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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _________________________
FORM 10-Q
_________________________

(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
_________________________
Delaware32-0454912
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
800 N. Glebe Road,Suite 500,Arlington,Virginia22203
(Address of principal executive offices)(Zip Code)

                           (571) 389-6000
Registrant’s telephone number, including area code
                         _________________________        

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock of Evolent Health, Inc., par value $0.01 per shareEVHNew York Stock Exchange


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

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

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

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

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

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

As of November 2, 2020, there were 85,778,739 shares of the registrant’s Class A common stock outstanding.




Evolent Health, Inc.
Table of Contents
ItemPage
1.
2.
3.
4.
1
1A.
2.
3.
4.
5.
6.




Explanatory Note

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

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

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

the potential negative impact of the COVID-19 pandemic;
the economic benefits we expect to receive as a result of the sale of certain assets of Passport may not be realized;
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;
the structural change in the market for health care in the United States;
uncertainty in the health care regulatory framework, including the potential impact of policy changes;
uncertainty in the public exchange market;
the uncertain impact of CMS waivers to Medicaid rules and changes in membership and rates;
the uncertain impact the results of elections may have on health care laws and regulations;
our ability to effectively manage our growth and maintain an efficient cost structure, and to successfully implement cost cutting measures;
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., NCIS 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;
our ability to consummate opportunities in our pipeline;
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;
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 (including in Florida), premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce health care costs;
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 recover the significant upfront costs in our partner relationships;
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;
restrictions and penalties as a result of privacy and data protection laws;
adequate protection of our intellectual property, including trademarks;
any alleged infringement, misappropriation or violation of third-party proprietary rights;
our use of “open source” software;
our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;
our reliance on third parties and licensed technologies;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
i




data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;
online security risks and breaches or failures of our security measures, including with respect to privacy of health information;
our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;
our reliance on third-party vendors to host and maintain our technology platform;
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;
True Health New Mexico’s ability to enter the individual market;
the risk of a significant reduction in the enrollment in our health plan;
our ability to accurately underwrite performance-based risk-bearing contracts;
risks related to our offshore operations;
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, the impact of covenants in our credit agreement on our business, our ability to access the delayed draw loan under our credit facility 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;
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 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 second 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;
our intention not to pay cash dividends on our Class A common stock; and
our ability to remediate our material weaknesses and to maintain effective internal control over certain instances of one of our claims processing systems.

The risks included here are not exhaustive.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements.  Our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K"), subsequent Quarterly Reports on Form 10-Q and other documents filed with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment.  New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.
 
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

ii




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
1


EVOLENT HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
  September 30, 2020December 31, 2019
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$370,514 $101,008 
Restricted cash and restricted investments21,985 20,080 
Accounts receivable, net (1)
95,317 75,667 
Prepaid expenses and other current assets (1)
55,381 28,488 
Investments, at amortized cost4,677 1,807 
Contract assets671 1,751 
Total current assets548,545 228,801 
Restricted cash and restricted investments9,462 8,260 
Investments, at amortized cost11,842 16,751 
Investments in and advances to equity method investees7,473 122,618 
Property and equipment, net88,072 85,155 
Right-of-use assets - operating60,240 72,173 
Customer advance for regulatory capital requirements, net of allowances (1)
 40,000 
Prepaid expenses and other noncurrent assets, net of allowances (1)
7,450 6,253 
Contract assets 999 
Contract cost assets28,491 36,482 
Intangible assets, net275,492 308,459 
Goodwill354,722 572,064 
Total assets$1,391,789 $1,498,015 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable (1)
$32,177 $37,488 
Accrued liabilities (1)
76,979 33,343 
Operating lease liability - current7,438 6,269 
Accrued compensation and employee benefits28,130 34,691 
Deferred revenue12,459 19,828 
Reserve for claims and performance-based arrangements (1)
208,313 61,150 
Total current liabilities365,496 192,769 
Long-term debt, net of discount285,213 293,667 
Other long-term liabilities20,207 11,732 
Operating lease liabilities - noncurrent64,738 68,858 
Deferred tax liabilities, net1,390 1,942 
Total liabilities737,044 568,968 
Commitments and Contingencies (See Note 10)
Shareholders' Equity (Deficit)
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 85,756,991 and 84,588,629 shares issued, respectively
858 846 
Additional paid-in-capital1,224,956 1,173,708 
Accumulated other comprehensive income (loss)(320)(234)
Retained earnings (accumulated deficit)(574,553)(251,962)
Treasury stock, at cost; 1,537,582 and 0 shares as of September 30, 2020 and December 31, 2019, respectively
(21,123) 
Total shareholders' equity attributable to Evolent Health, Inc.629,818 922,358 
Non-controlling interests24,927 6,689 
Total shareholders' equity (deficit)654,745 929,047 
Total liabilities and shareholders' equity (deficit)$1,391,789 $1,498,015 
(1) See Note 18 for amounts attributable to unconsolidated related parties included in these line items.
See accompanying Notes to Consolidated Financial Statements
2


EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands, except per share data)
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2020201920202019
Revenue
Transformation services (1)
$4,807 $5,184 $10,800 $10,481 
Platform and operations services (1)
230,299 171,438 652,574 463,252 
Premiums29,487 43,521 87,136 136,125 
Total revenue264,593 220,143 750,510 609,858 
Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)
183,165 131,763 524,630 357,587 
Claims expenses21,325 34,802 63,136 108,644 
Selling, general and administrative expenses (1)
55,758 58,808 160,967 200,578 
Depreciation and amortization expenses14,694 15,408 46,610 44,966 
Loss on extinguishment of debt, net4,789  4,789  
(Gain) loss on disposal of assets  6,447 (9,600)
Goodwill impairment  215,100  
Change in fair value of contingent consideration and indemnification asset2,570 (500)(492)(300)
Total operating expenses282,301 240,281 1,021,187 701,875 
Operating loss(17,708)(20,138)(270,677)(92,017)
Interest income1,288 1,124 3,049 3,026 
Interest expense(7,419)(3,630)(19,997)(10,812)
Impairment of equity method investments  (47,133) 
Gain (loss) from equity method investees(13,717)(3,859)11,014 (6,187)
Other income (expense), net(111)(84)170 (244)
Loss before income taxes and non-controlling interests(37,667)(26,587)(323,574)(106,234)
Provision (benefit) for income taxes503 (849)(3,131)53 
Net loss(38,170)(25,738)(320,443)(106,287)
Net loss attributable to non-controlling interests(822)(217)(822)(2,412)
Net loss attributable to common shareholders of Evolent Health, Inc.$(37,348)$(25,521)$(319,621)$(103,875)
Loss per common share
Basic and diluted$(0.44)$(0.30)$(3.87)$(1.27)
Weighted-average common shares outstanding
Basic and diluted85,172 83,819 82,615 81,831 
Comprehensive loss
Net loss$(38,170)$(25,738)$(320,443)$(106,287)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment71 (68)(86)(33)
Total comprehensive loss(38,099)(25,806)(320,529)(106,320)
Total comprehensive loss attributable to non-controlling interests(822)(217)(822)(2,412)
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc.$(37,277)$(25,589)$(319,707)$(103,908)
(1) See Note 18 for amounts attributable to unconsolidated related parties included in these line items.
See accompanying Notes to Consolidated Financial Statements
3



EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
For the Three Months Ended September 30, 2020
Class A Common StockClass B Common StockAdditional Paid-In CapitalAccumulated Other Income (Loss)Retained Earnings (Accumulated Deficit)Treasury StockTotal Shareholders' Equity
Attributable to
Evolent Health, Inc.
Non-Controlling InterestsTotal Equity (Deficit)
SharesAmountSharesAmount
Balance as of June 30, 202085,457 $855  $ $1,183,605 $(391)$(537,205)$ $646,864 $ $646,864 
Stock-based compensation expense— — — — 3,164 — — — 3,164 — 3,164 
Exercise of stock options265 3 — — 1,445 — — — 1,448 — 1,448 
Restricted stock units vested, net of shares withheld for taxes35 — — — (51)— — — (51)— (51)
Consolidation of equity method investment— — — — — — — (21,123)(21,123)25,749 4,626 
Foreign currency translation adjustment— — — — — 71 — — 71 — 71 
Equity component of 2024 notes, net of issuance costs— — — — 36,793 — — — 36,793 — 36,793 
Net loss— — — — — — (37,348)— (37,348)(822)(38,170)
Balance as of September 30, 202085,757 $858  $ $1,224,956 $(320)$(574,553)$(21,123)$629,818 $24,927 $654,745 
For the Three Months Ended September 30, 2019
Class A Common StockClass B Common StockAdditional Paid-In CapitalAccumulated Other Income (Loss)Retained Earnings (Accumulated Deficit)Treasury StockTotal Shareholders' Equity
Attributable to
Evolent Health, Inc.
Non-Controlling InterestsTotal Equity (Deficit)
SharesAmountSharesAmount
Balance as of June 30, 201983,815 $838 706 $7 $1,158,325 $(147)$(28,345)$ $ $16,078 $1,146,756 
Stock-based compensation expense— — — — 3,352 — — — — — 3,352 
Exercise of stock options13 — — — 49 — — — — — 49 
Restricted stock units vested, net of shares withheld for taxes3 — — — (3)— — — — — (3)
Share retirement(5)— — — — — — — — — — 
Foreign currency translation adjustment— — — — — (68)— — — — (68)
Net loss— — — — — — (25,521)— — (217)(25,738)
Reclassification of non-controlling interests— — — — (27)— — — — 27 — 
Balance as of September 30, 201983,826 $838 706 $7 $1,161,696 $(215)$(53,866)$ $ $15,888 $1,124,348 











