician associations, and other provider groups. During the first quarter of
2020, the Company sold its interest in the subsidiary and recorded a loss of $6.4 million in gain (loss) on disposal of assets and
consolidation on the consolidated statements of operations. The Company did not have any continuing involvement with the entity
after the consummation of this transaction.
Securities Offerings and Sales
Under exchange agreements we entered into at the time of our IPO and as part of the New Century Health acquisition, we granted
TPG, The Advisory Board Company (“The Advisory Board”) and Ptolemy Capital, LLC (together, the “Investor Stockholders”) and
certain former owners of New Century Health (the “New Century Health Class B Members”) an exchange right that allows receipt of
newly issued shares of the Company’s Class A common stock in exchange (a “Class B Exchange”) for an equal number of shares of
the Company’s Class B common stock (which are subsequently canceled) and an equal number of Evolent Health LLC’s Class B
common units (“Class B units”). Under the terms of the exchange agreements, Class B units received by the Company from relevant
Investor Stockholders and New Century Health Class B Members were simultaneously exchanged for an equivalent number of Class
A units of Evolent Health LLC, and Evolent Health LLC canceled the Class B units received in the Class B Exchange. On December
27, 2019, the cancellation of the remaining Class B units results in an increase in the Company’s economic interest in Evolent Health
LLC.
Note 5. Revenue Recognition
Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services.
Transformation Services Revenue
Transformation services consist of implementation services whereby we assist the customer in launching its population health or
health plan programs. In certain cases, transformation services can also include revenue associated with our support of certain one-
time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually
completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an
input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.
86
Platform and Operations Services Revenue
Platform and operations services are typically multi-year arrangements with customers to provide various clinical and administrative
solutions. Our clinical solutions are designed to lower the medical expenses of our partners and include our total cost of care and
specialty care management services; our administrative solutions are designed to provide comprehensive health plan operations and
claims processing services, and also include transition or run-out services to customers receiving primarily TPA services. Contracts to
provide these services may be developed on an integrated basis. For purposes of revenue disaggregation, we classify contracts
including both clinical and administrative solutions into the category corresponding to the majority of services provided under those
contracts.
Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is
customized to meet the specialized needs of our customers and members. Generally, we will apply the series guidance to the
performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for
these services that typically includes a monthly payment that is calculated based on a specified per member per month rate, multiplied
by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums.
Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and
other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and
best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a
significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from platform and operations
services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In
accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.
Contracts with Multiple Performance Obligations
Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both
transformation services and platform and operations services as these services are distinct from one another. When a contract has
multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone
selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to
satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into
consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives
when determining the standalone selling price.
Principal vs. Agent
We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the
principal or agent in the arrangement, we review each third-party relationship on a contract by contract basis. We are an agent when
our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before
it is provided and recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring
control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.
Disaggregation of Revenue
The following table represents Evolent’s Services segment revenue disaggregated by type of services (in thousands), excluding
revenues from our health plan operations, which include the True Health segment and EVH Passport, and from our downside risk
sharing arrangements through our insurance subsidiary, which are accounted for under ASC 944, Financial Services-Insurance.
For the Year Ended December 31,
2019
2020
2018
Services Revenue
Transformation services
Platform and operations services
Clinical solutions
Administrative solutions
$
11,990
$
15,203
$
32,916
690,391
202,547
458,991
198,618
228,464
264,104
87
Transaction Price Allocated to the Remaining Performance Obligations
For contracts with a term greater than one year, we have allocated approximately $87.8 million of transaction price to performance
obligations that are unsatisfied as of December 31, 2020. We do not include variable consideration that is allocated entirely to a
wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance
represents the value of the fixed consideration in our long-term contracts that we expect will be recognized as revenue in a future
period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as
discussed in Note 2. We expect to recognize revenue on approximately 54% and 86% of these remaining performance obligations by
December 31, 2021, and December 31, 2022, respectively, with the remaining balance to be recognized thereafter. However, because
our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of revenue that we
actually receive may be less or greater than this estimate and the timing of recognition may not be as expected.
Contract Balances
Contract balances consist of accounts receivable, contract assets and deferred revenue. Contract assets are recorded when the right to
consideration for services is conditional on something other than the passage of time. Contract assets relating to unbilled receivables
are transferred to accounts receivable when the right to consideration becomes unconditional. We classify contract assets as current or
non-current based on the timing of our rights to the unconditional payments. Our contract assets are generally classified as current and
recorded within contract assets on our consolidated balance sheets. Our current accounts receivables are classified within accounts
receivable, net on our consolidated balance sheets and our non-current accounts receivable are classified within prepaid expenses and
other non-current assets on our consolidated balance sheets.
Deferred revenue includes advance customer payments and billings in excess of revenue recognized. We classify deferred revenue as
current or non-current based on the timing of when we expect to recognize revenue. Our current deferred revenue is recorded within
deferred revenue on our consolidated balance sheets, and non-current deferred revenue is recorded within other long-term liabilities on
our consolidated balance sheets.
The following table provides information about receivables, contract assets and deferred revenue from contracts with customers (in
thousands):
Short-term receivables (1)
Long-term receivables (1)
Short-term contract assets
Long-term contract assets
Short-term deferred revenue
Long-term deferred revenue
(1) Excludes pharmacy claims receivable and premiums receivable
Changes in contract assets and deferred revenue for the year ended December 31, 2020 are as follows (in thousands):
Contract assets
Balance as of beginning-of-period
Reclassification to receivables, as the right to consideration becomes unconditional
Contract assets recognized, net of reclassification to receivables
Balance as of end-of-period
Deferred revenue
Balance as of beginning-of-period
Reclassification to revenue, as a result of performance obligations satisfied
Cash received in advance of satisfaction of performance obligations
Balance as of end-of-period
$
$
$
$
88
December
31, 2020
December 31,
2019
$
122,167
$
71,707
4,554
329
—
14,327
3,593
709
1,751
999
19,828
1,330
2,750
(2,539)
118
329
21,158
(18,481)
15,243
17,920
The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in previous period was $12.1 million
and $1.1 million during the years ended December 31, 2020, and 2019, respectively, due primarily to net gain share as well as changes
in other estimates.
Contract Cost Assets
Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer
that we expect to be recoverable. The capitalized contract acquisition costs are classified as non-current assets and recorded within
contract cost assets on our consolidated balance sheets. Amortization expense is recorded within selling, general and administrative
expenses on the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2020 and
2019, the Company had $3.3 million and $4.7 million, respectively, of contract acquisition cost assets, net of accumulated
amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization
expense of $1.9 million, $1.0 million and $0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
In our platforms and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to
satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract.
Our contract fulfillment costs primarily include our employee labor costs and third-party vendor costs. The capitalized contract
fulfillment costs are classified as non-current and recorded within contract cost assets on our consolidated balance sheets.
Amortization expense is recorded within cost of revenue on the accompanying consolidated statements of operations and
comprehensive income (loss). As of December 31, 2020 and 2019, the Company had $23.4 million and $31.8 million, respectively, of
contract fulfillment cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In
addition,
the Company recorded amortization expense of $13.0 million, $4.7 million and $2.4 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years.
The period of benefit was based on our technology, the nature of our customer arrangements and other factors.
Note 6. Credit Losses
We are exposed to credit losses primarily through our accounts receivable from revenue transactions, investments held at amortized
cost and customer advances for regulatory capital and other notes receivable. We estimate expected credit losses based on past events,
current conditions and reasonable and supportable forecasts. Expected credit losses are measured over the remaining contractual life of
these assets. As part of our consideration of current and forward-looking economic conditions, we considered the impact of the
COVID-19 pandemic on our customers’ and other third parties’ ability to pay. We did not observe notable increases in delinquencies
during the year ended December 31, 2020. Given the nature of our business, our past collection experience during recessionary and
pre-recessionary periods, and our forecasted impact of the COVID-19 pandemic on our business, we did not record material changes
in our allowances due to the COVID-19 pandemic during the year ended December 31, 2020.
Accounts Receivable from Revenue Transactions
Accounts receivable represent the amounts owed to the Company for goods or services provided to customers or third parties. Current
accounts receivables are classified within accounts receivable, net on the Company’s consolidated balance sheets, while non-current
accounts receivables are classified within prepaid expenses and other noncurrent assets on the Company’s consolidated balance sheets.
We monitor our ongoing credit exposure through active review of counterparty balances against contract terms, due dates and business
strategy. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ legal
counsel to pursue recovery of defaulted receivables. In addition, the Company will establish a general reserve based on delinquency
rates. Historical loss rates are determined for each delinquency bucket in 30-day past-due intervals, and then applied to the
composition of the reporting date balance based on delinquency. The allowance implied from application of the historical loss rates is
then adjusted, as necessary, for current conditions and reasonable and supportable forecasts.
Based on an aging analysis of our trade accounts receivable, non-trade accounts receivable and contract assets at December 31,
2020, 59% were current, 24% were past due less than 60 days, with 37% past due less than 120 days. At December 31, 2020, we
reported $173.7 million of accounts receivable, certain non-trade accounts receivable included in prepaids and other assets on the
consolidated balance sheet and contract assets, net of allowances of $7.1 million. The following table summarizes the changes in
allowance for credit losses on our accounts receivables, certain non-trade accounts receivable and contract assets for the year ended
December 31, 2020 (in thousands):
89
Balance as of December 31, 2019
Passport acquisition
Cumulative transition adjustment
Provision for credit losses
Charge-offs
Balance as of December 31, 2020
Investments Held at Amortized Cost
$
$
(41)
(2,582)
(2,815)
(3,283)
1,665
(7,056)
True Health invests in certain debt securities which are classified as held-to-maturity in Evolent’s consolidated financial statements
because True Health, as Evolent’s wholly-owned subsidiary, has the intent and ability to hold the securities until their individual
maturities. True Health invests in debt securities pursuant to an investment policy governing the nature and type of investments based
on the Company’s business strategy, risk tolerance, and investment objectives.
The amortized cost of our investments as of December 31, 2020 and 2019 and interest income for the years ended December 31, 2020
and 2019 were as follows (in thousands):
U.S. Treasury bills
Corporate bonds
Collateralized mortgage obligations
Corporate stock
Yankees
Total investments
Amortized Cost
December
31, 2020
December
31, 2019
Interest Income for the
Year Ended
December 31,
2020
2019
$
8,909
$
10,784
$
1,707
3,433
130
1,705
5,472
—
239
524
339
—
598
14,777
$
$
597
18,558
$
21
1,123
$
$
249
49
112
—
21
431
The Company reviewed its held-to-maturity investments to determine which types of securities have zero risk of credit loss because
payments are guaranteed by a third party. Based on this analysis, the Company determined that the expected credit losses on U.S.
Treasury bills and mortgage backed securities from government sponsored enterprise (“GSE”) is zero. The expected credit losses on
non-GSE backed securities is considered immaterial.
As of December 31, 2020 and 2019, all of the Company’s held-to-maturity investments were rated investment-grade or better and all
payments of interest or principal are current.
Note 7. Property and Equipment, Net
The following summarizes our property and equipment (in thousands):
Computer hardware
Furniture and equipment
Internal-use software development costs
Leasehold improvements
Total property and equipment
Accumulated depreciation and amortization expenses
Total property and equipment, net
December 31,
2020
18,866
3,559
137,085
15,586
175,096
(88,856)
86,240
$
$
$
$
2019
11,604
3,649
112,501
12,415
140,169
(55,014)
85,155
The Company capitalized $24.6 million, $30.9 million and $33.1 million of internal-use software development costs for the years
ended December 31, 2020, 2019 and 2018, respectively. The net book value of capitalized internal-use software development costs
was $75.3 million and $74.9 million as of December 31, 2020 and 2019, respectively.
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Depreciation expense related to property and equipment was $28.3 million, $23.3 million and $17.3 million for the years ended
December 31, 2020, 2019 and 2018, respectively, of which amortization expense related to capitalized internal-use software
development costs was $24.3 million, $18.7 million and $12.4 million, respectively.
Note 8. Goodwill and Intangible Assets, Net
Goodwill
Goodwill has an estimated indefinite life and is not amortized; rather, it is reviewed for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
The Company has four reporting units, each with discrete financial information. Our assets and liabilities are employed in and relate to
the operations of our reporting units. Therefore, the equity carrying value and future cash flows must be estimated each time
a goodwill impairment analysis is performed on a reporting unit. As a result, our assets, liabilities and cash flows are assigned to
reporting units using reasonable and consistent allocation methodologies.
Our annual goodwill impairment review occurs during the fourth quarter of each fiscal year. We evaluate qualitative factors that could
cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a
quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our
overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained
decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners, or litigation.
2019 Goodwill Impairment Test
During the second half of 2019, the price of our Class A common stock declined significantly. The average closing price per share of
our Class A common stock for the period from May 1 to October 31 decreased by $6.59 per common share, or 43.5%, compared to the
average closing price for the period from January 1 to April 30. At the time of our 2019 annual goodwill impairment test, it was not
known if UHC/EVH Passport would be awarded a contract under the RFP, which was expected to begin on January 1, 2021. If it was
not awarded a contract, it was expected that we would not receive any material revenue under our management services agreement
from EVH Passport subsequent to December 31, 2020 and the value of our investment in EVH Passport and goodwill would be
negatively impacted. The non-renewal of EVH Passport’s Medicaid contract would reduce our medium-term cash flow projections for
one of our reporting units, causing the decline in our stock price to possibly be further prolonged, indicating it was more likely than
not that that the fair value of the reporting units is less than the reporting unit’s carrying amounts, triggering an interim quantitative
assessment.
In performing our October 31, 2019 annual goodwill impairment test, we estimated the fair value of our reporting units by considering
a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the income approach,
we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the
Company’s weighted average cost of capital. This analysis required us to make judgments, including about revenues, expenses, fixed
asset and working capital requirements, the timing of exchanges of our Class B common shares, capital market assumptions, cash
flows, the probability of the Kentucky Medicaid RFP outcome and discount rates. The fair values determined by the income approach
were weighted considering future resolution of the Kentucky Medicaid RFP result to determine the concluded fair value for each
reporting unit.
As of October 31, 2019, we determined that one of our three reporting units in the Services segment had an estimated fair value less
than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $199.8 million in goodwill impairment on
our consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2019. If other indications
of impairment exist we may be required to recognize additional impairments in the future as a result of market conditions or other
factors related to our performance, including changes in our forecasted results, investment strategy, interest rates or assumptions used
as part of the goodwill impairment analysis. Any further impairment charges that we may record in the future could be material to our
results of operations. As of December 31 2019, the remaining goodwill attributable to the reporting unit from which we recognized a
non-cash goodwill impairment charge for the year ended December 31, 2019 was $431.7 million.
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2020 Goodwill Impairment Test
As of March 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its 2019 annual
goodwill impairment test that would indicate that it was more likely than not that the fair values of the reporting units were less than
the reporting units’ carrying amounts that would require an additional interim impairment assessment after October 31, 2019.
Considering the sharp decrease in the share price of the Company’s Class A common stock during the three months ended March 31,
2020, the Company determined indicators of an impairment were present and we performed an interim goodwill impairment
assessment as of March 31, 2020. As a result of this test, the Company determined that there was no goodwill impairment of the
reporting unit which recognized an impairment in the year ended December 31, 2019.
During May 2020, the CHFS announced that EVH Passport was not awarded a Kentucky managed Medicaid contract for the next
contract period and the Passport Medicaid Contract would expire on December 31, 2020. As a result of this announcement, the
Company determined there were events or changes in circumstances since its 2019 annual goodwill impairment test that indicated it
was more likely than not that the fair value of one of its three reporting units in the Services segment was less than the reporting unit’s
carrying amount triggering an interim quantitative assessment.
In performing this interim quantitative assessment, we estimated the fair value of the reporting unit by considering a discounted cash
flow valuation approach (“income approach”). In determining the estimated fair value in a quantitative analysis, we projected future
cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted
average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital
requirements, capital market assumptions, cash flows and discount rates.
