在這份第10-Q表格的季度報告中，除非上下文另有要求，「Evolent」，「公司」，「我們」，「我們的」和「我們」指的是 Evolent Health, Inc. 及其合併子公司。Evolent Health LLC 是 Evolent Health, Inc. 的子公司，我們通過該公司開展業務，自成立以來一直擁有我們的全部經營資產和幾乎所有的業務。 Evolent Health, Inc. 是一家控股公司，其主要資產是 Evolent Health LLC 的所有A類普通單位。
$的信用額度主要用於在117.1到2021年2月應償還的總額爲3.502020年8月，通過私下協商的交換和/或認購協議，將2024年到期的可轉換高級票據（以下簡稱「2024票據」）轉讓172.5到2021年2月應償還的總額爲1.502018年10月，通過向《證券法》第144A條規定的合格機構買傢俬人配售，將2025年到期的可轉換高級票據（以下簡稱「2025票據」）402.5到2021年2月應償還的總額爲3.502023年12月，通過向《證券法》第144A條規定的合格機構買傢俬人配售，2029年到期的可轉換高級票據（以下簡稱「2029票據」，與2024票據和2025票據一起，統稱「可轉換高級票據」）。所有2025票據和2029票據將於下表所示日期到期，除非提前根據各自條款回購、贖回或轉換。截至2023年10月13日， no 2024年的票據仍未償還。
2022年8月1日（「IPG結束日期」），公司與Evolent Health LLC簽訂了一項信貸協議，該協議由公司、作爲借款人的Evolent Health LLC（「借款人」）、公司的某些子公司作爲擔保人、不時參與的各貸款人、以及Ares Capital Corporation（「Ares」）作爲行政代理、抵押代理和循環貸款代理（「現有信貸協議」並按照修改後的修正案（以下定義），「信貸協議」）簽署。根據該協議，貸款人同意向借款人提供信貸擔保，包括（i）總本金金額爲$百萬的初始授信貸款（「初始授信貸款設施」）和（ii）總本金金額爲$百萬的循環授信承諾（「初始循環設施」），其可用性應依據$百萬和借款基數計算方法的較低者而定。借款人於IPG結束日期根據初始授信貸款設施和初始循環設施借款全額。175.0 百萬（「初始授信貸款設施」）和（ii）總本金金額爲$百萬的循環授信承諾（「初始循環設施」），其可用性應依據$百萬和借款基數計算方法的較低者而定。借款人於IPG結束日期根據初始授信貸款設施和初始循環設施借款全額。50.0 百萬的循環授信承諾（「初始循環設施」），其可用性應依據$百萬和借款基數計算方法的較低者而定。50.0 百萬和借款基數計算方法的較低者而定。
(1)Incurred health care costs related to the current year include a true-down in claims expense of $41.7 million for one of our Performance Suite customers related to a narrowed scope of services in select markets retroactive to the beginning of the year.
Note 21. Supplemental Cash Flow Information
The following represents supplemental cash flow information (in thousands):
For the Nine Months Ended September 30,
2024
2023
Supplemental disclosure of non-cash investing and financing activities
Accrued property and equipment purchases
$
86
$
322
Accrued expenses from acquisition of Machinify
8,500
—
Increase/decrease to goodwill from measurement period adjustments/business combinations
—
(391)
Class A common stock issued in connection with business combinations
—
261,271
Class A common stock issued in connection with debt repayment
—
23,073
Effects of leases
Operating cash flows from operating leases
10,704
9,587
Leased assets disposed of (obtained in) exchange for operating lease liabilities
(185)
6,956
Item 2. 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 interim consolidated financial statements and the accompanying notes to our interim consolidated financial statements presented in “Part I – Item 1. Financial Statements” of this Form 10-Q; our 2023 Form 10-K, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and our current reports on Form 8-K filed in 2024.
INTRODUCTION
Business Overview
We are a market leader in connecting care for people with complex conditions like cancer, cardiovascular disease, and musculoskeletal diagnoses. We work on behalf of health plans and other risk-bearing entities and payers (our customers) to support physicians and other healthcare providers (our users) in providing high quality evidence-based care to their patients. We believe adherence to
36
evidence-based clinical pathways supports better outcomes for patients, a better experience for physicians, and lower costs for the healthcare system overall.
Specialty care represents a significant and fast-growing portion of healthcare costs in the U.S., driven in part by the pace of development of new therapies and treatments. To manage these increasing costs, some health plans and other risk-bearing entities historically deployed cost containment strategies that can limit access to care and operate in narrow silos (for example, prior authorization for radiological studies being considered independently from a comprehensive chemotherapy regimen). We believe Evolent can bring an integrated approach to a patient’s condition across multiple specialties, using technology to recommend our evidence-based clinical pathways in a way that provides rapid feedback to the provider, seeks to remove barriers to care, and aligns financial incentives with the best evidence.
We were an early innovator in value-based care, founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board Company.
All of our revenue is recognized in the United States and substantially all of our long-lived assets are located in the United States.
Recent Events
Business Combination
On August 1, 2024, the Company completed its acquisition of certain assets of Machinify, Inc. and the exclusive, perpetual and royalty-free license of Machinify Auth, (“Machinify”), a software platform that leverages the latest advances in artificial intelligence. The acquisition consideration was $28.5 million which included $19.5 million of cash, $11.0 million which was paid upon closing and $8.5 million which was paid on November 1, 2024, as well as an earn-out consisting of additional consideration of up to $12.5 million payable in cash or shares of the Company’s Class A common stock at the election of the Company. See “Part I - Item 1. Financial Statements - Note 4” in this Form 10-Q for more information related to the acquisition of Machinify.
