Evolent Health Inc

Previous wording

We experience pricing pressures in the form of competitive prices in addition to rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits and facility leases. We do not believe these impacts were material to our revenues or net income during the three months ended March 31, 2024. However, significant sustained inflation driven by the macroeconomic environment or other factors could negatively impact our margins, profitability and results of operations in future periods.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

The following table provides a summary of our total costs associated with our repositioning plans for the three months ended March 31, 2024, by major type of cost (in thousands):

Current wording

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

Previous wording

Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of our reporting unit is below its carrying amount. Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring our reporting unit’s fair value.

Current wording

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

Previous wording

On October 31, 2023, the Company performed its annual goodwill impairment review for fiscal year 2023. In addition, the Company underwent organizational changes which required a reassessment of reporting units. As a result, the Company determined it has one reporting unit due to the economic similarity of the services provided to our partners. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of our reporting unit was below its respective carrying values. As a result, a quantitative goodwill impairment analysis was not required. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three months ended March 31, 2024. We will perform our annual impairment test of October 31, 2024.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

The following table represents the Company’s Lives on Platform, Cases, PMPM fees and revenue per case for the three months ended March 31, 2024 and 2023 (Lives on Platform in thousands):

Current wording

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

Previous wording

Approximately $1.0 million and $1.5 million of total personnel costs in costs of revenue was attributable to stock-based compensation expense for the three months ended March 31, 2024, and 2023, respectively. Cost of revenue represented 83.7% and 72.6% of total revenue for the three months ended March 31, 2024, and 2023, respectively. The majority of the increase in cost of revenue as a percentage of revenue was due to the rapid growth of our Performance Suite, which has a lower gross margin than our other product types.

Current wording

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

Previous wording

Approximately $17.8 million and $9.2 million of total personnel costs were attributable to stock-based compensation expense for the three months ended March 31, 2024, and 2023, respectively. Acquisition and severance costs accounted for approximately $0.4 million and $12.3 million of total selling, general and administrative expenses for the three months ended March 31, 2024, and 2023, respectively. Selling, general and administrative expenses represented 12.4% and 21.0% of total revenue for the three months ended March 31, 2024, as compared to 2023, respectively.

Current wording

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

Previous wording

We recorded a loss on change in fair value of contingent consideration of $8.9 million for the three months ended March 31, 2024 related to liabilities acquired as a result of the acquisition of NIA and $8.6 million for the three months ended March 31, 2023, related to the liabilities acquired as a result of the acquisition of NIA and IPG. We paid the NIA earnout, which was $88.7 million, in cash in April 2024. See “Part I - Item 1. Financial Statements - Note 17” in this Form 10-Q for more information related to changes in the fair value of contingent consideration.

Current wording

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

Previous wording

Our interest expense in the three months ended March 31, 2024, is attributable to our Credit Agreement with Ares, 2029 Notes and 2025 Notes. We recorded interest expense (including amortization of deferred financing costs) of approximately $6.0 million and $12.9 million for the three months ended March 31, 2024 and 2023, respectively. The decrease is primarily due to a $10.0 million decrease from the repayment of the Term Loan Facility of the Credit Agreement in a prior period offset by $4.0 million of interest expense from the new 2029 Notes. We expect interest expense to decrease in future periods after we repaid our floating rate Term Loan Facility offset by issuance of our 2029 Notes. In addition, we are focused on deleveraging the balance sheet in the long-term thereby decreasing interest expense. See “Part I - Item 1. Financial Statements and Supplementary Data - Note 9” in this Form 10-Q for more information related to interest expense by debt issuance.

Current wording

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

Previous wording

Due to the reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the NIA acquisition, the Company has recorded the remaining TRA liability of $108.1 million for the three months ended March 31, 2024.

Current wording

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

Previous wording

An income tax provision (benefit) of $0.6 million and $(68.2) million was recognized for the three months ended March 31, 2024 and 2023, respectively, which resulted in effective tax rates of (3.4)% and 77.3%, respectively. The decrease in benefits from income taxes was driven primarily by a reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the NIA acquisition in January 2023.

