S-1 1 d838828ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on May 4, 2015.

Registration No. 333-            

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Evolent Health, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware 8090

32-0454912

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

800 N. Glebe Road, Suite 500

Arlington, VA 22203

(571) 389-6000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Frank Williams

Chief Executive Officer

Evolent Health, Inc.

800 N. Glebe Road, Suite 500

Arlington, VA 22203

(571) 389-6000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

William V. Fogg

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

Jonathan Weinberg

General Counsel

Evolent Health, Inc.

800 N. Glebe Road, Suite 500

Arlington, VA 22203

(571) 389-6000

Richard D. Truesdell, Jr.

Sophia Hudson

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x  (Do not check if a smaller reporting company) Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Proposed maximum  

aggregate

offering price(1)

Amount of

registration fee

Class A Common Stock, par value $0.01 per share

$100,000,000 $11,620

 

 

(1)    Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. Includes the offering price of additional shares of Class A common stock that the underwriters may purchase pursuant to an over-allotment option.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated May 4, 2015

            shares

 

LOGO

Evolent Health, Inc.

Class A common stock

We are selling                 shares of our Class A common stock. This is our initial public offering and no public market exists for our Class A common stock. We anticipate that the initial public offering price of our Class A common stock will be between $         and $         per share. We intend to list our Class A common stock on the New York Stock Exchange under the symbol “EVH”. We have not yet filed an application to have our Class A common stock approved for listing. We intend to file such application following the filing of this registration statement.

We will be a holding company and our principal asset will be our Class A common units in Evolent Health LLC. Immediately following this offering, the holders of our Class A common stock will collectively own 100% of the economic interests in Evolent Health, Inc. and have     % of the voting power of Evolent Health, Inc. The other owners of Evolent Health LLC will have the remaining     % of the voting power of Evolent Health, Inc. through ownership of our Class B common stock.

We have granted the underwriters an over-allotment option to purchase an additional                 shares of Class A common stock.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act, and will therefore be subject to reduced reporting requirements.

Investing in our Class A common stock involves risks. See “Risk factors” beginning on page 19.

 

   Price to public   Underwriting discounts
and commissions*
  Proceeds to us,
before expenses
 

Per Share

$                 $                 $                

Total

$                 $                 $                

 

*   We have also agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting” for a description of all compensation payable to the underwriters.

The underwriters expect to deliver the shares to purchasers on or about                     , 2015 through the book-entry facilities of The Depository Trust Company.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

J.P. Morgan Goldman, Sachs & Co.

The date of this prospectus is                     , 2015.


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Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     19   

Special note regarding forward-looking statements

     48   

The reorganization of our corporate structure

     50   

Use of proceeds

     59   

Dividend policy

     60   

Capitalization

     61   

Dilution

     63   

Unaudited pro forma consolidated financial information

     65   

Selected historical financial and operational data

     73   

Management’s discussion and analysis of financial condition and results of operations

     76   

Business

     94   

Management

     112   

Executive compensation

     119   

Certain relationships and related transactions

     132   

Principal stockholders

     138   

Description of capital stock

     140   

U.S. federal income and estate tax considerations for non-U.S. holders of Class A common stock

     147   

Shares eligible for future sale

     151   

Underwriting

     154   

Legal matters

     161   

Experts

     161   

Where you can find more information

     161   

Index to financial statements

     F-1   

Neither we nor the underwriters have authorized anyone to provide you with information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give to you. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.

Until                     , 2015, all dealers that buy, sell or trade our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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Basis of presentation

In this prospectus, unless the context otherwise requires, the “company”, “we”, “us” and “our” refer to (1) prior to the completion of the offering reorganization described under “The reorganization of our corporate structure”, Evolent Health Holdings, Inc. (including its operating subsidiary, Evolent Health LLC), and (2) after giving effect to such reorganization, Evolent Health, Inc. and its consolidated subsidiary, Evolent Health LLC. Evolent Health LLC has owned all of our operating assets and substantially all of our business since inception. The financial statements of Evolent Health Holdings, Inc. included elsewhere in this prospectus reflect the consolidated results, including Evolent Health LLC, through September 23, 2013, and reflect the results of Evolent Health LLC as an equity method investment subsequent to such date due to a deconsolidation that occurred as a result of a round of equity financing. Accordingly, we have included the historical financial statements of both Evolent Health LLC and Evolent Health Holdings, Inc. in this prospectus in order to provide a consistent presentation for the periods before and after September 23, 2013. The financial results of Evolent Health LLC will be consolidated in the financial statements of Evolent Health, Inc. following this offering. We have not included the historical financial statements of Evolent Health, Inc. in this prospectus because Evolent Health, Inc. has engaged to date only in activities in contemplation of this offering and has no operations or assets. Following the completion of this offering, Evolent Health, Inc. will be a holding company and its principal asset will be all of the Class A common units in Evolent Health LLC. Accordingly, following the completion of this offering, we intend to include the financial statements of Evolent Health, Inc. in our periodic reports and other filings as required by applicable law and the rules and regulations of the Securities and Exchange Commission, or SEC. See “Management’s discussion and analysis of financial condition and results of operations—Basis of presentation” for more information.

This prospectus also includes unaudited consolidated pro forma financial information in order to reflect, on a pro forma basis, the impact of the offering reorganization and as further adjusted for this offering, on the historical financial information of Evolent Health Holdings, Inc. The unaudited pro forma consolidated financial information also reflects certain purchase accounting adjustments. See “Unaudited pro forma consolidated financial information”.