Industry Climate
Our results for the three months ended September 30, 2024 were impacted by higher-than-expected medical costs in our specialty Performance Suite business versus our previous expectations. This included two components:
•Some of our partners submitted new claims data to us that we received and processed from September through early November. These data files included higher expenses for claims paid in quarters than what these partners had previously submitted to us.
•The third quarter saw an acceleration in specialty pharmacy costs industry-wide, particularly in oncology, as referenced by many of the largest health insurers in the country.
We believe the high medical cost inflation in the third quarter in our specialty Performance Suite was driven by a confluence of factors, including significant increases in disease prevalence, Medicaid redetermination-based adverse selection, rapid increases in unit costs, post-COVID acuity increases and provider coding intensity. We are unable to predict how these broader dynamics will impact our business and results of operations in the future.
Impact of Inflation
We experience pricing pressures in the form of competitive prices in addition to rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits and facility leases. We do not believe these impacts were material to our revenues or net income during the nine months ended September 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.
37
Customers
The following table summarizes those partners who represented at least 10.0% of our consolidated revenue:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
Cook County Health and Hospitals System
11.6%
15.7%
11.3%
16.8%
Florida Blue Medicare, Inc.
13.2%
*
12.8%
10.9%
Humana Insurance Company
14.2%
13.7%
19.3%
*
Molina Healthcare, Inc.
14.9%
12.9%
13.0%
14.2%
Blue Cross and Blue Shield of North Carolina
10.8%
*
*
*
————————
* Represents less than 10.0% of the respective balance.
Repositioning Costs
During the second quarter of 2023, the Company implemented a broad set of repositioning initiatives designed to further align the Company’s assets and talent towards the value-based specialty care opportunity, with the intent of streamlining its operations and supporting the goal of realizing long-term sustainable earnings growth (the “2023 Repositioning Plan’). These initiatives include making organizational changes across the business that resulted in severance, terminated benefits and related payroll taxes and dedicated employee costs associated with recent acquisitions as well as third-party professional fees. Dedicated employee costs primarily include project management and technology staff costs needed to migrate acquired businesses to Evolent’s integrated technology platform and costs related to the consolidation of brands, internal operations, strategies, processes and platforms. Dedicated employee costs are limited to employees that will have no role in ongoing operations and have no planned role at Evolent once the repositioning activities are completed. Professional services costs primarily relate to services provided by a third-party vendor to review our operating model and organizational design in order to improve our profitability, create value through our solutions and invest in strategic opportunities in future periods. Office space consolidation includes early termination penalties and associated expenses. Costs associated with the 2023 Reposition Plan were recorded in selling, general and administrative expenses on the consolidated statements of operations and comprehensive income (loss). The 2023 Repositioning Plan was completed during the second quarter of 2024.
The following table provides a summary of our total costs associated with our repositioning plans for the nine months ended September 30, 2024, by major type of cost (in thousands):
For the Nine Months Ended September 30, 2024
Cumulative Amount Incurred Through September 30, 2024
Severance and termination benefits
$
1,835
$
10,399
Dedicated employee costs
1,185
8,085
Professional services
4,127
17,038
Office space consolidation
3,452
10,314
Total
$
10,599
$
45,836
Critical Accounting Policies and Estimates
Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 2” in our 2023 Form 10-K for a complete summary of our significant accounting policies.
Goodwill
We recognize the excess of the purchase price plus the fair value of any non-controlling interests in the acquiree over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting
38
unit level. We perform impairment tests between annual tests if an event occurs, or circumstances change, that we believe would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of our reporting unit is below its carrying amount. Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring our reporting unit’s fair value.
If the Company determines that it is more likely than not that the fair value of our reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). We use both a discounted cash flow analysis and market multiple analysis in order to estimate the fair value of our reporting unit. The discounted cash flow analysis relies on significant judgement and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins. These assumptions are based on estimates of future revenue and earnings after considering such factors as general economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The weighted average cost of capital is based on market-based factors/inputs but also considers the specific risk characteristics of the reporting unit’s cash flow forecast. A significant change to these estimates and assumptions could cause the estimated fair values of our reporting unit and intangible assets to decline and increase the risk of an impairment charge to earnings. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
On October 31, 2023, the Company performed its annual goodwill impairment review for fiscal year 2023. In addition, the Company underwent organizational changes which required a reassessment of reporting units. As a result, the Company determined it has one reporting unit due to the economic similarity of the services provided to our partners. Based on our qualitative assessment, we did not identify sufficient indicators of impairment that would suggest the fair value of our reporting unit was below its respective carrying values. As a result, a quantitative goodwill impairment analysis was not required. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three and nine months ended September 30, 2024. We will perform our annual impairment test of October 31, 2024.
RESULTS OF OPERATIONS
Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units in Evolent Health LLC, which has owned all of our operating assets and substantially all of our business since inception. The financial results of Evolent Health LLC are consolidated in the financial statements of Evolent Health, Inc.
Key Components of our Results of Operations
Revenue
Our revenue contracts are typically multi-year arrangements with customers to provide solutions designed to lower the medical expenses of our partners and include our total cost of care management and specialty care management services solutions, provide comprehensive health plan operations and claims processing services, and also include transition or run-out services to customers.
Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our partners and providers. Generally, we will apply the series guidance to the performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically includes a monthly payment that is calculated based on a specified per member per month rate, multiplied by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums. Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and best judgment at the time.