As of May 31, 2020, we determined that the reporting unit under review had an estimated fair value less than its carrying value. As a
result, we recorded a non-cash goodwill impairment charge of $215.1 million on our consolidated statements of operations and
comprehensive income (loss) for the three and six months ended June 30, 2020. In addition, the Company reviewed its interim
goodwill impairment analysis as of June 30, 2020 and did not identify any additional information or events that would contradict or
change the conclusion reached by the Company as of May 31, 2020.
During the three months ended September 30, 2020, we evaluated qualitative factors that could indicate the fair value of each of our
reporting units may be lower than the carrying value. We did not identify any qualitative factors that would trigger a quantitative
goodwill impairment test during the three months ended September 30, 2020.
During the Company’s annual impairment analysis as of October 31, 2020, the Company concluded that previous impairment charges
of $199.8 million and $215.1 million recorded during the three months ended December 31, 2019 and June 30, 2020, respectively, in
one of our three reporting units in the Services segment left that specific reporting unit with a limited fair value cushion. Therefore, the
Company elected to forego the qualitative assessment and proceed directly to the quantitative assessment of the goodwill impairment
test for that specific reporting unit. This election does not preclude management from performing the qualitative assessment in any
subsequent period. For the remaining reporting units, after assessing the totality of events and circumstances including the results of
our previous valuations, the minimal impacts of the Passport loss and COVID-19, the Company does not believe that an event
occurred or circumstances changed during the period under consideration that would, more likely than not, reduce the fair value of any
reporting unit below their carrying amount. Therefore, the Company concluded that the quantitative assessment was not required.
In performing our October 31, 2020 impairment test for one of the three reporting units in the Services segment, we estimated the fair
value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the
estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans
and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments
about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates. As
of October 31, 2020, we determined that one of our three reporting units in the Services segment had an estimated fair value greater
than its carrying value and as a result, goodwill is not impaired.
As of December 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its annual
goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting unit was less than the
reporting unit’s carrying amounts that would require an interim impairment assessment after October 31, 2020. The Company
determined there had been no such indicators, therefore, we did not perform an interim goodwill impairment assessment as of
December 31, 2020. As of December 31, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a
non-cash goodwill impairment charge earlier in the year was $214.3 million.
92
The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented (in
thousands):
Balance as of December 31, 2018
Goodwill acquired
Measurement period adjustments
Impairment
Foreign currency translation
Balance as of December 31, 2019(1)
Goodwill disposal (2)
Impairment
Foreign currency translation
$
Services
762,419
3,416
351
(199,800)
(27)
566,359
(2,200)
(215,100)
(30)
349,029
$
True Health Consolidated
768,124
$
3,416
351
(199,800)
(27)
572,064
(2,200)
(215,100)
(30)
354,734
5,705
—
—
—
—
5,705
—
—
—
5,705
$
Balance as of December 31, 2020 (1)
(1) Net of cumulative inception to date impairment of $575.5 million and $360.4 million as of December 31, 2020 and 2019, respectively.
(2) Goodwill written-off upon disposal of a consolidated subsidiary.
$
$
Intangible Assets, Net
Details of our intangible assets (in thousands, except weighted-average useful lives) are presented below:
As of December 31, 2020
As of December 31, 2019
Weighted-
Average
Remaining
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Weighted-
Average
Remaining
Useful Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
13.2
$
23,300
$
6,271
$ 17,029
14.2
$
23,300
$
4,891
$ 18,409
16.1
1.8
2.3
281,219
82,922
58,256
63,507
222,963
19,415
16.8
2.0
291,519
82,922
44,750
49,760
246,769
33,162
1,118
648
470
2.2
2,048
1,334
714
2.8
14,475
6,280
8,195
3.7
12,725
3,320
9,405
$ 403,034
$
134,962
$ 268,072
$ 412,514
$
104,055
$ 308,459
Corporate trade
name
Customer
relationships
Technology
Below market
lease, net
Provider
network
contracts
Total
intangible
assets, net
Amortization expense related to intangible assets for the years ended December 31, 2020, 2019 and 2018, was $32.9 million, $37.7
million, and $27.2 million, respectively.
Future estimated amortization of intangible assets (in thousands) as of December 31, 2020, is as follows:
2021
2022
2023
2024
2025
Thereafter
Total future amortization of intangible assets
$
$
28,701
24,819
22,055
16,171
15,916
160,410
268,072
Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the assets’ carrying
value. We did not identify any circumstances during the year ended December 31, 2020, that would require an impairment test for our
intangible assets.
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Note 9. Long-term Debt
2024 Notes
In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the
“2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and
certain new investors. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million
aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate
principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes,
which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2024 Notes. The
closing of the private placement of the 2024 Notes occurred on August 19, 2020.
Holders of the 2024 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1
of each year, beginning on December 1, 2020, at a rate equal to 3.50% per annum. The 2024 Notes will mature on December 1, 2024,
unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon maturity the principal
amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $1.5 million
for the year ended December 31, 2020.
The 2024 Notes are convertible into cash, shares of the Company's Class A common stock, or a combination of cash and shares of the
Company's Class A common stock, at the Company's election, based on an initial conversion rate of 54.8667 shares of Class A
common stock per $1,000 principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately
$18.23 per share of the Company’s Class A common stock. In the aggregate, the 2024 Notes are initially convertible into 6.4 million
shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with
a make-whole provision upon a fundamental change or a notice of redemption under the governing indenture). The conversion rate
may be adjusted under certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of
the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the
Company’s election.
The option to settle the 2024 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of
the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2024 Notes
into a debt component and an equity component. The debt component was determined to be $78.9 million, before issuance costs,
based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be
$38.1 million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference
between the aggregate principal amount of the debt and the fair value of the debt component. Issuance costs of $1.7 million and
$1.3 million are allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity
component of $38.1 million, $1.7 million of issuance costs will be amortized to interest expense on the consolidated statements of
operations and comprehensive income (loss) using the effective interest method over the contractual term of the 2024 Notes. The
equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity
classification. For the year ended December 31, 2020, the Company recorded $2.7 million of interest expense related to the
amortization of the debt discount and the issuance costs allocated to the debt component.
Holders of the 2024 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental
change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. The Company may not redeem the 2024 Notes prior to March 1, 2023. The
Company may redeem for cash all or any portion of the 2024 Notes, at its option, on or after March 1, 2023, if the last reported sale
price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading
days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending
on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a
redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but
excluding, the redemption date.
Credit Agreement
On December 30, 2019, the Company entered into a credit agreement, by and among the Company, Evolent Health LLC, as the
borrower (the “Borrower”), certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, and Ares
Capital Corporation, as administrative agent and collateral agent, together with the Company (the “Credit Agreement”), pursuant to
which the lenders agreed to extend credit to the Borrower in the form of (i) an initial secured term loan in the aggregate principal
amount of $75.0 million (the “Initial Term Loan Facility”) and (ii) a delayed draw secured term loan facility in the aggregate principal
amount of up to $50.0 million (the “DDTL Facility” and, together with the Initial Term Loan Facility, the “Senior Credit Facilities”),
subject to the satisfaction of specified conditions. The Borrower borrowed the loan under the Initial Term Loan Facility on December
94
30, 2019. In connection with the Credit Agreement, on December 30, 2019, the Company entered into a Security Agreement, by and
among the Company, the Borrower, the other guarantors and the collateral agent for the benefit of the secured parties, and a Guarantee
Agreement, by the Company and each of the other guarantors in favor of the collateral agent for the benefit of the secured parties. The
Senior Credit Facilities were guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain exceptions. The
Senior Credit Facilities were secured by a first priority security interest in all of the capital stock of the borrower and each guarantor
(other than the Company) and substantially all of the assets of the borrower and each guarantor, subject to certain exceptions.
The proceeds of the Initial Term Loan were used to finance the transactions contemplated by the Passport APA and pay fees and
expenses incurred in connection therewith. The proceeds of the DDTL Facility were permitted to be used, subject to the Company’s
satisfaction of specified conditions, to finance the repayment or repurchase of the Company’s 2.00% Convertible Senior Notes due
December 1, 2021 and to fund permitted acquisitions. The Initial Term Loan and any loans under the DDTL Facility would have
matured on the date that is the earliest of (a) December 30, 2024, (b) the date on which all amounts outstanding under the Credit
Agreement would have been declared or have automatically become due and payable under the terms of the Credit Agreement and (c)
the date that is ninety-one (91) days prior to the maturity date of the 2021 Convertible Notes unless certain liquidity conditions were
satisfied (the foregoing, the “Maturity Date”). The interest rate for each loan under the Senior Credit Facilities was calculated, at the
option of the Borrower, at either the Eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum
was payable by the Borrower quarterly in arrears on the unused portion of the DDTL Facility. The Company recorded $8.0 million in
interest expense related to our Credit Agreement for the year ended December 31, 2020.
Amounts outstanding under the Senior Credit Facilities could have been prepaid at the option of the Borrower subject to applicable
premiums, including a make-whole premium payable on certain prepayments made prior to the second anniversary of the closing of
the Senior Credit Facilities, and a call protection premium payable on the amount prepaid in certain instances as follows: (i) 4.00% of
the principal amount so prepaid after the second anniversary of the closing of the Senior Credit Facilities but prior the third
anniversary of the closing of the Senior Credit Facilities; (ii) 3.00% of the principal amount so prepaid after the third anniversary of
the closing of the Senior Credit Facilities but prior the fourth anniversary of the closing of the Senior Credit Facilities; and (iii) 2.00%
of the principal amount so prepaid after the fourth anniversary of the closing of the Senior Credit Facilities but prior the fifth
anniversary of the closing of the Senior Credit Facilities. Amounts outstanding under the Senior Credit Facility were subject to
mandatory prepayment upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt
of certain casualty proceeds, issuances of certain debt obligations and a change of control transaction.
The Senior Credit Facilities contained customary borrowing conditions, affirmative, negative and reporting covenants, representations
and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company was required
to comply at certain times with certain financial covenants comprised of a minimum net revenue test and a minimum liquidity test
commencing upon closing of the Senior Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal
quarter ending March 31, 2021. If an event of default had occurred, the lenders would be entitled to take enforcement action, including
foreclosure on collateral and acceleration of amounts owed under the Senior Credit Facilities. We incurred $4.7 million of debt
issuance costs in connection with this Credit Agreement, which will be included in long-term debt, net of discount on our consolidated
balance sheets and will be amortized into interest expense over the life of the agreement. For the year ended December 31, 2020, the
Company recorded $2.2 million in interest expense related to the amortization of the debt discount and the issuance costs.
On August 19, 2020, an amendment to the Company's Credit Agreement became effective. The amendment effected changes to,
among other things, permit the Company's use of cash in the exchange transactions in connection with the issuance of the 2024 Notes,
permit the issuance of the 2024 Notes and permit certain note repurchases, as well as to implement amendments to certain minimum
liquidity thresholds.
The Company was in compliance with all applicable covenants as of December 31, 2020.
On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares
Capital Corporation. Refer to Note 26 for additional information about the repayment of the Credit Agreement.
Warrant Agreement
In conjunction with the Company’s entry into the Credit Agreement, the Company entered into warrant agreements whereby it agreed
to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock at a per share purchase price equal to
$8.05. The holders could exercise the warrants at any time until thirty days after the maturity of the Credit Agreement. The
Company, at its sole discretion, could elect to pay the holders in cash in an amount determined based on the fair market value of the
Class A common stock for the shares of Class A common stock issuable upon exercise of the warrants in lieu of delivering the shares.
On January 8, 2021, the Company settled all amounts under the warrant agreements with Ares Capital Corporation. Refer to Note 26
for additional information about the settlement of the warrant agreements.
95
2025 Notes
In October 2018, the Company issued $172.5 million aggregate principal amount of its 1.50% Convertible Senior Notes due 2025 (the
“2025 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of
1933, as amended (the “Securities Act”). The 2025 Notes were issued at par for net proceeds of $166.6 million. We incurred $5.9
million of debt issuance costs in connection with the 2025 Notes. The closing of the private placement of $150.0 million aggregate
principal amount of the 2025 Notes occurred on October 22, 2018, and the Company completed the offering and sale of an additional
$22.5 million aggregate principal amount of the 2025 Notes on October 24, 2018, pursuant to the initial purchasers’ exercise in full of
their option to purchase additional notes.
Holders of the 2025 Notes are entitled to cash interest payments, which are payable semiannually in arrears on April 15 and October
15 of each year, beginning on April 15, 2019, at a rate equal to 1.50% per annum. The Company recorded interest expense of $2.6
million, $2.6 million and $0.5 million related to the 2025 Notes for the years ended December 31, 2020, 2019, and 2018, respectively.
The 2025 Notes will mature on October 15, 2025, unless earlier repurchased, redeemed or converted in accordance with their terms
prior to such date.
Prior to the close of business on the business day immediately preceding April 15, 2025, the 2025 Notes will be convertible at the
option of the holders only upon the satisfaction of certain conditions, as described in the indenture, dated as of October 22, 2018,
between the Company and U.S. Bank National Association, as trustee. At any time on or after April 15, 2025, until the close of
business on the business day immediately preceding the maturity date, holders may convert, at their option, all or any portion of their
notes at the conversion rate.
The 2025 Notes will be convertible at an initial conversion rate of 29.9135 shares of Class A common stock per $1,000 principal
amount of notes, which is equivalent to an initial conversion price of approximately $33.43 per share of the Company’s Class A
common stock. In the aggregate, the 2025 Notes are initially convertible into 5.2 million shares of the Company’s Class A common
stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole fundamental change or a
notice of redemption as described in the governing indenture). The conversion rate may be adjusted under certain circumstances. Upon
conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a
combination of cash and shares of the Company’s Class A common stock, at the Company’s election.
The option to settle the 2025 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of
the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2025 Notes
into a debt component and an equity component. The debt component was determined to be $100.7 million, before issuance costs,
based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $71.8
million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the
aggregate principal amount of the debt and the debt component. Issuance costs of $3.4 million and $2.5 million are allocated to the
debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $71.8 million, $3.4
million of issuance costs will be amortized to interest expense on the consolidated statements of operations and comprehensive income
(loss) using the effective interest method over the contractual term of the 2025 Notes. The equity component recorded within
additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. For the years ended
December 31, 2020, 2019 and 2018, the Company recorded $9.2 million, $8.5 million and $1.5 million, respectively, in interest
expense related to the amortization of the debt discount and the issuance costs allocated to the debt component.
Holders of the 2025 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental
change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. The Company may not redeem the 2025 Notes prior to October 20, 2022. The
Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after October 20, 2022, if the last reported sale
price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading
days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending
on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a
redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but
excluding, the redemption date.
2021 Notes
In December 2016, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2021
(the “2021 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act.
The 2021 Notes were issued at par for net proceeds of $120.4 million. We incurred $4.6 million of debt issuance costs in connection
with the 2021 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of
96
the 2021 Notes, since this method was not materially different from the effective interest method. The closing of the private placement
of the 2021 Notes occurred on December 5, 2016.
Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1
of each year, beginning on June 1, 2017, at a rate equal to 2.00% per annum. The 2021 Notes will mature on December 1, 2021, unless
earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require
the Company to repurchase all or part of their 2021 Notes upon the occurrence of a fundamental change at a price equal to 100.00% of
the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental
repurchase date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock.
We recorded interest expense of $1.7 million $2.5 million and $2.5 million for each of the years ended December 31, 2020, 2019 and
2018, respectively. We recorded non-cash interest expense related to the amortization of deferred financing costs of $0.6 million, $0.9
million and $0.9 million for each of the years ended December 31, 2020, 2019 and 2018, respectively.
The 2021 Notes are convertible into shares of the Company’s Class A common stock, based on an initial conversion rate of 41.6082
shares of Class A common stock per $1,000 principal amount of the 2021 Notes, which is equivalent to an initial conversion price of
approximately $24.03 per share of the Company’s Class A common stock. In the aggregate, the 2021 Notes are initially convertible
into 5.2 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in
connection with a make-whole provision upon a fundamental change under the governing indenture). The conversion rate may be
adjusted under certain circumstances.