This prospectus contains references to fiscal 2014, fiscal 2013 and fiscal 2012, which represent our fiscal years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively. As used in this prospectus:

 

    “accountable care organizations”, or “ACOs”, means organizations of groups of doctors, hospitals and other health care providers which have come together voluntarily to provide coordinated care to their Medicare patients;

 

    “capitated arrangements” means healthcare payment arrangements whereby providers are paid a fixed amount of money per patient during a given period time rather than on per-service or per-procedure basis;

 

    “founders” means The Advisory Board Company, which we refer to as The Advisory Board, and UPMC (University of Pittsburgh Medical Center);

 

    “GAAP” means U.S. generally accepted accounting principles;

 

    “health insurance exchanges” means organizations that provide a marketplace for individuals to purchase standardized and government-regulated health insurance policies;

 

    the “offering reorganization” means the reorganization transactions that are described under “The reorganization of our corporate structure”;

 

    “partners” means our customers, unless we indicate or the context otherwise implies;

 

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    “pharmacy benefit management”, or “PBM”, means the administration of prescription drug programs, including developing and maintaining a list of medications that are approved to be prescribed, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers and processing prescription drug claim payments;

 

    “population health” means an approach to healthcare that seeks to improve the health of an entire human population;

 

    “third party administration”, or “TPA”, means the processing of insurance claims or the administration of certain aspects of employee benefit plans for a separate entity;

 

    “TPG” means TPG Global, LLC and its affiliates and the “TPG Funds” means one or both of TPG Growth II BDH, L.P. and TPG Eagle Holdings, L.P.; and

 

    “value-based care” means a healthcare management strategy that is focused on high-quality and cost-effective care with the goals of promoting a healthy lifestyle, enhancing the patient experience and reducing preventable hospital admissions and emergency visits.

Market data and industry forecasts and projections

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the section entitled “Business”. We have obtained the market data from certain publicly available sources of information, including publicly available independent industry publications and other third-party sources. Unless otherwise indicated, statements in this prospectus concerning our industry and the markets in which we operate, including our general expectations and competitive position, business opportunity and market size, growth and share, are based on information from independent industry organizations and other third-party sources (including industry publications, surveys and forecasts), data from our internal research and management estimates. Forecasts are based on industry surveys and the preparer’s expertise in the industry and there is no assurance that any of the forecasted amounts will be achieved. We believe the data that third parties have compiled is reliable, but we have not independently verified the accuracy of this information (other than information provided by our affiliates). Any forecasts are based on data (including third-party data), models and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. While we are not aware of any misstatements regarding the industry data presented herein, forecasts, assumptions, expectations, beliefs, estimates and projections involve risks and uncertainties and are subject to change based on various factors, including those described under the headings “Special note regarding forward-looking statements” and “Risk factors”.

 

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including the sections entitled “Risk factors”, “Unaudited pro forma consolidated financial information” and “Management’s discussion and analysis of financial condition and results of operations” and the audited annual financial statements and notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus.

Company overview

We are a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading health systems and physician organizations, which we refer to as providers, are taking on increasing clinical and financial responsibility for the populations they serve. Our purpose-built platform, powered by our technology, proprietary processes and integrated services, enables providers to migrate their economic orientation from fee-for-service, or FFS, reimbursement to payment models that reward high-quality and cost-effective care, or value-based payment models. By partnering with providers to accelerate their path to value-based care, we enable our provider partners to expand their market opportunity, diversify their revenue streams, grow market share and improve the quality of the care they provide.

We consider value-based care to be the necessary convergence of healthcare payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS healthcare, a regulatory environment that is incentivizing value-based care models, a rapid expansion of retail insurance driven by the emergence of the health insurance exchanges and innovation in data and technology. We believe providers are positioned to lead this transition to value-based care because of their control over large portions of healthcare delivery costs, their primary position with consumers and their strong local brand.

Today, increasing numbers of providers are adopting value-based strategies, including contracting for capitated arrangements with existing insurance companies, governmental payers or large self-funded employers and managing their own captive health plans. Through value-based care, providers are in the early stages of transforming their role in healthcare as they attempt to defend their existing position and capture a greater portion of the more than $2 trillion in annual health insurance expenditures. While approximately 10% of healthcare payments are paid through value-based care programs today, including through models created by systems like UPMC, Kaiser Permanente and Intermountain Healthcare, it is estimated that this number will grow to over 50% by 2020. There were 120 provider-owned health plans as of 2010 and this number continues to grow. The number of ACOs constructed to manage capitated or value-based arrangements with existing insurance companies or government payers grew to 742 by the end of 2014.

We believe the transformation of the provider business model will require a set of core capabilities, including the ability to aggregate and understand disparate clinical and financial data, standardize and integrate technology into care processes, manage population health and build a financial and administrative infrastructure that capitalizes on the clinical and financial value it delivers. We provide an end-to-end, built-for-purpose, technology-enabled services platform for providers to transition their organization and business model to succeed in value-based payment models. The core elements of our platform include:

 

    Identifi®, our technology platform;
    an integrated technology, proprietary process and clinical services model;
    long-term, embedded and aligned partnerships with health systems;

 

 

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    integration into provider clinical processes; and
    a payer-agnostic position that allows a single point of integration between payers and the provider community.

We believe we are pioneers in enabling health systems to succeed in value-based payment models. We were founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board, to enable providers to pursue a value-based business model and evolve their competitive position and market opportunity. Our mission, technology and services were developed with UPMC, which operates the nation’s largest provider-owned health plan after Kaiser Permanente, and The Advisory Board, whose best practice research and technology solutions were available to a membership base of over 3,900 hospitals and providers as of March 2015.