We also deploy our services in capitation arrangements under our specialty care management solution and total cost of care solution, which we call the “Performance Suite.” Capitation arrangements under the Performance Suite may include performance-based arrangements and/or gainshare features. We occasionally use third parties to assist in satisfying our performance obligations. In order
39
to determine whether we are the principal or agent in the arrangement, we review each third-party relationship on a contract-by- contract basis. As we integrate goods and services provided by third parties into our overall service, we control the services provided to the customer prior to its delivery. As such, we are the principal and we will recognize revenue on a gross basis. In certain cases, we act as an agent and do not control the services from third parties before it is delivered to the customer, thereby recognizing revenue on a net basis.
Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.
Contracts with Multiple Performance Obligations
Our contracts with customers may contain multiple performance obligations, primarily when the partner has requested both administrative services and other services such as our specialty care management or total cost of care management services as these services are distinct from one another. When a contract has multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives when determining the standalone selling price.
Cost of Revenue (exclusive of depreciation and amortization)
Our cost of revenue includes direct expenses and shared resources that perform services in direct support of our partners. Costs consist primarily of claims expense, employee-related expenses (including compensation, benefits and stock-based compensation), expenses recorded as part of a Medicare shared savings program and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments to providers and payments for pharmaceutical treatments and other health care expenditures through performance-based arrangements.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of employee-related expenses (including compensation, benefits and stock-based compensation) for selling and marketing, corporate development, finance, legal, human resources, corporate information technology, professional fees and other corporate expenses associated with these functional areas. Selling, general and administrative expenses also include transition services agreements (“TSA”) fees associated with our acquisitions, costs associated with our centralized infrastructure and research and development activities to support our network development capabilities, technology infrastructure, clinical program development and data analytics.
Depreciation and Amortization Expense
Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value of Evolent Health LLC’s assets and liabilities for the Offering Reorganization, amortization of intangible assets recorded as part of our various business combinations and asset acquisitions and depreciation of property and equipment, including internal-use software development costs.
Lives on Platform and PMPM Fees
Performance Suite Lives on Platform are calculated by summing monthly members covered for specialty care services for contracts not under ASO arrangements, plus members managed by Complex Care in capitation arrangements and divided by the number of months in the period. Specialty Technology and Services Suite Lives on Platform are calculated by summing monthly members covered for oncology, cardiology, musculoskeletal, advanced imaging and other diagnostics specialty care services for contracts under ASO arrangements divided by the number of months in the period. Administrative Services Lives on Platform are calculated by summing monthly members covered for administrative services implementation and core performance services divided by the number of months in the period. Cases are calculated by summing the number of individuals receiving services through our surgery management and advanced care planning programs in a given period. Members covered for more than one category are counted in each category.
Performance Suite Average PMPM fee is defined as revenue pertaining to our Performance Suite during the period reported divided by Performance Suite Lives on Platform for the period divided by the number of months in the period. Specialty Technology and Services Suite Average PMPM fee is defined as revenue pertaining to the Specialty Technology and Services Suite during the period
40
reported divided by Specialty Technology and Services Suite Lives on Platform for the period divided by the number of months in the period. Administrative Services Average PMPM fee is defined as revenue pertaining to the Administrative Services during the period reported divided by the Administrative Services Lives on Platform for the period divided by the number of months in the period. Revenue per Case is calculated by the revenue pertaining to surgery management and advanced care planning programs divided by the number of cases for a given period.
Average Unique Members are calculated by summing members covered by our Performance Suite, Specialty Technology and Services Suite and Administrative Services. In cases where partners cross between multiple solutions, we only capture members from the solution with the maximum number of members.
Management uses Lives on Platform, PMPM fees, Cases, Revenue per Case and Average Unique Members because we believe that they provide insight into the unit economics of our services. We believe that these measures are also useful to investors because they allow further insight into the period over period operational performance.
Consolidated Results
(in thousands, except percentages)
For the Three Months Ended September 30,
Change Over Prior Period
For the Nine Months Ended September 30,
Change Over Prior Period
2024
2023
$
%
2024
2023
$
%
Revenue
$
621,401
$
511,015
$
110,386
21.6
%
$
1,908,199
$
1,407,841
$
500,358
35.5
%
Expenses
Cost of revenue
540,708
386,585
154,123
39.9
%
1,616,557
1,048,998
567,559
54.1
%
Selling, general and administrative expenses
67,060
96,567
(29,507)
(30.6)
%
215,349
276,682
(61,333)
(22.2)
%
Depreciation and amortization expenses
29,701
32,404
(2,703)
(8.3)
%
89,074
93,813
(4,739)
(5.1)
%
Loss on disposal of non-strategic assets
—
2,097
(2,097)
(100.0)
%
—
2,097
(2,097)
(100.0)
%
Right-of-use assets impairment
—
—
—
—
%
—
24,065
(24,065)
(100.0)
%
Change in fair value of contingent consideration
200
11,300
(11,100)
(98.2)
%
9,108
12,047
(2,939)
(24.4)
%
Total operating expenses
637,669
528,953
108,716
20.6
%
1,930,088
1,457,702
472,386
32.4%
Operating loss
$
(16,268)
$
(17,938)
$
1,670
9.3
%
$
(21,889)
$
(49,861)
$
27,972
56.1%
Cost of revenue as a % of revenue
87.0
%
75.7
%
84.7
%
74.5
%
Selling, general and administrative expenses as a % of revenue
10.8
%
18.9
%
11.3
%
19.7
%
Comparison of the Results for Three Months Ended September 30, 2024 to 2023
Revenue
Total revenue increased by $110.4 million, or 21.6%, to $621.4 million for the three months ended September 30, 2024, as compared to 2023. This increase is primarily due to growth in our Performance Suite of $60.8 million, net of a $41.8 million true-down of revenue related to a narrowed scope of services in select markets retroactive to the beginning of the year, higher revenue from one of our customers of $22.4 million and higher revenue from transitioning certain Specialty Technology and Services Suite customers to
41
Performance Suite of $28.2 million offset by lower run out services from our contract within our Administrative Services solution of $6.9 million.