The 2021 Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders at any time prior to the close of
business on the business day immediately preceding the maturity date. Upon conversion, we will deliver for each $1,000 principal
amount of notes converted a number of shares of our Class A common stock equal to the applicable conversion rate (together with a
cash payment in lieu of delivering any fractional share) on the third business day following the relevant conversion date.
In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024
Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. There was no cash consideration in these exchanges outside
of an aggregate cash payment of $2.5 million paid to exchanging noteholders. These exchanges were accounted for as an
extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment of $2.5 million
paid to exchanging noteholders.
In August 2020, we also repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on
extinguishment of debt.
Convertible Senior Notes Carrying Value
The 2025 Notes, 2024 Notes and 2021 Notes are recorded on our accompanying consolidated balance sheets at their net carrying
values as of December 31, 2020. However, the 2025 Notes, 2024 Notes and 2021 Notes are privately traded by qualified institutional
buyers (within the meaning of Rule 144A under the Securities Act) and their fair values are Level 2 inputs. The 2025 Notes, 2024
Notes and the 2021 Notes also have embedded conversion options and contingent interest provisions, which have not been recorded as
separate financial instruments. The following table summarizes the carrying value of the long-term convertible debt (in thousands):
97
2024 Notes
Carrying value
Unamortized debt discount and issuance costs
Principal amount
Remaining amortization period (years)
Fair value
2025 Notes
Carrying value
Unamortized debt discount and issuance costs
Principal amount
Remaining amortization period (years)
Fair value
2021 Notes
Carrying value
Unamortized issuance costs
Principal amount
Remaining amortization period (years)
Fair value
Note 10. Commitments and Contingencies
Commitments
Commitments to Equity-Method Investees
December 31,
2020
2019
81,462
35,589
117,051
3.9
153,220
$
$
$
—
—
—
—
116,349
56,151
172,500
4.8
147,488
$ 107,169
65,331
$ 172,500
5.8
$ 122,048
26,557
180
26,737
0.9
26,470
$ 123,237
1,763
$ 125,000
1.9
$ 111,250
$
$
$
$
$
$
$
$
$
During May 2020, the CHFS announced that EVH Passport was not awarded a Kentucky managed Medicaid contract for the next
contract period. As a result of EVH Passport not being awarded a new Medicaid contract with CHFS, the Company acquired the
Sponsors’ 30% ownership interest in EVH Passport for $20.0 million during the three months ended December 31, 2020. Refer to
Note 4 for additional information about the Passport transaction.
Letters of Credit
During the second quarter of 2020, the Company established an irrevocable standby letter of credit with a bank for $5.0 million for the
benefit of a regulatory authority. The letter of credit expired during the fourth quarter of 2020.
During the third quarter of 2019, the Company established an irrevocable standby letter of credit with a bank for $1.8 million for the
benefit of a regulatory authority and, as such, held $1.8 million in restricted cash and restricted investments as collateral as of both
December 31, 2020 and December 31, 2019, respectively. The original letter of credit expired on December 31, 2019 and was
automatically extended without amendment for an additional one-year period and will continue to automatically extend after each one-
year term from the expiry date, unless the bank elects not to extend beyond the initial or any extended expiry date.
Indemnifications
The Company’s customer agreements generally include a provision by which the Company agrees to defend its partners against third-
party claims (a) for death, bodily injury, or damage to personal property caused by Company negligence or willful misconduct, (b) by
former or current Company employees arising from such managed service agreements, (c) for intellectual property infringement under
specified conditions and (d) for Company violation of applicable laws, and to indemnify them against any damages and costs awarded
in connection with such claims. To date, the Company has not incurred any material costs as a result of such indemnities and has not
accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
During the second quarter of 2019, the Company and UHC, a then current customer (collectively the “Indemnitors”), pursuant to a
state requirement of all participating Medicaid Managed Care Organizations, entered into an indemnity agreement with a surety. The
surety issued a performance bond in the amount of $25.0 million to secure the customer’s performance under a contract to provide
98
Medicaid managed care services for the benefit of a beneficiary. Pursuant to the indemnity agreement, the Indemnitors are jointly and
severally liable to the surety in the maximum amount of the bond, plus certain costs of the surety, in the event of losses arising under
the bond. The bond’s effective date is July 1, 2019, and original expiry date was June 30, 2020. During the three months June 30,
2020, the expiry date was extended to December 31, 2020 and the bond was released in October 2020. To date, the Company has not
incurred any material costs as a result of the Indemnity Agreement and has not accrued any liabilities related to it in the accompanying
consolidated financial statements.
Pre-IPO Investor Registration Rights Agreement
We entered into a registration rights agreement with The Advisory Board, UPMC, TPG and another investor to register for sale under
the Securities Act shares of our Class A common stock, including those delivered in exchange for Class B common stock and Class B
common units. Subject to certain conditions and limitations, this agreement provides these investors with certain demand, piggyback
and shelf registration rights. The registration rights granted under the registration rights agreement will terminate upon the date the
holders of shares that are a party thereto no longer hold any such shares that are entitled to registration rights. Pursuant to our
contractual obligations under this agreement, we filed a registration statement on Form S-3 with the SEC on July 28, 2016, which was
declared effective on August 12, 2016.
We will pay all expenses relating to any demand, piggyback or shelf registration, other than underwriting discounts and commissions
and any transfer taxes, subject
includes customary
indemnification provisions, including indemnification of the participating holders of shares of Class A common stock and their
directors, officers and employees by us for any losses, claims, damages or liabilities in respect thereof and expenses to which such
holders may become subject under the Securities Act, state law or otherwise. We did not incur any expenses related to secondary
offerings or other sales of shares by our investor stockholders during the year ended December 31, 2020, 2019 and 2018, respectively.
to specified conditions and limitations. The registration rights agreement
Guarantees
In connection with the Molina Closing, the Company continued to provide administrative support services relating to the Passport
Medicaid Contract to Molina through the end of 2020. Following the Molina Closing, EVH Passport began working with regulatory
authorities including the Kentucky Department of Insurance (“KY DOI”) regarding the wind down of its operations throughout 2021.
As part of that wind down process, the Company, as the parent of EVH Passport, entered into a guarantee for the benefit of the KY
DOI to satisfy any EVH Passport liability or obligation in the event EVH Passport is not able to meet its wind down liabilities or
obligations.
As part of our strategy to support certain of our partners in the Next Generation Accountable Care Program, we entered into upside
and downside risk-sharing arrangements. Our downside risk-sharing arrangements are limited to our fees and are executed through our
wholly-owned captive insurance company. To satisfy the capital requirements of our captive insurance entity as well as state insurance
regulators, the Company entered into letters of credit of $4.7 million and $5.7 million as of December 31, 2020 and December 31,
2019, respectively, to secure potential losses related to insurance services. These amounts are in excess of our actuarial assessment of
loss.
During 2020, the Company entered into a guarantee agreement with the KY DOI whereby it agreed to provide support on behalf of
EVH Passport to maintain a minimum risk-based-capital of 150%. The maximum exposure is limited to amounts funded to return
EVH Passport to a risk-based-capital of 150%, however as of December 31, 2020, no amounts have been funded under this guarantee.
Reinsurance Agreements
At the Passport Closing, $16.2 million of the cash Passport Purchase Price was held back until such time as PHS I delivers to EVH
Passport certain owned real property and improvements free and clear of all encumbrances. In addition, at the Passport Closing, EVH
Passport and UHC entered into an agreement that provided for the administration and assumption of the financial risks by EVH
Passport of the D-SNP Business until such time as EVH Passport became certified as a Medicare Advantage Organization and the D-
SNP Business could be transferred to EVH Passport. On October 1, 2020, the D-SNP Business was transferred from UHC to EVH
Passport.
At the Molina Closing, Molina and EVH Passport entered into an agreement that provided for the assumption of the financial risks by
Molina of the D-SNP Business until such time as Molina’s Kentucky health plan becomes certified as a Medicare Advantage
Organization and the D-SNP Business is transferred Molina. The Company and EVH Passport continued to administer the D-SNP
Business until January 1, 2021, at which time Molina became responsible for its administration until the D-SNP Business is officially
transferred to Molina.
99
During the fourth quarter of 2017, the Company entered into a $10.0 million capital-only reinsurance agreement with NMHC which
expired on December 31, 2018. The purpose of the capital-only reinsurance was to provide balance sheet support to NMHC. There
was no uncertainty to the outcome of the agreement as there was no transfer of underwriting risk to Evolent or True Health, and
neither Evolent nor True Health was at risk for any cash payments on behalf of NMHC. As a result, this agreement did not qualify for
reinsurance accounting.
During the fourth quarter of 2018, the Company terminated its prior reinsurance agreement with NMHC and entered into a 15-month
quota-share reinsurance agreement with NMHC. Under the terms of the new reinsurance agreement, NMHC ceded 90% of its gross
premiums to the Company and the Company indemnified NMHC for 90% of its claims liability. The maximum amount of exposure to
the Company was capped at 105% of premiums ceded to the Company by NMHC. The new reinsurance agreement qualified for
reinsurance accounting due to the deemed risk transfer and, as such, the Company recorded the full amount of the gross reinsurance
premiums and claims assumed by the Company within premiums and claims expenses, respectively, and recorded claims-related
administrative expenses within selling, general and administrative expenses on our consolidated statements of operations and
comprehensive income (loss) from the legal effective date of the Reinsurance Agreement. Amounts owed to NMHC under the
reinsurance agreement are recorded within reserves for claims and performance-based arrangements on our consolidated balance
sheets. Amounts owed by NMHC under the reinsurance agreement are recorded within accounts receivable, net on our consolidated
balance sheets.
During the third quarter of 2019, the Company terminated the new reinsurance agreement with NMHC effective in the fourth quarter
of 2019, approximately one and a half months prior to its scheduled end.
The following summarizes premiums and claims assumed under the Reinsurance Agreements (in thousands):
Reinsurance premiums assumed
Reinsurance premiums ceded
Claims assumed
Claims ceded
Claims-related administrative expenses
Increase in reserves for claims and performance-based arrangements attributable to the
Reinsurance Agreement
Reserves for claims and performance-based arrangements attributable to the Reinsurance
Agreement at the beginning of the period
Impact of consolidation on payable for claims and performance-based arrangements
attributable to the Reinsurance Agreement
Reinsurance payments paid (received)
Payable for claims and performance-based arrangements attributable to the Reinsurance
Agreement at the end of the period
UPMC Reseller Agreement
2018
For the Year Ended December 31,
2019
$ 83,325
—
72,594
—
14,024
2020
$ 19,130
(3,275)
14,812
(422)
—
3,242
—
3,934
—
551
$
1,465
(3,293)
(1,243)
—
1,243
(502)
(3,039)
—
4,536
—
—
—
$
4,002
$
— $
1,243
The Company and UPMC are parties to a reseller, services and non-competition agreement, dated August 31, 2011, which was
amended and restated by the parties on June 27, 2013 (as amended through the date hereof, the “UPMC Reseller Agreement”). Under
the terms of the UPMC Reseller Agreement, UPMC has appointed the Company as a non-exclusive reseller of certain services, subject
to certain conditions and limitations specified in the UPMC Reseller Agreement. In consideration for the Company’s obligations under
the UPMC Reseller Agreement and subject to certain conditions described therein, UPMC has agreed not to sell certain products and
services directly to a defined list of 20 of the Company’s customers.
Contingencies
Tax Receivables Agreement
In connection with the Offering Reorganization, the Company entered into the Tax Receivables Agreement (the “TRA”) with certain
of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any,
that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as
tax benefits attributable to the future utilization of pre-IPO NOLs.
100
Due to the items noted above, and the fact that Evolent Health, Inc. is in a full valuation allowance position such that the deferred tax
assets related to the Company’s historical pre-IPO losses and tax basis increase benefit from exchanges have not been realized, the
Company has not recorded a liability pursuant to the TRA.
Litigation Matters
We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment claims.
When the likelihood of a loss contingency becomes probable and the amount of the loss can be reasonably estimated, we accrue a
liability for the loss contingency. We continue to review accruals and adjust them to reflect ongoing negotiations, settlements, rulings,
advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable
outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be
recorded in the period in which such determination is made.
On August 8, 2019, a shareholder of the Company filed a class action complaint against the Company, asserting claims under Section
10(b) and 20(a) of the Securities Exchange Act of 1934, in the United States District Court, Eastern District of Virginia, Alexandria
Division. An amended complaint was filed on January 10, 2020. The case, Plymouth County Retirement System v. Evolent Health,
Inc., Frank Williams, Nicholas McGrane, Seth Blackley, Christie Spencer, and Steven Wigginton, alleges that the Company’s
executives made false or misleading statements regarding its business with Passport. A second amended complaint, which was
substantially similar to the amended complaint, was filed on June 8, 2020. The Company filed a motion to dismiss in response on
June 22, 2020 and the briefing was completed on July 17, 2020; the parties are now waiting for the court’s decision. Under the Private
Securities Litigation Reform Act, PSLRA, all discovery in the case is stayed until the motion to dismiss is decided upon by the court.
Based on the Company’s investigation so far, we believe the case has little legal or factual merit. However, the outcome of any
litigation is uncertain, and at this early stage, the Company is currently unable to assess the probability of loss or estimate a range of
potential loss, if any, associated with this lawsuit.
The Company is not aware of any other legal proceedings or claims as of December 31, 2020, that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.
Credit and Concentration Risk
The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of
December 31, 2020, approximately 98.2% of our $361.6 million of cash and cash equivalents (including restricted cash) were held in
bank deposits with FDIC participating banks, approximately 1.6% were held in money market funds and 0.2% were held in
international banks. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it
often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not
experienced any realized losses on cash and cash equivalents to date.
The Company is also subject to significant concentration of accounts receivable risk as a substantial portion of our trade accounts
receivable is derived from a small number of our partners. The following table summarizes the partner included in our Services
segment who represented at least 10.0% of our consolidated trade accounts receivable for the periods presented:
Cook County Health and Hospitals System
As of December 31,
2019
2020
61.5 %
48.4 %
In addition, the Company is subject to significant concentration of revenue risk as a substantial portion of our revenue is derived from
a small number of contractual relationships with our operating partners.
101
The following table summarizes those customers of our Services segment who represented at least 10.0% of our consolidated revenue
for the periods presented:
Cook County Health and Hospitals Systems
Passport (1)
New Mexico Health Connections
1. Represents revenues from EVH Passport/UHC through the Molina Closing. Subsequent to the Molina Closing on September 1, 2020, the Company has not received
any material revenue from EVH Passport. However, as part of the Molina Closing, we entered into a new contract with Molina on similar terms to our prior services
contract with EVH Passport through December 31, 2020 which accounted for approximately 8.8% of our consolidated revenues for the year ended December 31,
2020.
20.3 %
16.8 %
*
2020
For the Year Ended December 31,
2019
*
18.7 %
10.9 %
2018
*
17.5 %
*
* Represents less than 10.0% of the respective balance
We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or
contract with any significant partner or multiple partners in the aggregate could have a material adverse effect on the Company's
financial condition and results of operations.
Note 11. Leases
The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business
operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease.
If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most
leases include one or more options to renew or may have a termination option. The Company determines whether these options are
reasonably certain to be exercised or not at the inception of the lease. In addition, some leases contain escalation clauses. The rent
expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the
term of the lease. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Further,
the Company treats all lease and non-lease components as a single combined lease component for all classes of underlying assets. The
Company also enters into sublease agreements for some of its leased office space. Immaterial rental income attributable to subleases is
offset against rent expense over the terms of the respective leases.
The Company leases office space and computer and other equipment under operating lease agreements expiring at various dates
through 2031. Under the lease agreements, in addition to base rent, the Company is generally responsible for operating and
maintenance costs and related fees. Several of these agreements include tenant improvement allowances, rent holidays or rent
escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability on our consolidated
balance sheets equal to the difference between rent expense and future minimum lease payments due. The rent expense related to these
items is recognized on a straight-line basis over the terms of the leases. The Company’s primary office location is in Arlington,
Virginia, which has served as its corporate headquarters since 2013. The Arlington, Virginia office lease expires in January 2032.