We have developed what we believe is a unique partner development model. Most partner relationships begin with our transformation services, during which a partner engages us to develop a customized value-based care execution plan. This allows us to define the opportunity for our partners and embed our technology and processes while building confidence and trust that we are the best long-term infrastructure partner for the provider’s value-based care strategy. We then transition our partner to our platform and operations phase, which is governed by a long-term contract. We incur significant expenses in securing new partner relationships, and, in fiscal 2014, our business development expenses represented approximately 10% of our total revenues. To date, we have secured ten long-term contracts representing over $             million in future total contract value from our platform and operations revenue based on current pricing and membership as of April 30, 2015, with additional upside as current partners grow and expand the membership in their value-based care offerings. Although the revenue from these long-term contracts is not guaranteed because certain of these contracts are terminable for convenience by our partners after a specified period of time, certain partners would be required to pay us a termination fee in certain circumstances.

We believe our business model provides strong visibility and aligns our partners’ incentives with our own. A large portion of our revenue is derived from our multi-year contracts, which are linked to the number of members that our partners are managing under a value-based care arrangement. This variable pricing model depends on the number of services and technology applications that our partners utilize to advance their value-based care strategies and the number of members they are able to attract over time. We expect to grow with current partners as they increase membership in their existing value-based programs, through expanding the number of services we provide to our existing partners and by adding new partners.

We believe we are in the early stages of capitalizing on these long-term aligned partnerships. Our health system partners’ current value-based care arrangements represent less than 10% of the health system partners’ total revenue each year. We believe the proportion of value-based care related revenues to total health system revenues will continue to grow, driven by continued price pressure in FFS, new government payment programs, growth in consumer-focused insurance programs, such as Medicare Advantage and the health insurance exchanges, and innovation in data and technology.

Our business model benefits from scale, as we leverage our purpose-built technology platform and centralized resources in conjunction with the growth of our partners’ membership base. These resources include technology development, clinical analytics and network development. While our absolute investment in our centralized resources will increase over time, we expect it will decrease as a percentage of revenue as we are able to scale this investment across a broader group of partners.

 

 

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The value we deliver to providers has translated into strong growth, as evidenced by Evolent Health LLC’s revenue increasing from $40.3 million for fiscal 2013 to $100.9 million for fiscal 2014. For fiscal 2014, Evolent Health LLC’s net loss was $52.3 million and Evolent Health LLC’s Adjusted EBITDA was approximately $(37.7) million. See “—Summary financial and operational data” for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss. Evolent Health LLC also incurred net losses of $32.8 million and $19.3 million for fiscal 2013 and fiscal 2012, respectively.

Our market opportunity

In 2014, healthcare spending in the United States is projected to be more than $3 trillion, of which we estimate $1 trillion to be waste. We believe that a fundamental shift to value-based care can address this $1 trillion opportunity. We believe that for the U.S. healthcare system to shift to a value-based care delivery model, providers must be an empowered part of the solution. Our comprehensive technology and services platform enables providers to capitalize on this transition, which we believe will position us to be at the forefront of the transformation to value-based care.

We believe our total market opportunity is over $10 billion today based on health insurance expenditures, the total percentage of payments providers receive under value-based contracting, the size of the provider-sponsored health plan market and the fees we believe we can charge. We believe this opportunity will grow to over $46 billion by 2020 driven by health insurance expenditures increasing from approximately $2.1 trillion in 2013 to approximately $3.2 trillion in 2020, the total percentage of payments providers receive under value-based care models growing from 10% to 50%, and the provider-sponsored health plan market representing 15% of total health plan membership.

Our solution

We provide an end-to-end, built-for-purpose, technology-enabled services platform for providers to succeed in value-based payment models.

Our long-term partnerships begin with a system transformation process called the Blueprint, where we work with a provider’s board of directors and senior management to assess their ability to succeed in value-based payment models. This process acts as a channel for long-term partnerships, as a significant portion of providers that make an investment in a Blueprint continue to partner with us for our proprietary processes and integrated services, which we refer to as our Value-Based Operations.

Once our platform is integrated into the clinical and financial systems of our provider partners through the Blueprint and implementation phase, our Value-Based Operations, including our technology-enabled services platform, support the execution and administration of a provider’s value-based care models on an ongoing basis. Value-Based Operations include Identifi®, our technology backbone, Population Health Services to enable provider-led management of the population and Financial and Administrative Management to measure performance and administer and capture the value of improved care.

 

 

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LOGO

Supporting multiple value-based care models

Our platform was built to support a diverse set of provider value-based care strategies. It provides the core technology and services necessary for all models pursued by providers.

Providers partner with us on at least one of three types of value-based contracting models, with most supporting at least the Direct to Employer model and one additional type of contracting arrangement.

 

    Direct to Employer:    Manage costs for self-funded employers including a health system’s own employees

 

    Payer contracts:    Value-based contracts with third-party payers (including commercial insurers and the government) that include a full spectrum of risk for bundled payments, pay for performance to full capitation

 

    Health plan:    Launching a provider-owned health plan allows providers to control all of the healthcare insurance premiums, or premium dollars, across multiple populations, including commercial, Medicare and Medicaid

Our partners benefit from a single platform that enables them to utilize our core suite of ongoing solutions, regardless of the size or type of value-based care models they are pursuing. Our platform grows through health systems increasing membership in their existing value-based care payment model, as well as their pursuit of additional payer contracts and health plans.