The following table represents Evolent’s revenue disaggregated by line of business (in thousands):
For the Three Months Ended September 30,
2024
2023
Medicaid
$
214,627
$
195,259
Medicare
238,527
208,166
Commercial and other
168,246
107,590
Total
$
621,400
$
511,015
The following table represents the Company’s Lives on Platform, Cases, PMPM fees and revenue per case for the three months ended September 30, 2024 and 2023 (Average Lives on Platform/Cases in thousands):
Average Lives on Platform/ Cases
Average PMPM Fees / Revenue per Case
For the Three Months Ended September 30,
For the Three Months Ended September 30,
2024
2023
2024
2023
Performance Suite (1)
6,916
3,906
$
20.97
$
27.63
Specialty Technology and Services Suite
74,192
72,381
0.38
0.37
Administrative Services
1,258
1,832
15.74
12.50
Cases
13
15
3,113
2,490
Average Unique Members
41,444
41,721
————————
(1)The decrease in Performance Suite PMPM for the three months ended September 30, 20254 compared to 2023 is driven primarily by $41.8M truedown of revenue related to a narrowed scope of services in select markets retroactive to the beginning of the year.
Cost of Revenue
Cost of revenue increased by $154.1 million, or 39.9%, to $540.7 million for the three months ended September 30, 2024, as compared to 2023, due to growth in our revenue and a shift in mix towards our Performance Suite, which has a lower gross margin than our Specialty Technology and Services solutions. The increase in cost of revenue this quarter is driven primarily by $196.1 million of higher claims cost compared to the prior year period, which is attributable to acceleration in medical expenses in certain Performance Suite markets relating to higher disease prevalence and acuity of certain populations, higher specialty pharmaceutical costs and inclusive of $24.6 million related to transitioning certain Specialty and Technology Service Suite customers to Performance Suite. This increase in cost was offset by a $41.7 million true-down in claims expense for one of our Performance Suite customers related to a narrowed scope of services in select markets retroactive to the beginning of the year, a decrease that was offset by a corresponding decrease in revenue.
Approximately $1.1 million and $51.0 thousand of total cost of revenue was attributable to stock-based compensation expense for the three months ended September 30, 2024, and 2023 respectively. Cost of revenue represented 87.0% and 75.7% of total revenue for the three months ended September 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 solution, which has a lower gross margin and longer maturation profile than our other product types and acceleration in specialty oncology pharmacy costs. We expect the claims expense portion of our cost of revenue to grow at the pace of overall growth in specialty spend for cancer and cardiovascular conditions, offset by the impact of our clinical interventions.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased by $29.5 million, or 30.6%, to $67.1 million for the three months ended September 30, 2024, as compared to 2023, principally as a result of lower TSA fees related to our acquisition of NIA of $2.6 million,
42
professional fees in the prior period of $9.8 million as a result of the 2023 Repositioning Plan and a $14.5 million decrease in personnel costs as a result of lower headcount and bonus accruals.
Approximately $13.3 million and $10.2 million of total selling, general and administrative costs were attributable to stock-based compensation expense for the three months ended September 30, 2024, and 2023, respectively. Selling, general and administrative expenses represented 10.8% and 18.9% of total revenue for the three months ended September 30, 2024, as compared to 2023, respectively, driven in part by the Company’s 2023 Repositioning Plan which concluded in the second quarter of 2024.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased $2.7 million, or 8.3%, to $29.7 million for the three months ended September 30, 2024, as compared to 2023 due primarily to fully amortizing our NCH technology intangible and provider network contracts in 2023 resulting in lower amortization of $1.4 million and $0.5 million, respectively, offset, in part by $0.3 million of amortization of technology intangible assets acquired through our acquisition of Machinify.
Change in Fair Value of Contingent Consideration
We recorded a loss on change in fair value of contingent consideration of $0.2 million for the three months ended September 30, 2024 primarily related to the liabilities acquired as a result of the acquisitions of Machinify in August 2024 and $11.3 million for the three months ended September 30, 2023, related to the liabilities acquired as a result of the acquisitions of Machinify in August 2024, NIA in January 2023 and IPG in August 2022. See “Part I - Item 1. 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.
Comparison of the Results for The Nine Months Ended September 30, 2024 to 2023
Revenue
Total revenue increased by $500.4 million, or 35.5%, to $1,908.2 million for the nine months ended September 30, 2024, as compared to 2023. The increase in revenue is primarily from $343.3 million from new Performance Suite contracts, $90.6 million from transitioning a customer from Specialty Technology and Services Suite to the Performance Suite, $36.8 million from new Specialty Technology and Services Suite contracts and $44.8 million from new oncology and cardiology contracts. Growth was also offset in part by a $34.8 million reduction in revenue from the run out of an Administrative Services contract.