Certain leases acquired as part of the Valence Health transaction included existing sublease agreements for office locations in
Chicago, Illinois.
In connection with various lease agreements, the Company is required to maintain $3.5 million in letters of credit. As of December 31,
2020 and December 31, 2019, the Company held $3.5 million and $3.6 million in restricted cash and restricted investments on the
consolidated balance sheet as collateral for the letters of credit, respectively.
The following table summarizes our primary office leases as of December 31, 2020 (in thousands, other than term):
Arlington, VA
Riverside, IL
Pune, India
Brea, CA
Location
Lease Termination
Term (in years)
Future Minimum
Lease Commitments
38,675
11.1 $
10.3
2.7
1.4
44,605
2,318
1,555
102
Letter of Credit
Amount Required
$
1,579
232
—
—
The following table summarizes the components of our lease expense (in thousands):
Operating lease cost
Amortization of right-of-use assets
Interest expense
Variable lease cost
Total lease cost
For the Year Ended December 31,
2020
2019
$
$
$
15,848
299
3
5,097
21,247
$
13,903
598
26
4,177
18,704
As discussed in Note 3, the Company adopted ASU 2016-02 effective January 1, 2019, which resulted in accounting for leases under
ASC 842. Prior to the adoption, we accounted for leases under ASC 840. In accordance with ASC 840, rent expense, net of sublease
income, on operating leases for the year ended December 31, 2018 was $14.2 million. The Company does not have any material
capital leases.
Maturity of lease liabilities (in thousands) as of December 31, 2020, is as follows:
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less:
Interest
Operating lease
expense(1)
11,558
9,562
9,012
8,733
8,265
47,759
94,889
25,006
69,883
Present value of lease liabilities
(1) We have additional operating lease agreements for office space that have not yet commenced as of December 31, 2020. The minimum lease payments for those leases
are $0.7 million commencing in both 2021 and 2022.
$
Our weighted-average discount rate and our weighted remaining lease terms (in years) are as follows:
Weighted average discount rate
Weighted average remaining lease term
December 31,
2020
2019
6.44 %
6.25 %
9.4
9.9
103
Note 12. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per share available for common stockholders (in
thousands, except per share data):
Net loss
Less:
Net loss attributable to non-controlling interests
Net loss available for common shareholders - basic and diluted (1)
For the Year Ended December 31,
2019
$ (334,246) $ (305,580) $ (54,191)
2018
2020
—
(1,533)
$ (334,246) $ (301,971) $ (52,658)
(3,609)
Weighted-average common shares outstanding - basic and diluted (1)
84,928
82,364
77,338
Loss per common share
Basic and diluted
(0.68)
(1) Each Class B common unit of Evolent Health LLC can be exchanged (together with a corresponding number of shares of our Class B common stock) for one share of
our Class A common stock. Therefore, shares of our Class B common stock are not considered dilutive shares for the purposes of calculating our diluted earnings
(loss) per common share as related adjustment to net income (loss) available for common shareholders would equally offset the additional shares, resulting in the
same earnings (loss) per common share.
(3.67) $
(3.94) $
$
Anti-dilutive shares (in thousands) excluded from the calculation of weighted-average common shares presented above are presented
below:
For the Year Ended December 31,
2019
2018
2020
Exchangeable Class B common stock
Restricted stock units ("RSUs"), performance-based RSUs and leveraged stock units ("LSUs")
Stock options
Convertible senior notes
Total
Note 13. Stock-based Compensation
2011 and 2015 Equity Incentive Plans
—
797
1,141
11,206
13,144
1,399
813
1,324
10,361
13,897
1,831
1,027
2,517
6,176
11,551
The Company issues awards, including stock options, performance-based stock options, restricted stock LSUs and RSUs, under the
Evolent Health Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the 2015 Evolent Health, Inc. Omnibus Incentive
Compensation Plan (the “2015 Plan”). We assumed the 2011 Plan in connection with the merger of Evolent Health Holdings with and
into Evolent Health, Inc. The 2011 Plan allows for the grant of an array of equity-based and cash incentive awards to our directors,
employees and other service providers. The 2011 Plan was amended on September 23, 2013, to increase the number of shares
authorized to 9.1 million of the Company’s common stock. As of December 31, 2020 and 2019, 4.8 million stock options and 3.8
million shares of restricted stock have been issued, net of forfeitures, under the 2011 Plan.
On May 1, 2015, the Board of Directors approved and authorized the 2015 Plan which provides for the issuance of up to 6.0 million
shares of the Company’s Class A common stock to employees and non-employee directors of the Company and its consolidated
subsidiaries. The 2015 Plan was amended on June 13, 2018, to increase the number of shares authorized to 10.5 million. Upon
confirmation of the amended 2015 Plan, the 2011 Plan was automatically terminated and no further awards may be granted under the
2011 Plan. The 2011 Plan will continue to govern awards previously granted under the 2011 Plan. As of December 31, 2020 and 2019,
2.8 million and 2.8 million stock options and 4.7 million and 4.4 million RSUs have been issued, net of forfeitures, under the 2015
Plan.
We follow an employee model for our stock-based compensation as awards are granted in the stock of the Company to employees and
non-employee directors of the Company or its consolidated subsidiaries. Following the adoption of ASU 2018-07 during 2018, we
also follow the employee model for stock-based compensation for awards granted to acquire goods and services from non-employees.
104
Stock-based Compensation Expense
Total compensation expense by award type and line item in our consolidated financial statements was as follows (in thousands):
Award Type
Stock options
Performance-based stock options
RSUs
Performance-based RSUs
LSUs
Total compensation expense by award type
Line Item
Cost of revenue
Selling, general and administrative expenses
Total compensation expense by financial statement line item
For the Year Ended December 31,
2020
2019
2018
$
2,927
$
4,237
$
9,008
75
7,763
—
3,841
448
8,877
(388)
2,444
447
7,766
388
—
$
14,606
$
15,618
$
17,609
$
$
1,811
12,795
14,606
$
$
2,673
12,945
15,618
$
$
1,475
16,134
17,609
No stock-based compensation was capitalized as software development costs for the years ended December 31, 2020, 2019 and 2018.
Total unrecognized compensation expense (in thousands) and expected weighted-average period (in years) by award type for all of our
stock-based incentive plans were as follows:
Stock options
RSUs
LSUs
Total
Stock Options
As of December 31, 2020
Weighted
Average
Period
Unrecognized
Compensation
Expense
$
$
1,971
11,914
6,694
20,579
1.55
1.89
1.77
Other than the performance-based stock options described below, options awarded under the incentive compensation plans are
generally subject to a four-year graded service vesting period where 25% of the award vests after each year of service and have a
maximum term of 10 years. Information with respect to our options is presented in the following disclosures.
The option price assumptions used for our stock option awards were as follows:
Weighted-average fair value per option granted
Assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
For the Year Ended December 31,
2019
2018
$
6.52
$
6.30
6.25
51.6 %
1.9% - 2.7%
— %
6.25
38.9 %
2.6% - 2.9%
— %
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table
above. The dividend rate is based on the expected dividend rate during the expected life of the option. Expected volatility is based on
the historical volatility over the most recent period commensurate with the estimated expected term of the Company’s awards due to
the limited history of our own stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
the grant. The expected life represents the period of time the stock options are expected to be outstanding and is based on
the simplified method. Under the simplified method, the expected life of an option is presumed to be the midpoint between the vesting
105
date and the end of the contractual term. We used the simplified method due to the lack of sufficient historical exercise data to provide
a reasonable basis upon which to otherwise estimate the expected life of the stock options.
Information with respect to our stock options (in thousands), including weighted-average remaining contractual term (in years) and
aggregate intrinsic value (in thousands) was as follows:
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited
Outstanding as of December 31, 2020
Vested and expected to vest after December 31, 2020
Exercisable at December 31, 2020
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
9.44
—
4.75
14.80
9.32
9.17
8.48
6.01
$
(1,880)
5.25
4.95
4.63
$
$
$
12,578
27,095
26,228
Options
4,828
—
(416)
(342)
4,070
3,951
3,475
$
$
$
$
The total fair value of options vested during the years ended December 31, 2020, 2019 and 2018, was $3.6 million, $5.9 million and
$11.3 million, respectively. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $2.2 million, $0.6 million
and $25.1 million, respectively. We issue new shares to satisfy option exercises.
Performance-based stock option awards
In March 2016, the Company granted approximately 0.3 million performance-based options to certain employees to create incentives
for continued long-term success and to more closely align executive pay with our stockholders’ interests. Each of the grants is subject
to market-based vesting, as follows:
• one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A
common stock on the NYSE is at least $13.35 per share for a consecutive ninety days period;
• one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A
common stock on the NYSE is at least $16.43 per share for a consecutive ninety days period; and
• one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A
common stock on the NYSE is at least $19.51 per share for a consecutive ninety days period.
In addition, the percentage of options per tranche that has satisfied the market-based performance hurdle is also subject to a service
completion schedule. The aggregate percentage of options eligible to vest is based upon each of the service completions dates below:
• 50% of the shares subject to the option award vested on March 1, 2019, and
• 50% of the shares subject to the option award vested on March 1, 2020.
We measured the fair value of the performance-based stock options using a Monte Carlo simulation approach with the following
assumptions: risk-free interest rate of 1.83%, volatility of 65%, expected term of ten years and dividend yield of 0% as we do not
currently pay dividends nor expect to do so during the expected option term. These inputs resulted in a weighted-average fair value per
option granted of $6.68. During 2016 all of the average stock price milestones were achieved and therefore the awards are now only
subject to the service completion obligations.
106
Information with respect to our performance-based stock options (shares and aggregate intrinsic value shown in thousands, weighted-
average remaining contractual term shown in years) was as follows:
Outstanding as of December 31, 2019
Outstanding as of December 31, 2020
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Options
$
268
268
10.27
10.27
6.17 $
6.17
(326)
(326)
Vested and expected to vest after December 31, 2020
268
$
10.27
6.17 $
(326)
Restricted Stock Units
Other than the performance-based RSUs described below, and other than RSUs granted to our non-employee directors which have a
one year vesting period, RSUs awarded under the incentive compensation plans are generally subject to a four-year graded service
vesting period where 25% of the award vests after each year of service and are issued to the participants for no consideration. During
2018, we also granted certain RSUs with a one-year vesting period in conjunction with the New Century Health transaction.
Information with respect to our RSUs is presented below (in thousands, except for weighted-average grant-date fair value):
Outstanding as of December 31, 2019
Granted
Forfeited
Vested
Outstanding as of December 31, 2020
Weighted
Average
Grant Date
Fair Value
12.23
8.88
11.38
11.11
10.13
Total RSUs
1,493
$
1,202
(304)
(654)
1,737
$
During the years ended December 31, 2020, 2019 and 2018, we granted RSUs with a weighted-average grant date fair value of $8.88,
$10.66 and $16.12, respectively, which represents the weighted-average closing price of our common stock on the grant date.
The total fair value of RSUs vested during the years ended December 31, 2020, 2019 and 2018 was $6.1 million, $7.3 million and
$4.8 million, respectively.
Leveraged Stock Unit Awards
During 2020 and 2019, the Company granted 0.5 million and 0.7 million shares, respectively, to certain employees to create incentives
for continued long-term success and to more closely align executive pay with our stockholders’ interests. Each of the grants is subject
to share price-based vesting on the business day following the third anniversary of the grant date, as follows:
• If the stock price has increased by 33.3%, 75% of the shares will vest
• If the stock price has increased by 50%, 100% of the shares will vest
• If the stock price has increased by 100%, 150% of the shares will vest
• If the stock price has increased by 200%, 200% of the shares will vest (this is the maximum possible vest amount)
The price assumptions used for our leveraged stock unit awards were as follows:
Weighted-average fair value per leveraged stock unit granted
Assumptions:
Expected term
Expected volatility
Risk-free interest rate
Dividend yield
107
For the Year Ended December 31,
2020
2019
$
8.90
$
6.52
10 years
62.1 %
0.85%
— %
10 years
51.7 %
2.54%
— %
The fair value of leveraged stock units are determined using a Black-Scholes valuation model with the assumptions disclosed in the
table above. The dividend rate is based on the expected dividend rate during the expected life of the award. Expected volatility is
based on the historical volatility over the most recent period commensurate with the estimated expected term of the Company’s
awards due to the limited history of our own stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of the grant. The expected life represents the period of time the awards are expected to be outstanding and is based on
the simplified method. Under the simplified method, the expected life of an award is presumed to be the midpoint between the vesting
date and the end of the contractual term. We used the simplified method due to the lack of sufficient historical exercise data to provide
a reasonable basis upon which to otherwise estimate the expected life of the awards.
Information with respect to our leveraged stock unit awards (shares and aggregate intrinsic value shown in thousands, weighted-
average remaining contractual term shown in years) was as follows:
Outstanding as of December 31, 2020
Vested and expected to vest after December 31, 2020
Performance-based RSUs
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Leveraged
Stock Units
1,170
1,170
$
$
11.10
11.10
8.65 $
5,771
8.65 $
5,771
During 2018, in conjunction with the New Century Health transaction, we issued performance-based RSU awards to certain
employees of New Century Health that became Evolent Health employees following the transaction. The awards were to vest based on
the passage of time (18-month vesting period) and the achievement of certain operating results by New Century Health in 2019. Upon
completion of the vesting period, the award recipients would have received a variable number of Evolent Health Class A common
shares based on the predetermined monetary value of the award. Accordingly, these performance-based RSUs are recorded as liability
awards. As one of the vesting criteria was continued employment at Evolent Health, these performance-based RSUs were considered
compensation expense for the Company as opposed to contingent consideration related to the acquisition of New Century Health.
The maximum monetary value of the original performance-based award, provided New Century Health meets or exceeds the defined
operating results targets, was capped at $8.6 million. The fair value of the performance-based RSUs was estimated based on the real
options approach, a form of the income approach, which estimated the probability of New Century Health achieving certain operating
results during 2019. The most significant unobservable inputs used in the valuation of the performance-based RSUs was the risk-
neutral probability of New Century Health achieving the defined operating results target or meeting the operating results target cap. A
significant increase in either of those metrics, in isolation, would result in a significantly higher fair value of the performance-based
RSUs. In determining the fair value of the performance-based RSUs, we determined the risk-neutral probability of New Century
Health achieving operating results target was approximately 39% and we determined the risk-neutral probability of New Century
Health meeting the operating results target cap was approximately 24%.
In August 2019, in connection with the settlement of the earn-out payable to the former employees of New Century Health, the
Company canceled outstanding restricted stock units held by the former employees of New Century Health and issued new restricted
stock units with modified performance conditions. No other changes to the original grant terms were made. In accordance with ASC
Topic 718, Share Based Payments, canceled equity award accompanied by the concurrent grant of a replacement award shall be
accounted for as a modification of the terms of the canceled award. The modification was treated as a Type 1 modification, as the
awards were expected to vest under the original terms. Incremental compensation cost of $4.7 million was measured as the excess of
the fair value of the modified award over the fair value of the original award immediately before the terms were modified and will be
recorded over the remaining requisite service period. As of December 31, 2020 and 2019, the required performance conditions for the
performance-based RSUs were not met and no shares will be issued in conjunction with these awards.
Note 14. Income Taxes
An income tax expense (benefit) of $(3.6) million, $(21.5) million and less than $0.1 million was recognized for the years ended
December 31, 2020, 2019 and 2018, respectively.