Identifi®

Identifi® is our proprietary technology platform that aggregates and analyzes data, manages care workflows and engages patients. Identifi® links our processes with those of our provider partners and other third parties in order to create a connected clinical delivery ecosystem, stratify patient populations, standardize clinical work flows and enable high-quality, cost-effective care. The configurable nature and broad capabilities of Identifi® help enhance the benefits our partners receive from our Value-Based Operations and increase the effectiveness of our partners’ existing technology architecture. Highlights of the capabilities of Identifi® include the following:

 

    data and integration services;
    clinical and business content;
    electronic medical records, or EMR, optimization; and
    a suite of cloud-based applications.

 

 

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Value-Based Operations

Our Value-Based Operations are empowered and supported by Identifi®. Other elements include:

Delivery network alignment.    We help our partners build the capabilities that are required to develop and maintain a coordinated and financially-aligned provider network that can deliver high-quality care necessary for value-based contracts.

Population Health Performance.    Population Health Performance is an integrated suite of technology-enabled solutions that supports the delivery of quality care in an environment where a provider’s need to manage health has significantly expanded.

Financial and administrative management.    We help providers assemble the complete infrastructure required to operate, manage and capitalize on a variety of value-based payment arrangements.

We integrate change management processes and ongoing physician-led transformation into all value-based services to build engagement, integration and alignment within our partners in order to successfully deliver value-based care and sustain performance. We have standardized the processes described above and are able to leverage our expertise across our entire partner base. Through the technological and clinical integration we achieve, our solutions are delivered as ingrained components of our partner’s core operations rather than add-on solutions.

 

 

Centralized infrastructure

Our solution was built to provide operating leverage that benefits from our continued growth. We leverage our purpose-built technology platform and centralized resources in conjunction with the growth in our partners’ membership base. Our centralized resources and technologies include our network development capabilities, PBM administration, technology infrastructure and data analytics.

Competitive strengths

We believe we are well-positioned to benefit from the transformations occurring in healthcare payment and delivery described above. We believe this new environment that rewards the better use of information to drive patient outcomes aligns with our platform, recent investments and other competitive strengths.

Early innovator

We believe we are an innovator in the delivery of a comprehensive value-based care solution for providers. We were founded in 2011, ahead of the implementation of the Patient Protection and Affordable Care Act, or ACA, health insurance exchanges and before the rapid expansion of programs, such as Medicare ACOs or Medicare Bundled Payment Initiatives. Since our inception, we have invested a significant amount in our offerings.

 

 

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Comprehensive technology platform

Our proprietary technology platform, Identifi®, allows us to deliver a connected delivery ecosystem, implement replicable clinical processes, scale our Value-Based Operations and capitalize on multiple types of value-based payment relationships. The Identifi® platform supports the following capabilities:

 

    data aggregation from internal and external sources, such as EMRs and payer claims;

 

    algorithmic interpretation of aggregated data to stratify populations and identify high-risk patients;

 

    standardized workflows and dashboards to enable consistency across disparate clinical resources;

 

    applications to support value-based business models;

 

    patient outreach and engagement tools;

 

    integration into physician workflows to proactively engage high-priority patients; and

 

    reporting and tracking of clinical and financial outcomes.

Provider-centric brand identity

We believe our provider-centric brand identity and origins differentiate us from our competitors. We believe our solutions, which have built on capabilities developed at UPMC, resonate with potential partners seeking proven solutions from providers rather than payers or non-healthcare businesses. Our analytical and clinical solutions are rooted in UPMC’s experience in growing a provider-led, integrated delivery network over the past 15 years, and growing to become one of the largest provider-owned health plans in the country. In addition, our deep strategic partnership with The Advisory Board strengthens our brand as a provider-friendly organization. The Advisory Board is well-recognized as an industry thought leader that made its research and technology solutions available to approximately 3,900 hospitals and providers as of March 2015. Our position as a payer-agnostic services organization allows for the sharing of data across multiple payers and care delivery integration regardless of payer, which we believe is not possible with payer-led solutions.

Partnership-driven business model

Our business model is predicated on long-term strategic partnerships with leading providers that are attempting to evolve two of their most critical business functions: how they deliver care and how they are compensated for it. The partnership model enables cultural alignment, integration into the provider care delivery and payment work flow, long-term contractual relationships and a cycle of clinical and cost improvement with shared financial benefit. We devote significant resources, primarily in the form of business development, to establish relationships with our partners. For fiscal 2014, our business development expenses represented approximately 10% of our total revenues. Thereafter, beginning with the Blueprint phase of our engagement with a partner, our costs to serve our partners primarily consist of personnel-related costs for the deployment of our solution. We expect our upfront costs as a percentage of revenue to decline over time. As of April 30, 2015, our average contractual relationship with our partners was over six years, with an average of 5.2 years of performance remaining per contract. As of December 31, 2014, we had entered into long-term contractual relationships with eight partners and we have subsequently entered into long-term contractual relationships with two additional partners. Our four largest partners, Indiana University Health, WakeMed Health and Hospitals, Piedmont WellStar Health Plan and Premier Health Partners, comprised approximately 25%, 21%, 16% and 14%, respectively, of our revenue for fiscal 2014, or 76% in the aggregate.

 

 

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Channel development

Our heritage, having been founded by UPMC, one of the largest providers in the country, and The Advisory Board with over 3,900 hospital and provider members, along with the relationships fostered by our senior management team, have allowed us to develop a significant channel into leading health systems. Our solution empowers a fundamental shift in a provider’s business model and requires alignment of their senior management and board of directors for success. A significant portion of providers that make an investment in a Blueprint continue to partner with us for our proprietary process and integrated services, which we refer to as our Value-Based Operations.