See accompanying Notes to Consolidated Financial Statements
4


EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
For the Nine Months Ended September 30, 2020
Class A Common StockClass B Common StockAdditional Paid-In CapitalAccumulated Other Income (Loss)Retained Earnings (Accumulated Deficit)Treasury StockTotal Shareholders' Equity
Attributable to
Evolent Health, Inc.
Non-Controlling InterestsTotal Equity (Deficit)
SharesAmountSharesAmount
Balance as of December 31, 201984,589 $846  $ $1,173,708 $(234)$(251,962)$ $922,358 $6,689 $929,047 
Cumulative-effect adjustment from adoption of ASU 2016-13— — — — — — (2,970)— (2,970)— (2,970)
Stock-based compensation expense— — — — 10,375 — — — 10,375 — 10,375 
Exercise of stock options355 4 — — 1,970 — — — 1,974 — 1,974 
Restricted stock units vested, net of shares withheld for taxes385 4 — — (1,386)— — — (1,382)— (1,382)
Consolidation of equity method investment— — — — — — — (21,123)(21,123)25,749 4,626 
Share retirement(188)(2)— — (683)— — — (685)— (685)
Class A common stock issued for payment of earn-outs616 6 — — 4,179 — — — 4,185 — 4,185 
Disposal of assets— — — — — — — — — (6,689)(6,689)
Foreign currency translation adjustment— — — — — (86)— — (86)— (86)
Equity component of 2024 notes, net of issuance costs— — — — 36,793 — — — 36,793 — 36,793 
Net loss— — — — — — (319,621)— (319,621)(822)(320,443)
Balance as of September 30, 202085,757 $858  $ $1,224,956 $(320)$(574,553)$(21,123)$629,818 $24,927 $654,745 
For the Nine Months Ended September 30, 2019
Class A Common StockClass B Common StockAdditional Paid-In CapitalAccumulated Other Income (Loss)Retained Earnings (Accumulated Deficit)Treasury StockTotal Shareholders' Equity
Attributable to
Evolent Health, Inc.
Non-Controlling InterestsTotal Equity (Deficit)
SharesAmountSharesAmount
Balance as of December 31, 201879,172 $792 3,190 $31 $1,093,174 $(182)$50,009 $ $ $45,532 $1,189,356 
Stock-based compensation expense— — — — 11,867 — — — — — 11,867 
Exercise of stock options116 1 — — 996 — — — — — 997 
Restricted stock units vested, net of shares withheld for taxes284 3 — — (2,411)— — — — — (2,408)
Share retirement(5)— — — — — — — — — — 
Class A common stock issued for payment of earn-outs43 — — — 800 — — — — — 800 
Issuance of non-controlling interest— — — — — — — — — 6,500 6,500 
Shares issued for equity-method investments and asset acquisitions1,732 18 — — 23,538 — — — — — 23,556 
Exchange of Class B common stock2,484 24 (2,484)(24)33,946 — — — — (33,946)— 
Foreign currency translation adjustment— — — — — (33)— — — — (33)
Net loss— — — — — — (103,875)— — (2,412)(106,287)
Reclassification of non-controlling interests— — — — (214)— — — — 214  
Balance as of September 30, 201983,826 $838 706 $7 $1,161,696 $(215)$(53,866)$ $ $15,888 $1,124,348 

See accompanying Notes to Consolidated Financial Statements
5


EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
For the Nine Months Ended September 30,
  20202019
Cash Flows Used In Operating Activities
Net loss$(320,443)$(106,287)
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(492)(300)
Loss (gain) on disposal of assets6,447 (9,600)
(Gain) loss from equity method investees(11,014)6,187 
Depreciation and amortization expenses46,610 44,966 
Goodwill impairment215,100  
Equity method investments impairment47,133  
Stock-based compensation expense10,375