Our loss before provision for income taxes was as follows (in thousands):
108
For the Year Ended December 31,
2019
2020
2018
Domestic
Foreign
Income (loss) before income taxes and non-controlling interests
Components of income tax expense (benefit) (in thousands) consist of the following:
$ (339,632) $ (328,161) $ (54,681)
1,833
1,045
530
$ (337,799) $ (327,116) $ (54,151)
For the Year Ended December 31,
2019
2020
2018
Current
Federal
State and local
Foreign
Total current tax expense (benefit)
Deferred
Federal
State and local
Foreign
Total deferred tax expense (benefit)
Change in valuation allowance
Total tax expense (benefit)
$
$
(3,338) $
200
721
(2,417)
$
1,175
14
399
1,588
458
9
251
718
(38,312)
(9,546)
(303)
(48,161)
47,025
(3,553) $
(27,334)
(5,046)
6
(32,374)
9,250
(21,536) $
(14,820)
(2,252)
(49)
(17,121)
16,443
40
As of December 31, 2020 and 2019, the Company has $3.9 million income taxes receivable and $0.6 million income taxes payable,
respectively, which is recorded in accrued liabilities on the consolidated balance sheets.
A reconciliation of the U.S. statutory tax rate to our effective tax rate and our statutory rate is presented below:
For the Year Ended December 31,
2019
2018
2020
U.S. statutory tax rate
U.S. state income taxes, net of U.S. federal tax benefit
Foreign earnings at other than U.S. rates
Change in valuation allowance
Benefit of net operating loss carryback provision
Non-deductible goodwill impairment
Non-controlling interest
Excess tax benefits on stock-based compensation
Federal and state research tax credits
Change in uncertain tax positions
Effect of investment in MHG
Change in state rate
Change in indefinite reinvestment assertion for domestic subsidiaries
Other, net
Effective rate
21.0 %
2.9 %
— %
(13.9)%
1.1 %
(11.2)%
— %
(0.3)%
— %
— %
— %
1.3 %
1.0 %
(0.9)%
1.0 %
21.0 %
4.4 %
(0.1)%
(2.8)%
— %
(15.8)%
(0.3)%
(0.2)%
— %
0.1 %
(1.4)%
— %
2.6 %
(0.8)%
6.7 %
21.0 %
3.6 %
(0.2)%
(30.4)%
— %
— %
(0.7)%
3.9 %
4.5 %
(1.1)%
— %
— %
— %
(0.7)%
(0.1)%
Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax
basis and are stated at the tax rates in effect when the temporary differences are expected to be recovered or settled.
109
Significant components of the Company’s deferred tax assets and liabilities (in thousands) were as follows:
Deferred Tax Assets
Start-up and organizational costs
Goodwill
Operating lease liabilities
Accrued expenses
Stock based compensation
Net operating loss carryforwards
Federal and state research tax credits
Fixed assets
Interest deduction limitation
Outside basis differences
Other
Subtotal
Valuation allowance
Total deferred tax assets
Deferred Tax Liabilities
Internally developed software costs
Intangible assets
Outside basis differences
Right-of-use assets - Operating
Contract fulfillment costs
Convertible debt
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Changes in our valuation allowance (in thousands) were as follows:
As of December 31,
2019
2020
$
$
117
23,534
15,963
7,488
8,530
123,604
1,828
131
2,452
197
8,640
192,484
(89,902)
102,582
12,973
48,857
—
13,122
6,375
20,411
—
1,572
103,310
$
(728) $
149
19,142
18,055
9,534
8,899
112,316
1,828
—
2,490
—
1,451
173,864
(50,815)
123,049
14,603
58,655
5,865
16,180
9,510
15,732
796
3,650
124,991
(1,942)
For the Year Ended December 31,
2019
2018
2020
Balance at beginning-of-year
Charged to costs and expenses
Charged to other accounts (1)
Balance at end-of-year
$
50,815
$
37,037
$
53,201
47,025
(7,938)
9,250
4,528
16,443
(32,607)
$
89,902
$
50,815
$
37,037
(1) Amounts charged to other accounts includes a decrease of $7.9 million, an increase of $4.5 million and a decrease of $32.6 million charged to additional paid-in-
capital for the years ended December 31, 2020, 2019 and 2018, respectively.
For the year ended December 31, 2020, the effective tax rate was 1% and the corresponding tax benefit recorded was $3.6 million. The
income tax benefit recorded by the Company in 2020 primarily relates to the impacts from the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”). On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act, was signed into law.
The CARES Act allows net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 to be carried back to each of the five
preceding taxable years for the recovery of previously paid federal income taxes. The Company recorded an income tax benefit related
to carrying back New Century Health’s 2018 NOL as part of a federal income tax refund claim for taxes it paid on income in 2013 and
2014. The remaining income tax provisions included in the CARES Act, apart from the aforementioned NOL carryback, did not have
a significant impact on the Company.
For the year ended December 31, 2019, the effective tax rate was 6.7%, and the corresponding tax benefit recorded was $21.5 million.
Our effective tax rate in 2019 was impacted by the tax expense for the impairment of non-deductible goodwill, change in valuation
allowance for current year losses, and offset in part by the tax effects resulting from the Company’s acquisition of all remaining Class
B units of Evolent Health LLC, resulting in it becoming a disregarded entity for U.S. federal and state income purposes on December
26, 2019. The change in Evolent Health LLC’s tax status resulted in a tax benefit from the reversal of the Company’s deferred tax
liability related to its investment in certain U.S. corporate subsidiaries through Evolent Health LLC, offset by an increase in valuation
110
allowance. In addition, the Company intends to file a consolidated tax return beginning January 1, 2020, which resulted in a tax
benefit offsetting the change in valuation allowance to the extent the deferred tax liabilities of our U.S. corporate subsidiaries can be
used as a source of future taxable income to support the Company’s deferred tax assets. Our valuation allowance assessment is made
without considering deferred tax liabilities of $1.9 million established with respect to certain indefinite-lived components that cannot
be utilized against indefinite-lived deferred tax assets or components that are expected to reverse outside of the net operating loss
carryover period, as these are not considered a source of future taxable income for realizing our deferred tax assets.
For the year ended December 31, 2018, the effective tax rate was (0.1)%, due to the impact of the valuation allowance recorded
against the Company’s net deferred tax assets, with the exception of indefinite lived components and those expected to reverse outside
of the net operating loss carryover period as part of the outside basis difference in our partnership interest in Evolent Health LLC.
As of December 31, 2020, the Company had $203.1 million of federal and $253.4 million of state NOL carryforwards available to
offset future taxable income that begin to expire in 2032 and 2022, respectively, and $288.5 million federal and $153.0 million of state
NOLs with an indefinite carryforward period, subject to a utilization limit of 80% of taxable income in any given year. However, as
realization of such tax benefit is not more likely than not, based on our evaluation, we have established a valuation allowance. Internal
Revenue Code Section 382 imposes limitations on the utilization of NOLs in the event of certain changes in ownership of the
Company, which may have occurred or could occur in the future. This could impose an annual limit on the Company’s ability to
utilize NOLs and could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in
effect.
As of December 31, 2020, the Company had $2.4 million and $0.3 million of research and development credits for federal and state
income tax purposes, which could expire unutilized beginning in 2037 and 2028, respectively. The Company has established valuation
allowance against those credits.
Changes in our unrecognized tax benefits (in thousands) were as follows:
Balance at beginning-of-year
Gross increases - tax positions in prior period
Gross decreases - tax positions in prior period
Lapse of statute of limitations
Balance at end-of-year
For the Year Ended
December 31,
2020
2019
2018
$
753
$
934
$
—
—
—
—
(75)
(181)
$
678
$
753
$
762
934
(762)
—
934
We are subject to taxation in various jurisdictions in the U.S. and India. Tax years 2011 an all subsequent periods remain subject to
examination by the U.S. federal and state taxing jurisdictions due to the availability of NOL carryforwards. Included in the balance of
unrecognized tax benefits as of December 31, 2020, are $0.7 million of tax benefits that, if recognized, would not affect the overall
effective tax rate, due to the offsetting impact on the Company’s valuation allowance. The Company has not recognized interest and
penalties related to uncertain tax positions due to the current NOL position. The Company had recognized $0.8 million of uncertain
tax positions as of December 31, 2019, and $0.9 million as of December 31, 2018. The Company and its subsidiaries are not currently
subject to income tax audits in any U.S. state or local jurisdiction, or any foreign jurisdiction, for any tax year.
Tax Receivables Agreement
Pursuant to the Offering Reorganization, Class B Exchanges increased our tax basis in our share of Evolent Health LLC’s tangible and
intangible assets. These increases in tax basis increased our depreciation and amortization deductions and create other tax benefits and,
therefore, may reduce the amount of tax that we would otherwise be required to pay in the future. In addition, certain NOLs of Evolent
Health Holdings (and of an affiliate of TPG) are available to us as a result of the Offering Reorganization.
In connection with the Offering Reorganization, we entered into the TRA with the holders of Class B common units. The agreement
requires us to pay to such holders 85% of the cash savings, if any, in U.S. federal, state and local and foreign income tax (as
applicable) we realize as a result of any deductions attributable to future increases in tax basis following the Class B Exchanges
(calculated assuming that any post-offering transfer of Class B common units had not occurred) or deductions attributable to imputed
interest or future increases in tax basis following payments made under the TRA. We are accounting for these payments as contingent
liabilities and will recognize them in our Consolidated Statements of Operations and Comprehensive Income (Loss) when their
realization is probable. Additionally, pursuant to the same agreement we will pay the former stockholders of Evolent Health Holdings
85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of the
111
utilization of the NOLs of Evolent Health Holdings (and the affiliate of TPG) attributable to periods prior to the Offering
Reorganization, approximately $79.3 million, as well as deductions attributable to imputed interest on any payments made under the
agreement.
We will benefit from the remaining 15% of any realized cash savings. The TRA was effective upon the completion of the Offering
Reorganization and will remain in effect until all such tax benefits have been used or expired, or until the agreement is terminated.
See Note 10 for additional discussion of the implications of the TRA.
Note 15. Employee Benefit Plans
We sponsor a tax-qualified 401(k) retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on
a tax advantaged basis. We make matching contributions to the plan in accordance with the plan documents and various limitations
under Section 401(a) of the Internal Revenue Code of 1986, as amended. The Company made $6.4 million, $2.6 million and
$8.6 million in contributions to the 401(k) plan for the years ended December 31, 2020, 2019 and 2018, respectively.
Note 16. Investments in and Advances to Equity Method Investees
The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. The
Company evaluates its interests in these entities to determine whether they meet the definition of a VIE and whether the Company is
required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to
direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could
potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be
significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the
Company's involvement with the VIE. The Company has determined that its interests in these entities meet the definition of a variable
interest, however, the Company is not the primary beneficiary since it does not have the power to direct activities, therefore, the
Company did not consolidate the VIEs.
As of December 31, 2020 and December 31, 2019, the Company’s economic interests in its equity method investments ranged
between 4% and 38%, and 4% and 70%, respectively, and voting interests in its equity method investments ranged between 25% and
40%, and 25% and 57%, respectively. The Company determined that it has significant influence over these entities but that it does not
have control over any of the entities. Accordingly, the investments are accounted for under the equity method of accounting and the
Company is allocated its proportional share of the entities’ earnings and losses for each reporting period. The Company’s proportional
share of the (gain) losses from these investments was approximately $(10.0) million, $9.5 million and $4.7 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
The Company signed services agreements with certain of the aforementioned entities to provide certain management, operational and
support services to help manage elements of their service offerings. Revenue related to these services agreements were $192.8 million,
$41.5 million and $10.7 million for the years ended December 31, 2020, 2019 and 2018 respectively.
Passport
At the Passport Closing, we paid approximately $70.0 million in cash and issued a 30% equity interest in the EVH Passport to the
Sponsors. As a result of the Molina Closing, the Company no longer accounts for its investment in EVH Passport under the equity
method of accounting. Refer to Note 4 for additional information about the investment in EVH Passport.
Unconsolidated VIEs
Global
On May 24, 2019, we completed the acquisition of approximately a 45% ownership interest in MHG, the sole owner of Momentum
Health Acquisition, Inc. (“MHA”), which is the sole owner of GlobalHealth Holdings, LLC (“GHH”), which is the sole owner of
GlobalHealth, Inc., a health maintenance organization based in the State of Oklahoma that offers, among other things, Medicare
Advantage products in the State of Oklahoma. At closing, we contributed approximately $15.0 million in cash and 1,577,841 shares of
our Class A common stock to MHG, together with certain of our other assets. Upon the contribution, the Company recorded a $9.6
million non-cash gain in gain (loss) on disposal of assets and consolidation on the consolidated statements of operations. We also
recognized a short-term contingent consideration liability fair valued at $5.9 million at the time of the transaction. At the closing of the
transaction, our economic interest in GlobalHealth was approximately 45% and our voting interest was approximately 29%.
As of March 31, 2020, the Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response to the COVID-19
pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 15, 2020. It would otherwise be
112
placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to
increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of
the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13,
2020. As a result of this transaction, we recorded a non-cash impairment charge of approximately $47.1 million, representing the total
value of our investment, in impairment of equity method investments on the consolidated statements of operations for the three months
ended March 31, 2020.
The following table represents the carrying value of the associated assets and liabilities and the associated maximum loss exposure for
the unconsolidated VIEs as of the date indicated (in thousands):
Assets:
Current assets
Non current assets
Total assets
Liabilities:
Current liabilities
Non current liabilities
Total liabilities
Investment carrying value
Loan and interest receivable
Guarantee
Maximum exposure
December 31, 2019
EVH
Passport
Momentum
Health
Group, LLC
$
$
$
$
$ 271,894
577
$ 272,471
181,206
40
$ 181,246
$ 70,000
41,387
25,000
50,729
39,259
89,988
55,442
44,650
100,092
46,456
—
—
$ 136,387
$
46,456
Summarized Financial Information of Equity Method Investees
The following table represents the aggregated summarized financial information as of and for the dates indicated (in thousands):
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Non-controlling interests
Revenue
Operating income (loss)
Net income (loss)
Net income (loss) attributable to entity
Note 17. Non-controlling Interests
$
December 31,
2020
2019
$
69,218
3,859
54,885
20,693
2,671
356,085
43,744
267,300
57,599
70,535
For the Year Ended December 31,
2018
2019
2020
$1,766,641 $
8,112
6,606
5,632
$
387,960
(60,572)
(73,685)
(23,348)
3,591
(13,085)
(13,066)
(4,099)
Immediately following the Offering Reorganization and IPO in May 2015, the Company owned 70.3% of Evolent Health LLC. The
Company’s ownership percentage changes with the issuance of Class A or Class B common stock and Class B Exchanges. In order to
account for any changes in the Company’s ownership of Evolent Health LLC, we record a reclassification of equity between non-
controlling interests and shareholders’ equity attributable to Evolent Health, Inc.
113
2020
On September 1, 2020, in connection with the consolidation of EVH Passport, the Company recognized a $25.7 million non-
controlling interest for the Sponsors’ 30% equity interest in EVH Passport which represented the fair value of the non-controlling
interest as of the date of consolidation. Pursuant to the shareholders’ agreement with the Sponsors, the Company was required to
acquire the Sponsors’ 30% ownership interest for $20.0 million on or prior to December 31, 2021. On November 16, 2020, the
Company acquired the Sponsors’ 30% equity interest and reclassified the non-controlling interests into shareholders’ equity
attributable to Evolent Health, Inc. As a result of this transaction, the Company recorded a $5.7 million gain on consolidation for the
year ended December 31, 2020 in gain (loss) on disposal of assets and consolidation on the consolidated statements of operations.
2019
During 2019, all remaining holders of Class B units executed Class B Exchanges. These Class B Exchanges resulted in the issuance of
3.1 million shares of the Company’s Class A common stock. As a result of these Class B Exchanges and Evolent Health LLC’s
cancellation of the related Class B units, the Company’s economic interest in Evolent Health LLC increased to 100% immediately
following the final Class B Exchange during the quarter, and, accordingly, we reclassified a portion of our non-controlling interests
into shareholders’ equity attributable to Evolent Health, Inc. The Company paid $1.3 million on behalf of certain holders of Class B
units to satisfy income tax obligations related to certain exchanges.