The following table represents Evolent’s revenue disaggregated by line of business (in thousands):
For the Nine Months Ended September 30,
2024
2023
Medicaid
$
646,819
$
587,611
Medicare
794,160
474,535
Commercial and other
467,220
345,695
Total
$
1,908,199
$
1,407,841
The following table represents the Company’s Lives on Platform, Cases, Average PMPM fees, Revenue per Case and Average Unique Members for the three and nine months ended September 30, 2024 and 2023 (Average Lives on Platform/Cases in thousands):
Average Lives on Platform/ Cases
Average PMPM Fees / Revenue per Case
For the Nine Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
Performance Suite (1)
6,956
3,653
$
21.48
$
25.56
Specialty Technology and Services Suite
72,732
68,613
0.39
0.36
Administrative Services
1,260
1,837
15.76
13.88
Cases
44
46
2,929
2,517
Average Unique Members
40,396
41,594
43
————————
(1)The decrease in Performance Suite PMPM for the nine months ended September 30, 20254 compared to 2023 is driven primarily by $41.8M truedown of revenue related to a narrowed scope of services in select markets retroactive to the beginning of the year.
Cost of Revenue
Cost of revenue increased by $567.6 million, or 54.1%, to $1,616.6 million for the nine months ended September 30, 2024, as compared to 2023, principally as a result of the 35.5% growth in our revenue compared to the nine months ended September 30, 2023. The increase included approximately $569.0 million of higher claims cost compared to the prior year period, which is attributable to higher medical expenses in certain Performance Suite markets relating to higher disease prevalence and acuity of certain populations inclusive of $77.1 million related to transitioning certain Specialty and Technology Service Suite customers to Performance Suite. This increase in cost was offset by a $41.7 million true-down in claims expense for one of our Performance Suite customers, a decrease that was offset by a corresponding decrease in revenue as well as $9.6 million in professional fees due primarily to consulting services. Overall, the company faced higher medical costs but managed to reduce some expenses through strategic measures. These increases were offset in part by a decrease of $11.3 million from lower personnel costs.
Approximately $3.3 million and $1.6 million of total cost of revenue was attributable to stock-based compensation expense for the nine months ended September 30, 2024, and 2023, respectively. Cost of revenue represented 84.7% and 74.5% of total revenue for the nine months ended September 30, 2024, and 2023 respectively. Our cost of revenue increased as a percentage of our total revenue due to higher medical costs with the rapid growth of our Performance Suite solution, which has a lower gross margin and longer maturation profile than our other product types and acceleration in specialty oncology pharmacy costs. We expect the claims expense portion of our cost of revenue to grow at the pace of overall growth in specialty spend for cancer and cardiovascular conditions, offset by the impact of our clinical interventions.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased by $61.3 million, or 22.2%, to $215.3 million for the nine months ended September 30, 2024, as compared to 2023. The decrease was primarily driven by lower TSA fees related to our NIA acquisition of $13.5 million recorded in 2023, $31.6 million of lower professional fees as a result of the 2023 Repositioning Plan, a $17.2 million decrease in personnel costs as a result of lower headcount and bonus accruals and lower bad debt expense of $9.5 million due to collection timing from our customers, offset by higher stock compensation of $14.3 million due to the achievement and change in projected achievement of certain performance measurements.
Approximately $42.5 million and $28.3 million of total selling, general and administrative expenses were attributable to stock-based compensation expense for the nine months ended September 30, 2024 and 2023, respectively. Acquisition and severance costs accounted for approximately $5.1 million and $15.2 million of total selling, general and administrative expenses for the nine months ended September 30, 2024 and 2023, respectively. Selling, general and administrative expenses represented 11.3% and 19.7% of total revenue for the nine months ended September 30, 2024, as compared to 2023, respectively, driven in part by the Company’s 2023 Repositioning Plan which concluded in the second quarter of 2024.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased $4.7 million, or 5.1%, to $89.1 million for the for the nine months ended September 30, 2024, as compared to 2023 primarily to fully amortizing our NCH technology intangible and provider network contracts in 2023 resulting in lower amortization of $4.1 million and $1.4 million, respectively, offset, in part by $1.6 million higher amortization on intangibles from our acquisition of NIA and Machinify.
Right-of-Use Asset Impairment
During the nine months ended September 30, 2023, the Company decommissioned its Chicago, IL lease and wrote off the associated right-of-use asset, recognizing an impairment charge of $24.1 million in right-of-use assets impairment on the consolidated statements of operations and comprehensive income (loss). There were no such impairments in 2024.
Change in Fair Value of Contingent Consideration
We recorded a loss on change in fair value of contingent consideration of $9.1 million for the nine months ended September 30, 2024 primarily related to the liabilities acquired as a result of the acquisitions of Machinify in August 2024 and NIA in January 2023 and $12.0 million for the nine months ended September 30, 2023, related to the liabilities acquired as a result of the acquisitions of NIA and IPG in August 2022. 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.
44
Discussion of Non-Operating Results
Interest Expense
Our interest expense is attributable to borrowings under convertible senior notes and 2022 Credit Agreement with Ares. Interest expense and amortization of debt issuance costs activity were as follows (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
2029 Notes
Interest expense
$
3,521
$
—
$
10,565
$
—
Amortization of debt issuance costs
481
—
1,441
—
Interest expense for 2029 Notes
$
4,002
$
—
$
12,006
$
—
2022 Credit Agreement
Interest expense
$
957
$
12,815
$
2,846
$
36,536
Amortization of debt issuance costs
79
630
238
1,810
Interest expense for 2022 Credit Agreement
$
1,036
$
13,445
$
3,084
$
38,346
2024 Notes
Interest expense
$
—
$
153
$
577
Amortization of debt issuance costs
—
47
—
139
Interest expense for 2024 Notes
$
—
$
200
$
—
$
716
2025 Notes
Interest expense
$
647
$
647
$
1,941
$
1,941
Amortization of debt issuance costs
325
322
971
964
Interest expense for 2025 Notes
$
972
$
969
$
2,912
$
2,905
The decrease in interest expense for the three and nine months ended September 30, 2024 compared to the same periods in 2023 is primarily due to repayment of the Term Loan Facility of the Credit Agreement in 2023, offset by interest expense incurred on our 2029 Notes. See “Part I - Item 1. Financial Statements - Note 9” in this Form 10-Q for more information related to interest expense by debt issuance.