Our business model creates additional channel development through our Blueprint services. Our Blueprint not only enables providers with a roadmap to value-based care and the financial implications of the transition, it also creates a connection between us and the provider’s senior leadership. As a result, we derive revenues from providers who have completed the Blueprint phase and proceed to partner with us to enable their transition to value-based contracting.

Proven leadership team

We have made a significant investment in building an industry-leading management team. The senior leadership team of ten individuals has an average of 15 years of experience in the healthcare industry and a track record of delivering measurable clinical, financial and operational improvement for healthcare providers and payers. Our chief executive officer, Frank Williams, was formerly the chief executive officer of The Advisory Board, where he oversaw the growth of the company and its initial public offering.

Growth opportunities

Multiple avenues for growth with our existing, embedded partner base

We have established a multi-year partnership model with multiple drivers of embedded growth through the following avenues:

 

    growth in lives in existing covered populations;

 

    partners expanding into new lines of value-based care to capture growth in new profit pools; and

 

    partners utilizing our additional capabilities, such as new Identifi® applications, PBM and TPA.

In addition to growth within our existing partner base, opportunities exist with providers utilizing our Blueprint, who sign short-term contracts under which we analyze the opportunities available to them in the value-based care market. Since our inception we have converted the majority of our Blueprints into long-term operating partnerships.

Early stages of a rapidly growing transformational addressable market

We believe that our existing partners represent a small fraction of health systems that could benefit from our solutions. The transformation of the care delivery and payment model in the United States has been rapid, but it is still in the early stages. While approximately 10% of healthcare payments are paid through value-based care programs today, it is estimated that this number will grow to over 50% by 2020.

 

 

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Capitalize on growth in select government-driven programs

Significant growth is projected in the number of people managed by government-driven programs in the United States over the next 10 years. Specifically, the Centers for Medicare and Medicaid Services project the number of Medicare beneficiaries to grow to approximately 63 million by 2020. We expect health systems to be direct beneficiaries of growth in Medicare Advantage, Medicaid Managed Care, Dual Eligible and health insurance exchanges because those specific markets are well suited for value-based care. We believe that the growth in government programs will create an opportunity for health systems to capture a greater portion of the over $2 trillion in annual health insurance expenditures. The nature of our variable fee economic model enables us to benefit from this growth in government-managed lives.

Ability to capture additional value through delivering clinical results

We are capturing only a portion of the administrative dollars in the market through our current solution, which represent over 10% of total premium dollars. We believe there is a significant opportunity to capture a portion of the medical dollar over time—namely the remainder of the premium dollar which goes to medical expenses. As our health system partners continue to own a larger percentage of overall premiums, we have begun to pursue business models that allow us to participate in the medical savings through shared savings agreements that align incentives to reduce costs and improve quality outcomes.

Expand platform offerings to meet evolving market needs

There are multiple business offerings that health systems may require to operate in a value-based care environment that we do not currently provide, including but not limited to:

 

    PBM expansion to include additional specialty pharmacy management capabilities;
    health savings account administration;
    on-site or specialty clinic platforms; and
    consumer engagement and digital outreach.

Selectively pursue strategic acquisitions

We believe that the nature of our competitive landscape provides meaningful acquisition opportunities. Our industry is in the early stages of its life cycle and there are multiple firms attempting to capitalize on the transformation of the care delivery model and the various forms of new profit pools. We believe that providers will require an end-to-end solution and we believe we are well positioned to meet this demand by expanding the breadth of our offerings through not only organic growth, but also the acquisition of niche providers and non-core portions of larger enterprises.

Class A common stock and Class B common stock

After the completion of this offering, our outstanding capital stock will consist of Class A common stock and Class B common stock. Investors in this offering will hold shares of Class A common stock. See “Description of capital stock”.

 

 

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Our history and the reorganization of our corporate structure

We are a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve. Historically, our business has been operated through Evolent Health LLC and its predecessor. Evolent Health, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will continue to be conducted through Evolent Health LLC, and the financial results of Evolent Health LLC will be consolidated in our financial statements. Evolent Health, Inc. will be a holding company whose principal asset will be all of the Class A common units in Evolent Health LLC. For more information regarding the offering reorganization and holding company structure, see “The reorganization of our corporate structure”. The diagram below shows our organizational structure immediately after the offering reorganization described under “The reorganization of our corporate structure” and the completion of this offering.

 

LOGO

 

 

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Risk factors

Before you invest in our Class A common stock, you should carefully consider all the information in this prospectus, including matters set forth in the section entitled “Risk factors”. We believe the primary risks to our business are:

 

    the structural change in the market for healthcare in the United States;
    our ability to effectively manage our growth;
    the significant portion of revenues we derive from our largest partners, including 76% in the aggregate for fiscal 2014 with respect to our four largest partners;
    our ability to offer new and innovative products and services;
    the growth of our partners, which is difficult to predict and is subject to factors outside of our control;
    our ability to attract new partners;
    our incurrence of significant upfront costs in our partner relationships, including business development expenses representing approximately 10% of our total revenues for fiscal 2014;
    our history of net losses, including $52.3 million, $32.8 million and $19.3 million for fiscal 2014, fiscal 2013 and fiscal 2012, respectively, and our ability to achieve profitability in the future; and
    our intention to take advantage of certain exemptions following the completion of this offering as a “controlled company” under the rules of the New York Stock Exchange, or NYSE.

Corporate information

Our principal executive offices are located at 800 N. Glebe Road, Suite 500, Arlington, Virginia 22203 and our telephone number is (571) 389-6000. We also maintain a website at www.evolenthealth.com. Our website and the information contained therein or connected thereto are not incorporated into this prospectus or the registration statement of which it forms a part.