In May 2019, the Company issued 1.6 million Class A common shares as part of the consideration for the GlobalHealth transaction.
For each share of Class A common stock issued by Evolent Health, Inc., the Company received a corresponding Class A common unit
from Evolent Health LLC. As a result of the Class A common units (and corresponding Class A common shares) issued as part of the
GlobalHealth transaction, the Company’s economic interest in Evolent Health LLC increased from 99.1% to 99.2%, immediately
following the transaction.
2018
During the year ended December 31, 2018, the Company completed the March 2018 Private Sale. The shares sold in the March 2018
Private Sale consisted of 1.2 million existing shares of the Company’s Class A common stock owned and held by The Advisory Board
and 1.8 million newly-issued shares of the Company’s Class A common stock received by The Advisory Board pursuant to a Class B
Exchange.
As a result of this Class B Exchange and Evolent Health LLC’s cancellation of the Class B common units during the March 2018
Private Sale, the Company’s economic interest in Evolent Health LLC increased from 96.6% to 98.9% immediately following the
March 2018 Private Sale and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity
attributable to Evolent Health, Inc.
Also, during the year ended December 31, 2018, the Company issued 3.1 million shares of Evolent Health LLC’s Class B common
units and an equal number of the Company’s Class B common shares as part of the consideration for the New Century Health
transaction. The Class B common units, together with a corresponding number of shares of the Company’s Class B common stock,
can be exchanged for an equivalent number of shares of the Company’s Class A common stock. As a result of the Class B common
units (and corresponding Class B common shares) issued as part of the New Century Health transaction, the Company’s economic
interest in Evolent Health LLC decreased from 99.0% to 95.3%, immediately following the acquisition.
In addition, the Company completed the November 2018 Private Sales during 2018. The shares sold in the November 2018 Private
Sales consisted of 0.1 million existing shares of the Company’s Class A common stock owned by TPG and 0.7 million newly-issued
shares of the Company’s Class A common stock received by TPG pursuant to Class B Exchanges. As a result of these Class B
Exchanges and Evolent Health LLC’s cancellation of the Class B common units during the November 2018 Private Sales, the
Company’s economic interest in Evolent Health LLC increased from 95.3% to 96.1% immediately following the November 2018
Private Sales.
114
Changes in non-controlling interests (in thousands) for the periods presented were as follows:
Non-controlling interests balance as of beginning of period
Decrease in non-controlling interests as a result of Class B Exchanges
Issuance of non-controlling interest
Net loss attributable to non-controlling interests
Disposal of assets
Redemption of Sponsor’s equity
Reclassification of non-controlling interests
Non-controlling interests balance as of end of period
Note 18. Fair Value Measurement
For the Year Ended
December 31,
2020
$
6,689
—
25,749
—
(6,689)
(25,749)
—
— $
2019
45,532
(42,377)
6,500
(3,609)
—
—
643
6,689
$
$
GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price)
assuming an orderly transaction in the most advantageous market at the measurement date. GAAP also establishes a hierarchical
disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:
•
•
•
Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of
the reporting date;
Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or
indirectly observable as of the reporting date and the fair value can be determined through the use of models or other
valuation methodologies; and
Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market
activity for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to
the particular asset or liability being measured.
Recurring Fair Value Measurements
In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following
table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
Assets
Cash and cash equivalents (1)
Total fair value of assets measured on a recurring basis
Liabilities
Warrants (3)
Total fair value of liabilities measured on a recurring basis
Level 1
December 31, 2020
Level 3
Level 2
Total
5,877
5,877
$
$
— $
— $
— $
— $
5,877
5,877
— $
— $
— $
— $
13,730
13,730
$
$
13,730
13,730
$
$
$
$
115
Assets
Cash and cash equivalents (1)
Restricted cash and restricted investments (1)
Total fair value of assets measured on a recurring basis
Liabilities
Contingent consideration (2)
Warrants (3)
Total fair value of liabilities measured on a recurring basis
Level 1
December 31, 2019
Level 3
Level 2
Total
3,698
1,004
4,702
$
$
— $
—
— $
— $
—
— $
3,698
1,004
4,702
— $
—
— $
— $
—
— $
9,883
7,092
16,975
$
$
9,883
7,092
16,975
$
$
$
$
(1) Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of December 31, 2020 and
December 31, 2019, as presented in the tables above.
(2) Represents the fair value of earn-out consideration related to the Passport, GlobalHealth, Inc. and other transactions, as described in Note 4.
(3) Represents the fair value of 1,513,786 shares issuable under the warrant agreements discussed in Note 9.
The Company recognizes any transfers between levels within the hierarchy as of the beginning of the reporting period. There were no
transfers between fair value levels for the years ended December 31, 2020 and 2019, respectively.
In the absence of observable market prices, the fair value is based on the best information available and involves a significant degree
of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for
non-performance and liquidity risks.
In conjunction with the Credit Agreement discussed in Note 9, the Company entered into warrant agreements whereby it agreed to sell
to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock. The fair value of the warrants was estimated
based on the Black-Scholes model which incorporates the constant price variation of the stock, the time value of money, the option's
strike price, and the time to the option's expiry. The significant unobservable inputs used in the fair value measurement of the warrants
are the stock price volatility and annual risk free rate. A significant increase in the stock price or discount rate in isolation would result
in a significantly higher fair value of the contingent consideration.
The changes in our liabilities measured at fair value for which the Company uses Level 3 inputs to determine fair value are as follows
(in thousands):
Balance as of beginning of period
Additions
Settlements
Realized and unrealized gains (losses), net
Balance as of end of period
For the Year Ended
December 31,
2020
2019
$
$
16,975
—
(3,500)
255
13,730
$
$
8,800
12,992
(800)
(4,017)
16,975
The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3
fair value measurements as of the periods presented:
Fair
Value
Valuation
Technique
Significant
Unobservable Inputs
Assumption or
Input Ranges
December 31, 2020
Warrants
$ 13,730
Black-Scholes
Stock price volatility
Annual risk free rate
62.2 %
0.2 %
116
Passport contingent
consideration
GlobalHealth contingent
consideration
Other contingent
considerations
Warrants
Fair
Value
Valuation
Technique
Significant
Unobservable Inputs
Assumption or
Input Ranges
December 31, 2019
$
3,700
Real options approach Risk-adjusted recurring revenue CAGR
Discount rate/time value
93.9 % (1)
4.8% - 5.3%
$
$
$
5,200 Monte Carlo simulation Stock price volatility
80.0 % (2)
983 Management estimate Adjusted EBITDA
$
19,235
7,092
Black-Scholes
Stock price volatility
Annual risk free rate
55.0 %
1.7 %
(1) The risk-adjusted recurring revenue CAGR is calculated over the five-year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the
calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenue of $1.0 million, resulting in a higher growth rate.
(2) Equity volatility based on Evolent’s daily stock price returns for a look-back period corresponding to the time until the second test date. The large one-day stock
price drop on November 27, 2019, was excluded from the volatility calculation.
Nonrecurring Fair Value Measurements
In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and
liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring
basis as a result of impairment charges. This includes assets and liabilities recorded in business combinations or asset acquisitions,
goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not
carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current
carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value.
Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents (those not held in a money market fund), restricted cash, receivables, prepaid
expenses, accounts payable, accrued liabilities and accrued compensation approximate their fair values because of the relatively short-
term maturities of these items and financial instruments.
See Note 9 for information regarding the fair value of the 2024 Notes, 2025 Notes and 2021 Notes.
Note 19. Related Parties
The entities described below are considered related parties and the balances and/or transactions with them are reported in our
consolidated financial statements.
As discussed in Note 16, the Company had economic interests in several entities that were previously accounted for under the equity
method of accounting, including EVH Passport. The Company has allocated its proportional share of the investees’ earnings and
losses each reporting period. In addition, Evolent has entered into services agreements with certain of the entities to provide certain
management, operational and support services to help the entities manage elements of their service offerings.
The Company also works closely with UPMC, one of its founding investors. The Company’s relationship with UPMC is a
subcontractor relationship where UPMC has agreed to execute certain tasks (primarily TPA services) relating to certain customer
commitments. We also conduct business with a company in which UPMC holds a significant equity interest.
117
The following table presents assets and liabilities attributable to our related parties (in thousands):
Assets
Accounts receivable, net
Prepaid expenses and other current assets
Customer advance for regulatory capital requirements, net of allowances
Prepaid expenses and other noncurrent assets, net of allowances
Liabilities
Accounts payable
Accrued liabilities
Reserve for claims and performance-based arrangements
December 31,
2020
2019
$
9,474
51
—
4,554
2,509
$
1,520
435
8,781
1,592
40,000
2,709
6,429
2,583
4,264
$
$
The following table presents revenues and expenses attributable to our related parties (in thousands):
For the Year Ended December 31,
2019
2018
2020
Revenue
Transformation services
Platform and operations services
Expenses
$
5,416
$
4,009
$
10,540
226,339
60,325
37,490
Cost of revenue (exclusive of depreciation and amortization expenses)
Selling, general and administrative expenses
2,863
113
28,954
991
9,451
917
118
Note 20 - Repositioning and Other Changes
We continually assess opportunities to improve operational effectiveness and efficiency to better align our expenses with revenues,
while continuing to make investments in our solutions, systems and people that we believe are important to our long-term goals.
Across 2020, we divested or agreed to divest a majority of our health plan assets, including certain assets of EVH Passport, which
represented a significant revenue stream for the Company. In parallel with these divestitures, we contracted with a third-party vendor
to review our operating model and organizational design in order to improve our profitability, create value through our solutions and
invest in strategic opportunities in future periods.
In the fourth quarter of 2020, we committed to certain operational efficiency and profitability actions that we are taking in order to
accomplish these objectives (“Repositioning Plan”). These actions included making organizational changes across our Services
segment as well as other profitability initiatives expected to result in reductions in force, re-aligning of resources as well as other
potential operational efficiency and cost-reduction initiatives. The Repositioning Plan is expected to continue through the fourth
quarter of 2021.
The Company recorded approximately $1.3 million of repositioning costs in selling, general and administrative expenses during the
year ended December 31, 2020 in connection with the Repositioning Plan. The following tables provide a summary of our total costs
associated with the Repositioning Plan for the year ended December 31, 2020, by major type of cost:
Incurred For the Year
Ended December 31,
2020
Total Amount Expected
to be Incurred in the
Repositioning Plan
Cumulative Amount
Incurred through
December 31, 2020
Severance and termination benefits
Office space consolidation
Professional services
Total
$
$
— $
—
1,275
1,275 $
2,500 $
2,100
4,200
8,800 $
—
—
1,275
1,275
119
Note 21. Segment Reporting
We define our reportable segments based on the way the CODM, currently the chief executive officer, manages the operations for
purposes of allocating resources and assessing performance. We classify our operations into two reportable segments as follows:
• Services, which consists of two clinical solutions: (i) total cost of care management, and (ii) specialty care management services,
and one administrative solution: comprehensive health plan administrative services; and
• True Health, which consists of a commercial health plan we operate in New Mexico that focuses on individual and family as well
as small and large group businesses as well as the Federal Employee Health Benefits Program.
In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions
are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that
is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.
The CODM uses revenue in accordance with U.S. GAAP and Adjusted EBITDA as the relevant segment performance measures to
evaluate the performance of the segments and allocate resources.
Adjusted EBITDA is a segment performance financial measure that offers a useful view of the overall operation of our businesses and
may be different than similarly-titled segment performance financial measures used by other companies.
Adjusted EBITDA is defined as EBITDA (net loss attributable to common shareholders of Evolent Health, Inc. before interest income,
interest expense, (provision) benefit for income taxes, depreciation and amortization expenses), adjusted to exclude equity method
investment impairment, loss on extinguishment of debt, gain (loss) from equity method investees, gain (loss) on disposal of assets and
consolidation, goodwill impairment, changes in fair value of contingent consideration and indemnification asset, other income
(expense), net, net loss attributable to non-controlling interests, ASC 606 transition adjustments, purchase accounting adjustments,
repositioning costs, stock-based compensation expense, severance costs, amortization of contract cost assets and acquisition-related
costs.
Management considers revenue and Adjusted EBITDA to be the appropriate metrics to evaluate and compare the ongoing operating
performance of our segments on a consistent basis across reporting periods as they eliminate the effect of items which are not
indicative of each segment's core operating performance.
The following tables present our segment information (in thousands):
120
Revenue
For the Year Ended December 31, 2020
Services:
Transformation services
Platform and operations services
Services revenue
True Health:
Premiums
Total revenue
For the Year Ended December 31, 2019
Services:
Transformation services
Platform and operations services
Services revenue
True Health:
Premiums
Total revenue
For the Year Ended December 31, 2018
Services:
Transformation services
Platform and operations services
Services revenue
True Health:
Premiums
Total revenue
For the Year Ended December 31, 2020
Adjusted EBITDA
For the Year Ended December 31, 2019
Adjusted EBITDA
For the Year Ended December 31, 2018
Adjusted EBITDA
Services
True
Health
Intersegment
Eliminations
Consolidated
$
$
$
$
$
$
11,990
913,005
924,995
—
924,995
15,203
671,919
687,122
—
687,122
32,916
514,515
547,431
—
547,431
$
$
$
$
$
$
— $
—
—
— $
(19,939)
(19,939)
11,990
893,066
905,056
117,579
117,579
$
(202)
(20,141) $
117,377
1,022,433
— $
—
—
— $
(12,481)
(12,481)
172,722
172,722
$
(980)
(13,461) $
15,203
659,438
674,641
171,742
846,383
— $
—
—
— $
(14,325)
(14,325)
32,916
500,190
533,106
94,763
94,763
$
(806)
(15,131) $
93,957
627,063
Services
True
Health
Segments Total
$
48,573
$
(7,137) $
41,436
$
(14,667) $
3,699
$
(10,968)
$
21,310
$
1,915
$
23,225
121
The following table presents our reconciliation of segments total Adjusted EBITDA to net loss attributable to Evolent Health, Inc. (in
thousands):
Net loss attributable to common shareholders of Evolent Health, Inc.
Less:
Interest income
Interest expense
(Provision) benefit for income taxes
Depreciation and amortization expenses
Equity method investment impairment
Loss on extinguishment of debt, net
Gain (loss) from equity method investees
Gain (loss) on disposal of assets and consolidation
Goodwill impairment
Change in fair value of contingent consideration and indemnification asset
Other income (expense), net
Net loss attributable to non-controlling interests
ASC 606 transition adjustments
Purchase accounting adjustments
Repositioning costs
Stock-based compensation expense
Severance costs
Amortization of contract cost assets
Acquisition costs
Adjusted EBITDA
For the Year Ended December 31,
2019
$ (334,246) $ (301,971) $ (52,658)
2018
2020
3,164
(28,337)
3,553
(61,475)
(47,133)
(4,789)
10,039
(698)
(215,100)
(3,860)
(119)
—
—
—
(1,275)
(14,606)
(8,986)
(3,944)
(2,116)
41,436
3,987
(14,534)
21,536
(60,913)
—
—
(9,465)
9,600
(199,800)
3,997
(492)
3,609
—
(1,915)
—
(15,618)
(17,350)
(2,876)
(10,769)
$ (10,968) $
$
3,440
(5,484)
(40)
(44,515)
—
—
(4,736)
—
—
4,104
109
1,533
(4,498)
(861)
—
(17,609)
(2,205)
(2,456)
(2,665)
23,225
Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset
information by segment.
Note 22. Reserve for Claims and Performance-Based Arrangements
The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based
arrangements related to its total cost of care and specialty care management services. The Company also maintained reserves for
claims incurred but not paid related to its capitation arrangement and for its health plan, True Health, in New Mexico.
Reserves for claims and performance-based arrangements for our Services and True Health segments reflect actual payments under
performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected
development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care
expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care
professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed under the
reinsurance agreements, as discussed further in Note 10.
The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the
actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial
standards of practice that the liabilities be adequate under moderately adverse conditions.