Change in Tax Receivable Agreement Liability
Due to the reduction in the Company’s valuation allowance primarily resulting from deferred tax liabilities established as part of the NIA acquisition, the Company has recorded the remaining TRA liability of $66.2 million for the nine months ended September 30, 2023.
Provision for (Benefit from) Income Taxes
An income tax benefit of $0.6 million and $0.3 million was recognized for the three and nine months ended September 30, 2024, respectively, which resulted in effective tax rates of 2.6% and 0.7%, respectively. An income tax benefit of $5.6 million and $74.7 million was recognized for the three and nine months ended September 30, 2023, respectively, which resulted in effective tax rates of 18.0% and 48.4%, respectively. The income tax benefit recorded during the nine months ended September 30, 2024 primarily relates to the expected tax effect of net losses, partially offset by state and foreign taxes. The income tax benefit recorded during the nine months ended September 30, 2023, primarily relates to the reduction in the valuation allowance resulting from deferred tax liabilities established as part of the NIA acquisition accounting, partially offset by state and foreign taxes.
Dividends and Accretion of Series A Preferred Stock
We pay quarterly regular cash dividends on the Series A Preferred Stock at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. In addition, we accrete deferred financing costs and the redemption value in excess of par value in additional paid-in-capital on the consolidated balance sheets. The Company paid $5.1 million and $15.3 million
45
of dividends and accreted $3.0 million and $8.7 million of deferred issuance costs and redemption value for the three and nine months ended September 30, 2024, respectively.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Liquidity and Capital Resources
The Company reported net loss attributable to common shareholders of Evolent Health, Inc. of $62.8 million and $100.9 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, the Company had $96.6 million of cash and cash equivalents and $31.3 million in restricted cash and restricted investments.
We believe our current cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months as of the date the financial statements were issued. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies, which may require us to seek sources of financing.
Cash Flows
The following summary of cash flows(in thousands) has been derived from our financial statements included in “Part I - Item 1. Financial Statements - Consolidated Statements of Cash Flows:”
For the Nine Months Ended September 30,
2024
2023
Net cash and restricted cash provided by operating activities
$
44,996
$
53,201
Net cash and restricted cash used in investing activities
(43,002)
(409,492)
Net cash and restricted cash (used in) provided by financing activities
(97,507)
365,692
Operating Activities
Cash flows from operating activities primarily represent inflows and outflows associated with our operations. Primary activities include net loss from operations adjusted for non-cash transactions, working capital changes and changes in other assets and liabilities.
Cash flows provided by operating activities of $45.0 million for the nine months ended September 30, 2024 were affected by decreases in accounts receivable of $38.8 million from timing of our partner and vendor payments including higher cash receipts from certain performance-based customers, offset by higher payment for claims and performance-based arrangements of $91.4 million, a reduction in accrued compensation and benefits of $24.8 million due to year end bonus payments and severance of $2.9 million and payments for office lease consolidation of $6.7 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 presented in cash flows provided by operating activities under changes in accrued expenses.
Cash flows provided by operating activities of $53.2 million for the nine months ended September 30, 2023 were primarily due to our net loss of $79.6 million, non-cash items including depreciation and amortization expenses of $93.8 million, stock-based compensation expense of $29.9 million, deferred tax benefit of $(78.2) million, impairment of the right-of-use asset connected to our Chicago, IL office lease of $24.1 million and change in our tax receivables liability of $66.2 million. Our operating cash inflows were affected by the timing of our customer and vendor payments primarily driven by lower cash receipts from certain customers of approximately $98.4 million and additional increases in accounts receivable from our acquisition of NIA of $38.5 million combined with a reduction of our accrued compensation and employee benefits due to end of year bonus payments and severance of $(8.8) million, offset in part by higher reserve for claims and performance-based arrangements of $100.0 million and restricted cash held for claims processing services of $7.9 million.
46
Investing Activities
Cash flows used in investing activities of $43.0 million for the nine months ended September 30, 2024 were primarily attributable to cash paid for asset acquisitions and business combinations of $16.9 million which is inclusive of $11.0 million for the purchase of Machinify and $3.0 million for investment in future equity notes, and $18.7 million of investments in internal-use software and purchases of property and equipment.
Cash flows used in investing activities of $409.5 million in the nine months ended September 30, 2023 were primarily attributable to $388.2 million paid for the acquisition of NIA and $22.7 million of investments in internal-use software and purchases of property and equipment.
Financing Activities
Cash flows used in financing activities of $97.5 million for the nine months ended September 30, 2024 were primarily related to $15.3 million of preferred dividends paid on our Series A Preferred Stock and$15.4 million from withholding taxes paid on of vested restricted stock units that were net settled. Additional cash used in financing activities include the portion of the NIA contingent consideration representing the fair value at the acquisition date of $66.6 million.