Implications of being an emerging growth company

We are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of this offering or (b) in which we have total annual gross revenue of at least $1.0 billion (adjusted for inflation), (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, we have been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, for a period of at least 12 months and we have filed at least one annual report pursuant to the Exchange Act and (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

    the option to report only two years of audited annual financial statements and to present management’s discussion and analysis of financial condition and results of operations for only those two years;

 

    exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of our internal controls over financial reporting;

 

 

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    exemption from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Customer Protection Act, which we refer to as the Dodd-Frank Act;

 

    exemption from certain disclosure requirements of the Dodd-Frank Act relating to compensation of our executive officers, permission to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and permission to include executive compensation disclosure for fewer named executive officers; and

 

    exemption from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on the financial statements.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Controlled company

Upon the completion of this offering, we expect to be considered a “controlled company” under the NYSE rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirement to have a board that is composed of a majority of independent directors. We intend to take advantage of these exemptions following the completion of this offering. These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the applicable requirements of the Sarbanes-Oxley Act and rules with respect to our audit committee within the applicable time frame. See “Management—Controlled company”.

 

 

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The offering

Class A common stock

offered

         shares.

Class A common stock to

be outstanding after this

offering

         shares (or          shares if each outstanding share of Class B common stock and each corresponding Class B common unit was exchanged for one share of Class A common stock, as described under “The reorganization of our corporate structure—Third amended and restated operating agreement of Evolent Health LLC”).

 

Over-allotment option

         shares of Class A common stock.

Class B common stock to be

outstanding after this

offering

         shares. In connection with this offering, shares of our Class B common stock will be issued in connection with, and in equal proportion to, issuances of Class B common units of Evolent Health LLC. Each Class B common unit of Evolent Health LLC, together with a share of our Class B common stock, will be exchangeable for one share of Class A common stock, as described under “The reorganization of our corporate structure—Third amended and restated operating agreement of Evolent Health LLC”.

 

Voting rights

Each share of our Class A common stock and Class B common stock will entitle its holder to one vote on all matters to be voted on by stockholders. Holders of Class A common stock and holders of Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law. After completion of this offering, (a) the TPG Funds will beneficially own approximately     % of our outstanding Class A common stock and approximately     % of our outstanding Class B common stock, which collectively represent     % of our voting power, (b) UPMC will beneficially own approximately     % of our outstanding Class A common stock, which represents     % of our voting power, and (c) The Advisory Board will beneficially own approximately     % of our outstanding Class A common stock and approximately     % of our outstanding Class B common stock, which collectively represent     % of our voting power.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $         , or approximately $          if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by $          million (assuming no exercise of the underwriters’ over-allotment option). We intend to use all of the net proceeds from this offering to purchase

 

 

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Class A common units of Evolent Health LLC from Evolent Health LLC at a price per Class A common unit equal to the public offering price per share of our Class A common stock, after deducting underwriting discounts and commissions. We expect that Evolent Health LLC will use the net proceeds of this offering contributed by us for working capital and other general corporate purposes. See “Use of proceeds”.

 

Dividend policy

We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future. Our Class B common stock will not be entitled to any dividend payments. See “Dividend policy”.

 

Controlled company

We expect that TPG, The Advisory Board and UPMC will each be a party to a stockholders’ agreement and will collectively own a majority of the voting power of our outstanding common stock following the completion of this offering. Accordingly, we expect to be considered a “controlled company” under the NYSE rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirement to have a board that is composed of a majority of independent directors. We intend to take advantage of these exemptions following the completion of this offering. See “Management—Controlled company”.

 

Risk factors

See “Risk factors” on page 19 and the other information in this prospectus for a discussion of factors you should carefully consider before you decide to invest in our Class A common stock.

 

Proposed listing and symbol

We intend to apply to have our Class A common stock listed on the NYSE under the symbol “EVH”.

Unless the context requires otherwise, the number of shares to be outstanding after completion of this offering is based on                  shares of Class A common stock and                  shares of Class B common stock outstanding as of                     , 2015, after giving effect to the offering reorganization described under “The reorganization of our corporate structure” and the application of the net proceeds of this offering described under “Use of proceeds”, but excludes:

 

                     shares of Class A common stock that are issuable upon exchanges of Class B common units (together with an equal number of shares of our Class B common stock) that will be outstanding immediately after the completion of this offering;

 

                     shares of our Class A common stock issuable upon the exercise of options outstanding under our 2011 Equity Incentive Plan at a weighted average exercise price of $        ,          restricted stock awards granted under our 2011 Equity Incentive Plan that have not yet vested and                  shares of our Class A common stock reserved for issuance under our 2015 Omnibus Incentive Compensation Plan (see “Executive compensation”); and

 

    the exercise by the underwriters of their over-allotment option.

 

 

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Summary financial and operational data

Historically, our business has been operated through Evolent Health LLC and its predecessor. Prior to the offering reorganization, Evolent Health Holdings, Inc. was the managing member of Evolent Health LLC. The financial statements of Evolent Health Holdings, Inc. included elsewhere in this prospectus reflect the consolidated results, including Evolent Health LLC, through September 23, 2013 and reflect the results of Evolent Health LLC as an equity method investment subsequent to such date due to a deconsolidation that occurred as a result of a round of equity financing. Evolent Health, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will continue to be conducted through Evolent Health LLC, and the financial results of Evolent Health LLC will be consolidated in our financial statements. Evolent Health, Inc. will be a holding company whose principal asset will be all of the Class A common units in Evolent Health LLC. For more information regarding the offering reorganization and holding company structure, see “The reorganization of our corporate structure”.