This liability predominately consists of incurred but not reported amounts and reported claims in process including expected
development on reported claims. The liability, for reserves related to its total cost of care and specialty care management services and
True Health, is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims
were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual
claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.
The Company’s policy for reserves related to its total cost of care and specialty care management services and True Health is to use
historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of
completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of
122
completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful
indicator for the current period.
For more recent months, and for newer lines of business where there is not sufficient paid claims history to develop completion
factors, the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflects expected claim
payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by
medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including
inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer
demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for
the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.
For each reporting period, the Company compares key assumptions used to establish the reserves for claims and performance-based
arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based
arrangements are adjusted through current period net income. Additionally, the Company evaluates expected future developments and
emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical
accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments.
These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost
trends.
Activity in reserves for claims and performance-based arrangements for the years ended December 31, 2020 and 2019, was as follows
(in thousands):
For the Year Ended December 31,
Services
(1)(2)
$
54,510
2020
True
Health (2)
6,640
$
Total
$ 61,150
Services (1)
17,715
$
2019
True
Health (2)
9,880
$
Total
$ 27,595
Beginning balance
Incurred costs related to current year
Incurred costs related to prior year
Paid costs related to current year
Paid costs related to prior year
Change during the year
420,597
2,878
464,571
9,598
(50,694)
89,008
799
79,640
6,949
3,218
509,605
3,677
544,211
16,547
(47,476)
Impact of consolidation on reserves for claims
and performance-based arrangements
Other adjustments (3)
Ending balance
164,297
10,714
178,827
$
$
— 164,297
—
10,714
$ 188,685
9,858
$
$
267,064
(334)
220,050
8,165
38,515
$ 136,303
(529)
61,621
8,092
66,061
$ 403,367
(863)
281,671
16,257
104,576
—
(1,720)
54,510
—
(69,301)
6,640
—
(71,021)
$ 61,150
$
(1) Costs incurred to provide specialty care management and EVH Passport are recorded within cost of revenue in our statement of operations. EVH Passport
operations are not included in 2019 activity.
(2) There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is
the number of customers for whom an insured medical claim was paid. The number of claims processed for the Services and True Health segments for years ended
December 31, 2020 and 2019 were 2,279,228 and 317,187, respectively.
(3) Other adjustments to reserves for claims and performance-based arrangements for Services reflect changes in accrual for amounts payable to facilities and amounts
owed to our payer partners for claims paid on our behalf. Other adjustments related to EVH Passport and our True Health segment represent premiums received less
administrative expenses related to the reinsurance agreements. Refer to Note 10 for additional information about the reinsurance agreements.
Note 23. Investments
Our investments held by wholly-owned subsidiaries other than EVH Passport are classified as held-to-maturity as we have both the
intent and ability to hold the investments until their individual maturities. Investments held by EVH Passport are classified as
available-for-sale upon their consolidation. The amortized cost, gross unrealized gains and losses, and fair value of our investments as
measured using Level 2 inputs as of December 31, 2020 and 2019 (in thousands) were as follows:
123
December 31, 2020
Gross
Unrealized
December 31, 2019
Gross
Unrealized
U.S. Treasury bills
Corporate bonds
Collateralized mortgage obligations
Corporate stock
Yankees
Total investments
Amortized
Cost
$
$
8,909
1,707
3,433
130
598
14,777
Gains Losses
$ 384
132
149
—
49
$ 714
Fair
Value
$ — $ 9,293
1,839
3,582
130
647
$ — $15,491
—
—
—
—
$
Amortized
Cost
10,784
1,705
5,472
—
597
18,558
$
Gains Losses
$ 270
70
56
—
30
$ 426
Fair
Value
$ — $11,054
1,775
—
5,523
(5)
—
—
—
627
(5) $18,979
$
The amortized cost and fair value of our investments by contractual maturities as of December 31, 2020 and 2019 (in thousands) were
as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Total investments
December 31, 2020
December 31, 2019
Amortized Cost
3,858
$
10,919
—
14,777
$
$
$
Fair Value
3,915
11,576
—
15,491
Amortized Cost
1,807
$
16,121
630
18,558
$
$
$
Fair Value
1,810
16,542
627
18,979
When a held-to-maturity investment is in an unrealized loss position, we assess whether or not we expect to recover the entire cost
basis of the security, based on our best estimate of the present value of cash flows expected to be collected from the debt security.
Factors considered in our analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss
position, credit worthiness and forecasted performance of the investee. In cases where the estimated present value of future cash flows
is less than our cost basis, we recognize an other than temporary impairment and write the investment down to its fair value. The new
cost basis would not be changed for subsequent recoveries in fair value.
There were no securities held in an unrealized loss position for more than twelve months as of December 31, 2020 or 2019.
Note 24. Quarterly Results of Operations (unaudited)
The unaudited consolidated quarterly results of operations (in thousands, except per share data) were as follows:
2020
Total revenue
Total operating expenses
Net loss
Net loss attributable to non-controlling interests
For the Three Months Ended
December 31
September 30
June 30 March 31
$
271,923 $
264,593 $ 238,632 $ 247,285
276,659
(13,803)
822
277,512
466,101
272,785
(38,170)
(203,521)
(78,752)
(822)
—
—
Net loss attributable to common shareholders of Evolent Health, Inc.
(14,625)
(37,348)
(203,521)
(78,752)
Loss per common share
Basic and Diluted
2019
Total revenue
Total operating expenses (1)
Net loss
Net loss attributable to non-controlling interests
Net loss attributable to common shareholders
124
$(0.17)
$(0.44)
$(2.38)
$(0.93)
$
236,525 $
220,143 $ 191,959 $ 197,756
451,120
(199,293)
(1,197)
(198,096)
240,281
217,192
244,402
(25,738)
(31,900)
(48,649)
(217)
(285)
(1,910)
(25,521)
(31,615)
(46,739)
Loss per common share
Basic and Diluted
$(2.36)
$(0.30)
$(0.38)
$(0.59)
For the Three Months Ended
December 31
September 30
June 30 March 31
(1)
The Company recorded goodwill impairment of $199.8 million during the three months ended December 31, 2019.
Note 25. Supplemental Cash Flow Information
The following represents supplemental cash flow information (in thousands):
For the Year Ended December 31,
2019
2018
2020
Supplemental Disclosure of Non-cash Investing and Financing Activities
Class A and Class B common stock issued in connection with business combinations
Change in goodwill from measurement period adjustments/business combinations
Acquisition consideration payable
Settlement of escrow related to asset acquisition
Settlement of indemnification asset
Accrued property and equipment purchases
Accrued deferred financing costs
Consideration for asset acquisitions or business combinations
Effects of Leases
Operating cash flows from operating leases
Leased assets obtained in exchange for operating lease liabilities
Effects of Class B Exchanges
Decrease in non-controlling interests as a result of Class B Exchanges
Decrease in deferred tax liability as a result of securities offerings and exchanges
Supplemental Disclosures
Cash paid for interest
Cash paid for taxes, net
Note 26. Subsequent Events
Agreement for the Sale of True Health New Mexico
$
— $
2,200
4,185
—
—
11
—
—
$
23,556
(351)
800
—
—
(527)
—
16,000
13,708
(2,170)
12,330
30,463
83,173
(117)
—
2,519
1,004
368
607
500
—
—
—
—
42,377
(22)
34,682
652
13,352
9,679
5,037
1,484
2,500
343
On January 11, 2021, Evolent Health LLC, EH Holdings and True Health, each wholly owned subsidiaries of the Company, entered
into a Stock Purchase Agreement (the “True Health SPA”) with Bright Health Management, Inc. (“Bright HealthCare”), pursuant to
which EH Holdings expects to sell all of its equity interest in True Health to Bright HealthCare for a purchase price of $22.0 million
plus excess risk based capital, subject to satisfaction of customary closing conditions, including regulatory approvals. The purchase
price is subject to a customary purchase price adjustment following the closing of the transactions (the “True Health Closing”) based
in part on actual medical claims experience.
In the True Health SPA, EH Holdings, True Health and Bright HealthCare have made customary representations and warranties and
have agreed to customary covenants, indemnification and termination rights relating to the transactions contemplated by the True
Health SPA. Among other things, True Health will be subject to certain business conduct restrictions with respect to its operations
prior to the True Health Closing. Evolent Health LLC has guaranteed the obligations of EH Holdings under the True Health SPA.
The True Health Closing is conditioned on customary conditions, including, among others, (i) the accuracy of the representations and
warranties of the parties at True Health Closing (generally, subject to a material adverse effect standard), (ii) material compliance with
the covenants and the agreements made by the parties in the True Health SPA, (iii) approval of the Transactions by the New Mexico
Office of Superintendent of Insurance, (iv) the absence of any legal restraints prohibiting the Transactions and (v) the entry into a
transition services agreement. The True Health Closing is expected to occur on or after the end of the first half of 2021.
125
As of December 31, 2020, the Company determined that True Health did not meet the held for sale criteria under ASC 360, and as
such, True Health assets and liabilities as of December 31, 2020, and the results of operations for all periods presented are not
classified as held for sale and are included in continuing operations in the consolidated financial statements.
Change in Reportable Segments
The Company made organizational changes, including re-evaluating its reportable segments, as a result of the entry into the agreement
to sell True Health on January 11, 2021. Notably, the chief executive officer will remain the CODM and will no longer manage the
operations for purposes of allocating resources and assessing performance through the Services and True Health segments. Effective
during the first quarter of 2021, the Company will bifurcate its Services segment into two reportable segments as follows:
•
•
Evolent Health Services, which houses our Administrative Simplification solution and certain supporting population
health infrastructure; and
Clinical Solutions, which includes our specialty management and physician-oriented total cost of care solutions, along
with the New Century Health and Evolent Care Partners brands.
The CODM continues to use revenue in accordance with U.S. GAAP and Adjusted EBITDA as the relevant segment performance
measures to evaluate the performance of the segments and allocate resources. The impact of the organizational changes on the
Company’s operating segments, reportable segments and reporting units will be reflected in the Company’s financial statements as of
and for the three months ending March 31, 2021. Prior year segment information will be reclassified to conform to the reporting
structure change.
Repayment and Termination of Existing Credit Agreement
On January 8, 2021, the Company repaid all outstanding amounts owed under, and terminated, the Credit Agreement with Ares
Capital Corporation. The total amount paid to Ares Corporation under the Credit Agreement in connection with the prepayment was
$98.6 million, which included $9.7 million for the make-whole premium as well as $0.2 million in accrued interest. In addition to the
payment of the Credit Agreement, the Company settled the outstanding warrants associated with the debt for $13.7 million.
126
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, as of the end of the period covered by this Annual Report on Form 10-K. 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 December 31, 2020 and, based on their evaluation, have concluded that the disclosure
controls and procedures were effective as of such date.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
As permitted by the SEC rules, management's assessment and conclusion on the effectiveness of our internal control over financial
reporting as of December 31, 2020 excludes an assessment of the internal control over financial reporting of EVH Passport,
consolidated on September 1, 2020.
Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over
financial reporting as of December 31, 2020, using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework.
As disclosed in Part II-Item 9A-Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended December 31,
2019, during fiscal 2019 we identified material weaknesses in internal control related to inadequate user access role definitions within
certain instances of one of our claims processing systems due to inadequate segregation of duties, inadequate controls over the set-up
and modifications of claims data, and lack of evidence of the operation of controls over claims data received from certain third-party
service providers. None of the control deficiencies resulted in any adjustments to our 2019 annual or interim 2020 consolidated
financial statements.
During fiscal year 2020, management implemented our previously disclosed remediation plan as described in the Remediation of
Material Weakness in Internal Controls over Financial Reporting section, below. We have completed execution of our remediation
plan and successfully remediated the material weaknesses in internal control over financial reporting as of December 31, 2020.
Remediation of Material Weaknesses in Internal Controls over Financial Reporting
During the year ended December 31, 2020, management designed and implemented enhanced procedures to remediate the deficiencies
in our internal control over financial reporting that resulted in the material weaknesses. These remediation efforts included the
following:
•
•
•
System enhancements, implementation of role-based access, and updated polices and control procedures related to user
access role definitions and segregation of duties within certain instances of one of our claims processing systems;
Expanded controls and/or applied other appropriate procedures to address the design and operation of internal controls
related to the set-up and modification of claims data; and
Enhanced monitoring processes and internal controls related to claims data received from certain third-party service
providers.
During the fourth quarter of 2020, we completed our testing of the operating effectiveness of the implemented controls and found
them to be effective. As a result we have concluded the material weaknesses have been remediated as of December 31, 2020.
127
Changes in Internal Control over Financial Reporting
Except for the changes in connection with our implementation of the remediation plan discussed above, there were no changes in our
internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our
employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19
situation on our internal controls to minimize the impact on their design and operating effectiveness.
Inherent Limitations of Internal Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override
of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
128
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Evolent Health, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Evolent Health, Inc. and subsidiaries (the “Company”) as of December
31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated
February 25, 2021, expressed an unqualified opinion on those financial statements.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at EVH Passport, which was a voting interest entity consolidated on September
1, 2020, and whose financial statements constitute 13% and 14% of total assets and total liabilities, respectively, and 3% of net loss of
the consolidated financial statement amounts as of and for the year ended December 31, 2020. Accordingly, our audit did not include
the internal control over financial reporting at EVH Passport.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 25, 2021
129
Item 9B. Other Information
None.
130
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information called for by this Item 10 pertaining to Directors is incorporated herein by reference to Evolent Health, Inc.’s
definitive proxy statement for the Annual Meeting of Shareholders to be held on June 10, 2021, to be filed by Evolent Health, Inc.
with the SEC pursuant to Regulation 14A within 120 days after the year ended December 31, 2020 (the “2021 Proxy Statement”).
The information called for by this Item 10 pertaining to Executive Officers appears in “Part I - Item 1. Business - Information about
our Executive Officers” in this Annual Report on Form 10-K and our 2021 Proxy Statement.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our
principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our investor relations
website (ir.evolenthealth.com) under “Corporate Governance.” We intend to satisfy the SEC’s disclosure requirements regarding
amendments to, or waivers of, the code of ethics by posting such information on our website.
Item 11. Executive Compensation
Information required by this Item 11 is incorporated herein by reference to our 2021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item 12 is incorporated herein by reference to our 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 is incorporated herein by reference to our 2021 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information required by this Item 14 is incorporated herein by reference to our 2021 Proxy Statement.
131
Item 15. Exhibits
(a) The following documents are filed as part of this report:
PART IV
(1) The following financial statements of the registrant and report of independent registered public accounting firm are
included of Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consent of Previous Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities
and Exchange Commission either have been included in the Financial Statements, are not required under the related
instructions, or are not applicable and therefore have been omitted.
(3) The Exhibits listed in the Exhibit Index below are filed with or incorporated by reference into this report.
EVOLENT HEALTH, INC.