Cash flows provided by financing activities of $365.7 million in the nine months ended September 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 $47.5 million of cash outflows related to repayment on our Acquisition Facilities, $13.6 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.
Contractual and Other Obligations
We believe that the amount of cash and cash equivalents on hand and cash flows from operations, plus borrowings under our credit facilities and if necessary, additional funding through other forms of financing, will be adequate for us to execute our business strategy and meet anticipated requirements for lease obligations, capital expenditures working capital and debt service for the next twelve months. Our estimated known contractual and other obligations (in thousands) as of September 30, 2024, were as follows (including as discussed in the narrative below):
2024
2025-2026
2027-2028
2029+
Total
Operating leases for facilities
$
2,106
$
15,908
$
12,767
$
12,428
$
43,209
Purchase obligations related to vendor contracts
3,893
23,429
1,481
—
28,803
Convertible notes interest payments (1)
8,338
30,763
28,175
14,088
81,364
Convertible notes principal repayment
—
172,500
—
402,500
575,000
Contingent consideration (2)
—
9,200
—
—
9,200
Total known contractual obligations
$
14,337
$
251,800
$
42,423
$
429,016
$
737,576
————————
(1)Refer to the discussion in “Part I - Item 1. Financial Statements - Note 9” for additional information on payment dates for our convertible notes interest.
(2)Represents the fair value of earn-out consideration related to the Machinify transaction. See “Part I - Item 1. Financial Statements - Note 17” for further details of the Company’s contingent consideration obligation.
As of September 30, 2024, we had $37.5 million of aggregate principal amount in a secured revolving credit facility which will mature in 2029. Subsequent to September 30, 2024, we drew the remaining $37.5 million of aggregate principal amount under our secured revolving credit facility as a result of a slow-down in collections from certain health plan partners in September 2024 and October 2024. The interest rate for the secured revolving credit facility will be calculated, at the option of the borrowers at either the Adjusted Term SOFR Rate (as defined in the Credit Agreement) plus 4.00%, or the base rate plus 3.00%.
In addition, as of September 30, 2024, we had 175,000 shares of the Series A Preferred Stock outstanding. Regular dividends on the Series A Preferred Stock are paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. The regular dividend rate will also increase by 2.0% per annum upon the occurrence and during the continuance of certain triggering events.
The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. Our joint ventures and other investments from time to time may, and some do, include put or call features under which we could be contractually required to purchase interests from our joint venture partner at an exercise price determined in reference to a multiple of the dollar amount of our joint venture partner’s total capital contributions, the performance of the joint venture, and other factors. One
47
of our investments includes a put option that can be exercised by our joint venture partner in the first half of 2025 which, if exercised, would require us to acquire the interests in the joint venture that we do not own for a price that may be up to $50.0 million.
Financing Commitments
Subsequent to September 30, 2024, Evolent entered into a debt financing commitment letter with Ares and Ares Capital Management, LLC pursuant to which Ares Capital LLC has committed to provide, subject to certain conditions, with secured debt financing to be available to the Company to fund acquisitions, ongoing working capital needs and other growth capital expenditure investments. See “Part II - Item 5. Other Information” for further details of the Company’s financing commitments.
Accounts Receivable, net
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. During the nine months ended September 30, 2024, accounts receivable, net, decreased primarily due to the timing of cash receipts from certain customers.
Restricted Cash and Restricted Investments
Restricted cash and restricted investments of $31.3 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $12.8 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 $16.5 million as of September 30, 2024. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are carried at cost and includes prepaid expenses and non-trade accounts receivable. During the nine months ended September 30, 2024, prepaid and other current assets decreased due to lower non-trade accounts receivable of $1.9 million, offset by 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
Uses of Capital
Our principal uses of cash are in the operation and expansion of our business, payment of interest and other amounts payable on our convertible debt and secured borrowings and payment of preferred dividends. The Company does not anticipate paying a cash dividend on our Class A common stock in the foreseeable future.
48
Item 3. 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 September 30, 2024, the Company had cash and cash equivalents and restricted cash and restricted investments of $127.9 million, which consisted of bank deposits with FDIC participating banks of $124.0 million and bank deposits in international banks of $3.9 million.
Changes in interest rates affect the interest earned on our cash and cash equivalents (including restricted cash). We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
As of September 30, 2024, we had $575.0 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. In addition, as of September 30, 2024, we have $37.5 million of aggregate principal amount in a secured revolving credit facility and $175.0 million of Series A Preferred Stock outstanding, all of which are floating rate instruments based on the SOFR and subject to fluctuations in interest rates. In the case of (a) the revolving loan, interest is calculated at either the Adjusted Term SOFR Rate (as defined in the Certificate of Designation) plus 4.00%, or the base rate plus 3.00% and (b) the Series A Preferred Stock, dividends are to be paid quarterly in cash in arrears at a rate per annum equal to Adjusted Term SOFR (as defined in the Certificate of Designation) plus 6.00%. For every 1% increase in SOFR, the Company would record additional interest expense of $0.4 million per annum and preferred dividends of $1.8 million per annum.
Refer to the discussion in “Part I - Item 1. Financial Statements - Note 9” for additional information on our long-term debt.
Foreign Currency Exchange Risk
We have de minimis foreign currency risks related to our operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee and the Philippine Peso. In general, we are a net payer of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating results as expressed in U.S. dollars. At this time, we have not entered into, but in the future, we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations.
49
Item 4. 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 Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2024, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting
Management has designed its internal controls over financial reporting under the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
50
PART II
Item 1. Legal Proceedings
The discussion of legal proceedings included within “Part I – Item 1. Financial Statements - Note 10 - Commitments and Contingencies - Litigation Matters” is incorporated by reference into this Item 1.