The following tables summarize the financial and other data of Evolent Health LLC and Evolent Health Holdings, Inc. as of and for the periods indicated, as well as certain pro forma and pro forma as adjusted financial data of Evolent Health, Inc. The summary statements of operations data for the years ended December 31, 2014 and December 31, 2013 and the balance sheet data as of December 31, 2014 have been derived from the audited annual financial statements included elsewhere in this prospectus.

The unaudited pro forma consolidated balance sheet as of December 31, 2014 presents the consolidated financial position of Evolent Health, Inc. after giving pro forma effect to the offering reorganization and as further adjusted for this offering and the contemplated use of the net proceeds from this offering as described under “The reorganization of our corporate structure” and “Use of proceeds” as if such transactions occurred as of the balance sheet date. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2014 presents the consolidated results of operations of Evolent Health, Inc. after giving pro forma effect to the offering reorganization and as further adjusted for this offering and the contemplated use of the net proceeds from this offering as described under “The reorganization of our corporate structure” and “Use of proceeds” as if such transactions had occurred on January 1, 2014. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the offering reorganization and as further adjusted for this offering, on the historical financial information of Evolent Health Holdings, Inc. The unaudited pro forma consolidated financial information also reflects the application of purchase accounting. The unaudited pro forma consolidated financial information is subject to completion due to the fact that certain information related to the offering reorganization and this offering is not currently determinable. The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Evolent Health Holdings, Inc. that would have occurred had it operated as a public company during the periods presented.

The offering reorganization described under the heading “The reorganization of our corporate structure” will be accounted for as a purchase and the purchase price will be reflected on the financial statements of Evolent Health, Inc. Accordingly, purchase accounting adjustments will be reflected in the financial statements of Evolent Health, Inc. and will be accounted for as a business combination using the acquisition method of accounting. The following summary financial and operational data covers periods before the offering reorganization. Accordingly, the historical summary financial and operational data presented below does not reflect the purchase accounting adjustments described above. The general nature of our operations will not be impacted by the offering reorganization.

 

 

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You should read the following summary financial and operational data together with the sections of this prospectus titled “Use of proceeds”, “Capitalization”, “Unaudited pro forma consolidated financial information”, “Selected historical financial and operational data” and “Management’s discussion and analysis of financial condition and results of operations” and the audited annual financial statements and notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus.

Evolent Health LLC

 

Results of operations

(in thousands)

 

Historical  
Year ended
December 31,
 
2014   2013  
         

Revenue

Transformation

$ 36,289    $ 34,560   

Platform and operations

  64,599      5,721   
  

 

 

 

Total Revenue

  100,888      40,281   
  

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

  73,122      46,327   

Selling, general and administrative expenses

  76,521      24,103   

Depreciation and amortization expense

  3,694      1,838   
  

 

 

 

Total Operating Expenses

  153,337      72,268   
  

 

 

 

Operating Loss

  (52,449   (31,987

Interest (income) / expense, net

  (195   820   

Other (income) / expense, net

  9      (1
  

 

 

 

Loss before income tax

  (52,263   (32,806

Income tax (benefit) / expense

       8   
  

 

 

 

Net Loss and Comprehensive Loss

$ (52,263 $ (32,814

 

 

 

 

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Evolent Health Holdings, Inc.

 

   (successor)   (predecessor)  

Results of operations

(in thousands, except per share data)

 

Evolent
Health, Inc.
pro forma for
offering
reorganization
and as
adjusted for
offering
  Historical  

 

  Year ended
December 31,
 
2014   2014   2013  

Revenue

Transformation

$                 $    $ 22,130   

Platform and operations

       3,541   
 

 

 

   

 

 

   

 

 

 

Total Revenue

       25,671   

Cost of revenue (exclusive of depreciation and amortization presented separately below)

       30,018   

Selling, general and administrative expenses

       15,600   

Depreciation and amortization expenses

       1,208   
 

 

 

   

 

 

   

 

 

 

Total Operating Expenses

       46,826   
 

 

 

   

 

 

   

 

 

 

Operating Loss

       (21,155
 

 

 

   

 

 

   

 

 

 

Interest expense / (income), net

       820   

Other (income) / expense, net

       (1

Gain on deconsolidation

            46,246   

Loss from equity investees

       (25,246   (4,241
 

 

 

   

 

 

   

 

 

 

(Loss) income before income tax

  (25,246   20,031   

Income tax expense / (income)

            8   
 

 

 

   

 

 

   

 

 

 

Net (Loss) Income and Comprehensive (Loss) Income

$                $ (25,246 $ 20,023   
 

 

 

   

 

 

   

 

 

 

Net (Loss) Income Attributable to Non-controlling Interest

$    $    $   
 

 

 

   

 

 

   

 

 

 

Net (Loss) Income Attributable to the Company

$      $ (25,246 $ 20,023   
 

 

 

   

 

 

   

 

 

 

Net (Loss) Income Available for Common Stockholders

Basic

  (31,137   2,418   

Diluted

  (31,137   2,957   

Net (Loss) Income Per Share Available for Common Stockholders

 

 

 

   

 

 

   

 

 

 

Basic

$      $ (53.83 $ 10.03   
 

 

 

   

 

 

   

 

 

 

Diluted

$      $ (53.83 $ 3.96   
 

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

Basic

  578      241   

Diluted

  578      747   

 

 

 

 

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Balance sheet data

(in thousands)

 

As of December 31, 2014  
Evolent Health,
Inc. pro forma
for offering
reorganization
and as adjusted
for offering
  Evolent Health,
Inc. pro forma
for offering
reorganization
  Evolent
Health
Holdings, Inc.
historical
 