Exhibit Index
Agreement and Plan of Merger, dated July 12, 2016, by and among Evolent Health, Inc., Electra Merger Sub, LLC,
Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their capacity as the
Securityholders’ Representative, filed as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on July
14, 2016, and incorporated herein by reference
First Amendment to Agreement and Plan of Merger, dated October 3, 2016, by and among Evolent Health, Inc., Electra
Merger Sub, LLC, Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their
capacity as securityholders’ representative, filed as Exhibit 2.2 to the Company’s Report on Form 8-K filed with the SEC
on October 3, 2016, and incorporated herein by reference
Agreement and Plan of Merger, dated September 7, 2018, by and among Evolent Health, Inc., Evolent Health LLC,
Element Merger Sub, Inc., NCIS Holdings, Inc. and New Century Investment, LLC, in the capacity set forth therein, filed
as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on September 12, 2018, and incorporated herein
by reference
Asset Purchase Agreement, dated May 28, 2019, by and among University Health Care, Inc., d/b/a Passport Health Plan,
Passport Health Solutions, LLC, Evolent Health, Inc. and Justify Holdings, Inc., filed as Exhibit 2.4 to the Company’s
Report on Form 10-Q filed with the SEC on August 9, 2019, and incorporated herein by reference
First Amendment to Asset Purchase Agreement, dated as of December 30, 2019, by and among University Health Care,
Inc., d/b/a Passport Health Plan, Passport Health Solutions, LLC, Justify Holdings, Inc., and Evolent Health, Inc., filed as
Exhibit 2.1 to the Company’s Report on Form 8-K with the SEC on December 31, 2019, and incorporated herein by
reference
Second Amended and Restated Certificate of Incorporation of Evolent Health, Inc., filed as Exhibit 3.1 to the Company’s
Report on Form 8-K filed with the SEC on June 15, 2016, and incorporated herein by reference
Third Amended and Restated By-laws of Evolent Health, Inc., filed as Exhibit 3.1 to the Company’s Report on Form 8-K
filed with the SEC on December 14, 2020, and incorporated herein by reference
Form of Class A common stock certificate, filed as Exhibit 4.1 to Amendment No. 1 to the Company’s Registration
Statement on Form S-1 filed with the SEC on May 18, 2015, and incorporated herein by reference
Registration Rights Agreement, dated as of June 4, 2015, by and among Evolent Health, Inc., TPG Growth II BDH, L.P.,
TPG Eagle Holdings, L.P., UPMC, The Advisory Board Company and Ptolemy Capital, LLC, filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the SEC on June 10, 2015, and incorporated herein by reference
Indenture dated as of December 5, 2016, between Evolent Health, Inc. and U.S. Bank National Association, as trustee,
filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 5, 2016, and
incorporated herein by reference
Form of 2.00% Convertible Senior Notes due 2021, filed as Exhibit A to the Indenture (Item 4.3 above), which was filed
as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 5, 2016, and incorporated
herein by reference
2.1*
2.2*
2.3*
2.4*
2.5*
3.1
3.2
4.1
4.2
4.3
4.4
132
4.5
4.6
4.7
4.8
4.9*
4.10*
10.1
10.2
10.3
10.4*
10.5
10.6
10.7
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
Indenture dated as of October 22, 2018, between Evolent Health, Inc. and U.S. Bank National Association, as trustee,
filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 23, 2018, and
incorporated herein by reference
Form of 1.50% Convertible Senior Notes due 2025, filed as Exhibit A to the Indenture (Item 4.5 above), which was filed
as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 23, 2018, and incorporated
herein by reference
Registration Rights Agreement, dated May 24, 2019, by and between Evolent Health, Inc. and Momentum Health Group,
LLC, filed as exhibit 4.1 to the Company’s Report on Form 8-K filed with the SEC on May 28, 2019, and incorporated
herein by reference.
Description of Registrant’s Securities, filed as exhibit 4.8 to the Company’s Report on Form 10-K filed with the SEC on
March 2, 2020, and incorporated herein by reference.
Indenture, dated as of August 19, 2020, by and between Evolent Health, Inc. and U.S. Bank National Association, as
trustee, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K with the SEC on August 25, 2020, and
incorporated herein by reference
Form of 3.50% Convertible Senior Note due 2024 (included as Exhibit A to Exhibit 4.1), filed as Exhibit 4.2 to the
Company’s Current Report on Form 8-K with the SEC on August 25, 2020, and incorporated herein by reference
Third Amended and Restated Operating Agreement of Evolent Health LLC, dated as of June 4, 2015, filed as Exhibit
10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2015, and incorporated herein by
reference
Income Tax Receivables Agreement, dated as of June 4, 2015, by and among Evolent Health, Inc., Evolent Health LLC
and certain stockholders of Evolent Health, Inc., filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K
filed with the SEC on June 10, 2015, and incorporated herein by reference
Exchange Agreement, dated June 4, 2015, by and among Evolent Health, Inc., Evolent Health LLC, TPG Eagle
Holdings, L.P., The Advisory Board Company and Ptolemy Capital, LLC, filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the SEC on June 10, 2015, and incorporated herein by reference
Exchange Agreement, dated October 1, 2018, by and among Evolent Health, Inc., Evolent Health LLC and certain
holders of Class B common units in Evolent Health LLC, filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K filed with the SEC on October 2, 2018, and incorporated herein by reference
Amended and Restated Master Investors’ Rights Agreement among Evolent Health Holdings, Inc., Evolent Health LLC
and the Investors named therein, dated as of January 6, 2014, filed as Exhibit 10.6 to the Company’s Registration
Statement on Form S-1 filed with the SEC on May 5, 2015, and incorporated herein by reference
Stockholders Agreement, dated as of June 4, 2015, by and among Evolent Health, Inc., TPG Growth II BDH, L.P., TPG
Eagle Holdings, L.P., UPMC and The Advisory Board Company, filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the SEC on June 10, 2015, and incorporated herein by reference
VPHealth, Inc. 2011 Equity Incentive Plan, filed as Exhibit 10.8 to the Company’s Registration Statement on Form S-1
filed with the SEC on May 5, 2015, and incorporated herein by reference
Amendment No. 1 to the Evolent Health, Inc. 2011 Equity Incentive Plan, filed as Exhibit 10.9 to the Company’s
Registration Statement on Form S-1 filed with the SEC on May 5, 2015, and incorporated herein by reference
Evolent Health, Inc. 2015 Omnibus Equity Incentive Plan, filed as Exhibit 10.9 to Amendment No. 1 to the Company’s
Registration Statement on Form S-1 filed with the SEC on May 18, 2015, and incorporated herein by reference
Amendment to the Evolent Health, Inc. 2015 Omnibus Equity Incentive Plan, filed as Appendix B to the Company’s
Definitive Proxy Statement on Schedule 14A filed with the SEC on April 27, 2018, and incorporated herein by reference
Form of Executive Officer Option Award Agreement under the Evolent Health, Inc. 2015 Omnibus Incentive
Compensation Plan, filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on June 10,
2015, and incorporated herein by reference
Form of Executive Officer Restricted Stock Unit Award Agreement under the Evolent Health, Inc. 2015 Omnibus
Incentive Compensation Plan, filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on
June 10, 2015, and incorporated herein by reference
Form of Non-Employee Director Restricted Stock Unit Award Agreement under the Evolent Health, Inc., 2015 Omnibus
Incentive Compensation Plan, filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on
June 10, 2015, and incorporated herein by reference
Form of Non-Qualified Stock Option Agreement under the Evolent Health, Inc. 2011 Equity Incentive Plan, filed as
Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2015, and incorporated
herein by reference
Consulting Agreement by and between Evolent Health LLC and NCP, Inc., dated as of March 12, 2014, filed as Exhibit
10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 5, 2015, and incorporated herein
by reference
133
10.16†
10.17†
10.18
10.19
10.20
10.21
10.22
10.23+
10.24+
10.25+
10.26*
10.27
10.28+
10.29+
10.30+
10.31+
Amended and Restated HealthPlaNet Technology License Agreement between UPMC and Evolent Health, Inc., dated as
of June 27, 2013, filed as Exhibit 10.12 to the Company’s Registration Statement on Form S-1 filed with the SEC on
May 5, 2015, and incorporated herein by reference
Amended and Restated Intellectual Property License and Development Services Agreement between UPMC and Evolent
Health, Inc., dated as of June 27, 2013, filed as Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed
with the SEC on May 5, 2015, and incorporated herein by reference
Amended and Restated Intellectual Property License and Data Access Agreement by and between The Advisory Board
Company and Evolent Health, Inc., dated as of June 27, 2013, filed as Exhibit 10.15 to the Company’s Registration
Statement on Form S-1 filed with the SEC on May 5, 2015, and incorporated herein by reference
Deed of Lease by and between North Glebe Office, L.L.C. and Evolent Health, Inc., dated as of July 31, 2012, filed as
Exhibit 10.18 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 5, 2015, and
incorporated herein by reference
First Amendment to Deed of Lease by and between North Glebe Office, L.L.C. and Evolent Health, Inc., dated as of
March 1, 2013, filed as Exhibit 10.19 to the Company’s Registration Statement on Form S-1 filed with the SEC on May
5, 2015, and incorporated herein by reference
Second Amendment to Deed of Lease by and between North Glebe Office, L.L.C. and Evolent Health, Inc., dated as of
April 1, 2014, filed as Exhibit 10.20 to the Company’s Registration Statement on Form S-1 filed with the SEC on May 5,
2015, and incorporated herein by reference
Form of Director Indemnification Agreement, filed as Exhibit 10.20 to Amendment No. 2 to the Company’s Registration
Statement on Form S-1 filed with the SEC on May 26, 2015, and incorporated herein by reference
Form of Executive Officer Performance-Based Option Award Agreement Under the Evolent Health, Inc. 2015 Omnibus
Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC
on May 16, 2016, and incorporated herein by reference
Form of Non-Employee Director Restricted Stock Unit Agreement under the Evolent Health, Inc. 2015 Omnibus
Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC
on August 7, 2017, and incorporated herein by reference
Form of Leveraged Stock Unit Award Agreement under the Evolent Health, Inc. 2015 Omnibus Incentive Compensation
Plan, filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2019,
and incorporated herein by reference
Asset Purchase Agreement, dated July 16, 2020, by and among Passport Health Plan, Inc., Evolent Health LLC, and
Molina Healthcare, Inc., filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q with the SEC on August
7, 2020, and incorporated herein by reference
Cooperation Agreement, dated December 21, 2020, by and among Evolent Health, Inc., Engaged Capital Flagship
Master Fund, LP, Engaged Capital Co-Invest XI, LP, Engaged Capital Special Situation Fund, LP, Engaged Capital
Flagship Fund, LP, Engaged Capital Flagship Fund, Ltd., Engaged Capital LLC, Engaged Capital Holdings, LLC and
Glenn W. Welling, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December
22, 2020, and incorporated by reference herein
Severance and Change-in-Control Agreement, dated as of January 27, 2021, by and between Evolent Health, Inc. and
Mr. Frank Williams, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on
January 29, 2021, and incorporated by reference herein
Severance and Change-in-Control Agreement, dated as of January 27, 2021, by and between Evolent Health, Inc. and
Mr. Seth Blackley, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed with the SEC on January
29, 2021, and incorporated by reference herein
Severance and Change-in-Control Agreement, dated as of January 27, 2021, by and between Evolent Health, Inc. and
Mr. John Johnson, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed with the SEC on January
29, 2021, and incorporated by reference herein
Severance and Change-in-Control Agreement, dated as of January 27, 2021, by and between Evolent Health, Inc. and
Mr. Jonathan Weinberg, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K/A filed with the SEC on
January 29, 2021, and incorporated by reference herein
10.32+
Severance and Change-in-Control Agreement, dated as of January 27, 2021, by and between Evolent Health, Inc. and
Mr. Steve Tutewohl
16.1
21.1
23.1
23.2
31.1
Letter from PricewaterhouseCoopersLLP, dated April 9, 2019, filed as Exhibit 16.1 to the Company’s Current Report on
Form 8-K filed with the SEC on April 10, 2019, and incorporated herein by reference.
Subsidiaries of Evolent Health, Inc.
Consent of Independent Registered Public Accounting Firm
Consent of Prior Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
134
31.2
32.1
32.2
Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
104
The cover page from this Annual Report on Form 10-K, formatted as Inline XBRL
† The Company’s request for confidential treatment with respect to certain portions of this exhibit has been accepted.
+ Constitutes a management contract or other compensatory plan or arrangement.
* The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in
accordance with Item 601(b)(2) of Regulation S-K.
135
Item 16. Form 10-K Summary
Not Applicable.
136
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By:
Name:
Title:
Evolent Health, Inc.
/s/ John Johnson
John Johnson
Chief Financial Officer
Dated: February 25, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Seth Blackley
Seth Blackley
/s/ John Johnson
John Johnson
/s/ Aammaad Shams
Aammaad Shams
/s/ Frank Williams
Frank Williams
/s/ Michael D’Amato
Michael D’Amato
/s/ Craig Barbarosh
Craig Barbarosh
/s/ M. Bridget Duffy
M. Bridget Duffy, MD
/s/ David Farner
David Farner
/s/ Peter Grua
Peter Grua
/s/ Diane Holder
Diane Holder
/s/ Kim Keck
Kim Keck
/s/ Cheryl Scott
Cheryl Scott
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Corporate Controller
(Principal Accounting Officer)
Date
February 25, 2021
February 25, 2021
February 25, 2021
Executive Chair, Director
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
Director
Director
Director
Director
Director
Director
Director
Director
137
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Appendix A
Adjusted EBITDA
Adjusted EBITDA is defined as net loss attributable to common shareholders of Evolent
Health, Inc. before interest income, interest expense, benefit for income taxes, depreciation
and amortization expenses, adjusted to exclude equity method investment impairment, loss
on extinguishment of debt, gain (loss) from equity method investees, gain (loss) on disposal of
assets and consolidation, goodwill impairment, change in fair value of contingent consideration
and indemnification asset, other income (expense), net, net loss attributable to non-controlling
interests, purchase accounting adjustments, repositioning costs, stock-based compensation
expense, severance costs, amortization of contract cost assets and acquisition-related costs.
Management considers Adjusted EBITDA to be an appropriate metric to evaluate and compare
the ongoing operating performance of our Company on a consistent basis across reporting
periods as they eliminate the effect of items which are not indicative of the Company’s core
operating performance.
The following table presents our reconciliation of Adjusted EBITDA to net loss attributable
to common shareholders of Evolent Health, Inc. (in thousands):
Net loss attributable to common shareholders of Evolent Health, Inc.
$ (334,246)
$ (301,971)
For the Year Ended
December 31,
2020
2019
Less:
Interest income
Interest expense
Benefit for income taxes
Depreciation and amortization expenses
Impairment of equity method investees
Loss on extinguishment of debt
Gain (loss) from equity method investees
Gain (loss) on disposal of assets and consolidation
3,164
3,987
(28,337)
(14,534)
3,553
(61,475)
(47,133)
(4,789)
10,039
(698)
21,536
(60,913)
-
-
(9,465)
9,600
Goodwill impairment
(215,100)
(199,800)
Change in fair value of contingent consideration and indemnification asset
Other income (expense), net
Net loss attributable to non-controlling interests
Purchase accounting adjustments
Repositioning costs
Stock-based compensation expense
Severance costs
Amortization of contract cost assets
Acquisition-related costs
Adjusted EBITDA
(3,860)
(119)
-
-
(1,275)
(14,606)
(8,986)
(3,944)
(2,116)
3,997
(492)
3,609
(1,915)
-
(15,618)
(17,350)
(2,876)
(10,769)
$ 41,436
$ (10,968)
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Coorrppooorrraatteee Innnffooormmmmaatioon
Board of Directors
Investor Relations
Seth Blackley
Chief Executive Offi cer and Co-Founder, Evolent Health
Craig Barbarosh
Partner, Katten Muchin Rosenman LLP
Michael A. D'Amato
Managing Partner, Sears Road Partners
M. Bridget Duff y, MD
Chief Medical Offi cer, Vocera Communications, Inc.
David Farner
Executive Vice President,
Chief Strategic and Transformation Offi cer, UPMC
Peter Grua
Managing Partner, HLM Venture Partners
Diane Holder
President, UPMC Insurance Services Division;
President and Chief Executive Offi cer, UPMC Health Plan;
Executive Vice President, UPMC
Kim Keck
President and Chief Executive Offi cer,
Blue Cross Blue Shield Association
Cheryl Scott
Main Principal, McClintock Scott Group
Frank J. Williams
Executive Chairman and Co-Founder, Evolent Health
Evolent Health encourages those
seeking more information to visit
our website ir.evolenthealth.com
or contact:
Chelsea Griffi n
Investor Relations
cgriffi n@evolenthealth.com
919.817.8045
Stock Exchange
Evolent Health’s stock
is listed on the New York
Stock Exchange (NYSE)
under the symbol EVH
Corporate Governance
Information and documents
concerning our corporate
governance practices are
available on ir.evolenthealth.com
800 N. Glebe Road
Suite 500
Arlington, VA 22203
571.389.6000
evolenthealth.com
© 2021 Evolent Health Inc.
EH-2112331-0413