Current wording

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

Previous wording

We pay quarterly regular cash dividends on the Series A Preferred Stock at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. In addition, we accrete deferred financing costs and the redemption value in excess of par value in additional paid-in-capital on the consolidated balance sheets. The Company paid $5.1 million of dividends and accreted $2.9 million of deferred issuance costs and redemption value during the three months ended March 31, 2024.

Current wording

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

Previous wording

The Company reported net loss attributable to common shareholders of Evolent Health, Inc. of $25.2 million and $26.3 million for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the Company had $165.1 million of cash and cash equivalents and $68.3 million in restricted cash and restricted investments.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Cash flows provided by operating activities of $4.9 million for the three months ended March 31, 2024 were affected by decreases in accounts receivable from timing of our partner and vendor payments including higher cash receipts from certain performance-based customers as well as an increase of $8.9 million from contingent consideration, which was more than offset by payment for claims and performance-based arrangements of $(35.4) million and a reduction of our accrued compensation and employee benefits due to end of year bonus payments of $(27.3) million.

Current wording

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

Previous wording

Cash flows used in operating activities of $8.0 million for the three months ended March 31, 2023 were primarily due to our net loss of $20.0 million, non-cash items including depreciation and amortization expenses of $29.3 million, stock-based compensation expense of $10.7 million, deferred tax benefit of $(68.7) million, amortization of contract cost assets of $2.3 million, change in fair value of contingent consideration of $8.6 million and change in our tax receivable liability of $66.2 million. Our operating cash outflows were affected by the timing of our customer and vendor payments primarily driven by cash receipts from certain customers of approximately $39.8 million and a reduction of our accrued compensation and employee benefits due to end of year bonus payments and severance of $31.4 million, offset in part by increases in accounts receivable from our acquisition of NIA of $28.1 million.

Current wording

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

Previous wording

Cash flows used in investing activities of $9.7 million in the three months ended March 31, 2024 were primarily attributable to a purchase of investments for $3.0 million and $5.3 million of investments in internal-use software and purchases of property and equipment.

Current wording

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

Previous wording

Cash flows used in investing activities of $395.0 million in the three months ended March 31, 2023 were primarily attributable to $386.7 million paid for acquisitions and $9.1 million of investments in internal-use software and purchases of property and equipment.

Current wording

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

Previous wording

Cash flows provided by financing activities of $14.9 million in three months ended March 31, 2024, were primarily related to $37.5 million of restricted cash inflows from working capital related to claims processing offset, in part by $3.8 million from the payment of contingent consideration, $5.1 million of preferred dividends paid on our Series A Preferred Stock and $14.3 million from withholding taxes paid in respect of vested restricted stock units that were net settled.

Current wording

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

Previous wording

Cash flows provided by financing activities of $379.7 million in the three months ended March 31, 2023, were primarily related to $256.3 million received from our Acquisition Facilities in connection with our Credit Agreement and $168.0 million from the issuance of preferred equity, offset in part, by $37.5 million of cash outflows related to the payment on our Revolving Facility, $3.7 million of preferred dividends paid on our Series A Preferred Stock and $12.6 million from taxes withheld for restricted stock unit vesting.

Current wording

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

Previous wording

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the three months ended March 31, 2024, accounts receivable, net, decreased primarily due to the timing of cash receipts from certain customers.

Current wording

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

Previous wording

Restricted cash and restricted investments of $68.3 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $49.8 million, collateral for letters of credit required as security deposits for facility leases of $2.2 million, amounts held with financial institutions for risk-sharing arrangements of $16.3 million as of March 31, 2024. See “Part I - Item 1. Financial Statements and Supplementary Data - Note 2” for further details of the Company’s restricted cash balances.

Current wording

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

Previous wording

Prepaid expenses and other current assets are carried at cost and includes prepaid expenses and non-trade accounts receivable. During the three months ended March 31, 2024, prepaid insurance increased as a result of higher premiums.

Current wording

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