Item 1A. Risk Factors
Our significant business risks are described in Part I, Item 1A. “Risk Factors” to our 2023 Form 10-K. These risk factors are supplemented for the item described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.
We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our partners and operating our business, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation, negatively impact our relationships with partners, adversely affect our brand and our business.
Our ability to deliver our solutions, particularly our cloud-based solutions, is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. As a result, our information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information technology, emerging cybersecurity risks and threats, evolving industry and regulatory standards and changing preferences of our partners.
Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our services, and we may experience more significant interruptions in the future. We rely on internal systems as well as third-parties, including bandwidth and telecommunications equipment providers, to provide our services and operate our business. We do not maintain redundant systems or facilities for some of these services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our services and prevent or inhibit the ability of our partners to access our services. These systems may be at greater risk of interruption as a result of increased use of mobile and cloud technologies, including as a result of the shift to work from home arrangements as a result of the COVID-19 pandemic.
In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact our relationship with our partners, our business, results of operations and financial condition. To operate without interruption, both we and our service providers must guard against:
•damage from fire, power loss and other natural disasters;
•telecommunications failures;
•software and hardware errors, failures and crashes;
•security breaches, computer viruses and similar disruptive problems; and
•other potential interruptions.
Any disruption in the network access, telecommunications or co-location services provided by third-party vendors or any failure of or by third-party vendors’ systems or our own systems to handle current or higher volume of use could significantly harm our business.Similarly, disruptions of service to other third parties or to our customers can negatively impact our ability to serve our clients and run our business. For example, in February 2024, Change Healthcare, a subsidiary of UnitedHealth Group and the largest clearinghouse for medical claims in the U.S., was the subject of a cyberattack that required it to take offline its computer systems that handled electronic payments and insurance claims. As a result of the outage, we had reduced visibility into setting our claims reserve for the nine months ended September 30, 2024. Similar events could occur in the future, and the impact to our business could be material.
We exercise limited control over third-parties, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own
51
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.
Failure to accurately predict our exposure under performance-based contracts could result in a reduction in profitability for our specialty care management services solution.
We deploy our specialty care management services solution in capitation arrangements, which we call the Performance Suite, where we are paid a fixed fee per member per month and assume responsibility for the cost of medical claims under our scope. If the Company is unable to accurately predict our exposure under the health care cost risk and control associated costs, for example due to changes in the delivery system; changes in utilization patterns, including post-pandemic as we may experience increased utilization due to higher demand for elective procedures that were not performed during the pandemic and for example, as we experienced in the third quarter of 2024 with the rapid increase in oncology costs; changes in the number of members seeking treatment; unforeseen fluctuations in claims backlogs; unforeseen increases in the costs of the services; the occurrence of catastrophes; regulatory changes; and changes in benefit plan design, the Company’s profitability, margins and prospects have and could decline. In addition, when we enter new or less mature specialty markets, and as our products evolve, it may be difficult for us to predict our exposure under performance-based contracts and our contracts may be less profitable than we expect. We are also dependent on our customers to provide us with accurate and timely information which we cannot control; for example, in the third quarter of 2024, we received revised claims paid data related to previously submitted quarters from customers which had a material adverse impact on our financial results and prospects. Similar occurrences in the future could negatively impact our profitability, operating margins and prospects. Moreover, costs of providing oncology, cardiology, radiology (including advanced imaging), musculoskeletal, physical medicine, genetics and other specialties 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. While we have provisions in certain of our contracts that provide for automatic rate increases, some of our contracts require consent of our partners to certain revised rate increases. If we are unable to reach agreement on revised rates when appropriate, our profitability, margins and prospects will be negatively impacted. When generic drugs are not available or there are shortages, this has increased and in the future may increase our costs, and has impacted and in the future may impact our profitability. Further, the competitive environment for our performance-based products, and customer demands or expectations as to margin levels could result in pricing pressures which could cause us to reduce our rates. A reduction inperformance-based contract rates which are not accompanied by a reduction in covered services or expected underlying care trends could result in a decrease of our profitability and operating margins.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Debt Commitment Letter
On November 6, 2024, Evolent Health LLC entered into a debt financing commitment letter (the “Debt Commitment Letter”) with Ares and Ares Capital Management, LLC (“Ares Capital”), pursuant to which Ares Capital has committed to (a) provide the Borrower with secured debt financing in the form of (i) additional commitments under the Borrower’s existing Revolving Facility in an aggregate principal amount equal to $50.0 million (the “Priority ABL Incremental Facility”), (ii) a new delayed draw term loan facility in an aggregate principal amount equal to $125.0 million (the “2024-A Delayed Draw Term Loan Facility”) and (iii) a new delayed draw term loan facility in an aggregate principal amount equal to $75.0 million (the “2024-B Delayed Draw Term Loan Facility” and together with the Priority ABL Incremental Facility and the 2024-A Delayed Draw Term Loan Facility, the “Committed Facilities”) and (b) effect certain amendments to the Credit Agreement (as amended through the date hereof, the “Existing Credit Agreement”), to be effected through pursuant to an amendment thereto (“Amendment No. 3”; the Existing Credit Agreement, as amended by
52
Amendment No. 3, the “Amended Credit Agreement”). The Debt Commitment Letter provides that the proceeds of borrowings under the Committed Facilities will be used to fund acquisitions, ongoing working capital needs and other growth capital expenditure investments.