  (successor)   (predecessor)  

Cash and cash equivalents

$                             $                             $   

Total Current Assets

  1,074   

Equity method investment

            37,203   

Total Assets

  38,277   

Total Liabilities

  1,074   

Total Redeemable Preferred Stock

  39,273   

Total Equity (Deficit)

  (2,070
  

 

 

 

Total Liabilities, Redeemable Preferred Stock and
Shareholders’ Equity

$      $      $ 38,277   

 

 

Other financial and operational data

 

(in thousands, except lives on platform data)

 

Pro forma for
offering
reorganization
and as
adjusted for
offering
  Historical  
Year ended
December 31,
 
2014   2014   2013  
             

Evolent Health, Inc. (successor)

EBITDA(1)

$                         $    $   

Adjusted EBITDA(1)

$      $    $   

Evolent Health LLC

EBITDA(1)

$    $ (48,764 $ (30,148

Adjusted EBITDA(1)

$    $ (37,673 $ (28,913

Lives on Platform(2)

       432,837      174,193   

 

 

 

(1)    We define “EBITDA” as net (loss) income before interest (income) / expense, income tax (benefit) / expense and depreciation and amortization expense. We define “Adjusted EBITDA” as EBITDA adjusted to exclude stock-based compensation. EBITDA and Adjusted EBITDA do not represent, and should not be considered as, alternatives to net (loss) income or cash flows from operations, each as determined in accordance with GAAP. We have presented EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe that they are frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate EBITDA and Adjusted EBITDA differently than we do. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

 

(2)    We define lives on our platform as the number of unique lives our partners are serving under value-based arrangements. Our platform and operations revenue is primarily based on the number of lives served by our partners under value-based arrangements.

 

 

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The following is a reconciliation of net loss to EBITDA and Adjusted EBITDA:

Evolent Health LLC

 

   Historical  
  Year ended
December 31,
 
(in thousands) 2014   2013  
         

Net loss

$ (52,263 $ (32,814

Depreciation and amortization expense

  3,694      1,838   

Interest (income) / expense, net

  (195   820   

Income (expense) / tax benefit

  —        8   
  

 

 

 

EBITDA

  (48,764   (30,148
  

 

 

 

Stock-based compensation(a)

  11,091      1,235   
  

 

 

 

Adjusted EBITDA

$ (37,673 $ (28,913

 

 

 

(a)    Represents stock-based compensation expenses related to equity awards granted to Evolent Health LLC’s employees.

Evolent Health, Inc. (successor)

 

   Pro forma for offering
reorganization and as

adjusted for offering
 
  Year ended
December 31,
 
(in thousands)

2014

 

Net loss

$                                    

Depreciation and amortization expenses

Interest (income) / expense, net

Income tax (expense) / benefit

  

 

 

 

EBITDA

  

 

 

 

Stock-based compensation(a)

  

 

 

 

Adjusted EBITDA

$     

 

 

 

 

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Risk factors

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the audited annual financial statements and notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus, before deciding whether to purchase shares of our Class A common stock. If any of the following risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks relating to our business and industry

The market for healthcare in the United States is in the early stages of structural change and is rapidly evolving, which makes it difficult to forecast demand for our products and services.

The market for healthcare in the United States is in the early stages of structural change and is rapidly evolving. Our future financial performance will depend in part on growth in this market and on our ability to adapt to emerging demands of this market. It is difficult to predict with any precision the future growth rate and size of our target market.

The rapidly evolving nature of the market in which we operate, as well as other factors that are beyond our control, reduce our ability to accurately evaluate our long-term outlook and forecast annual performance. We believe demand for our products and services has been driven in large part by price pressure in traditional FFS healthcare, a regulatory environment that is incentivizing value-based care models, a rapid expansion of retail insurance, broader use of the Internet and advances in technology. Widespread acceptance of the value-based care model is critical to our future growth and success. A reduction in demand for our products and services caused by lack of acceptance, technological challenges, competing offerings or other factors would result in a lower revenue growth rate or decreased revenue, either of which could negatively impact our business and results of operations. In addition, our business, financial condition and results of operations may be adversely affected if healthcare reform is not implemented in accordance with our expectations or if it is amended in a way that impacts our business and results in our failure to execute our growth strategies.

If we fail to effectively manage our growth, our business and results of operations could be harmed.

We have expanded our operations significantly since our inception. For example, we grew from six full-time employees at inception to 836 full-time employees as of April 30, 2015, and our revenue increased from $40.3 million for fiscal 2013 to $100.9 million for fiscal 2014. If we do not effectively manage our growth as we continue to expand, the quality of our products and services could suffer. Our growth to date has increased the significant demands on our management, our operational and financial systems and infrastructure and other resources. In order to successfully expand our business, we must effectively recruit, integrate and motivate new employees, while maintaining the beneficial aspects of our corporate culture. We may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and results of operations could be harmed. We must also continue to improve our existing systems for operational and financial management, including our reporting systems, procedures and controls. These improvements could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, our business and results of operations could be harmed.

 

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We derive a significant portion of our revenues from our largest partners.

Historically, we have relied on a limited number of partners for a substantial portion of our total revenue and accounts receivable. Our four largest partners, Indiana University Health, WakeMed Health and Hospitals, Piedmont WellStar Health Plan and Premier Health Partners, comprised approximately 25%, 21%, 16% and 14%, respectively, of our revenue for fiscal 2014, or 76% in the aggregate. Our four largest partners in terms of accounts receivable comprised approximately 37%, 17%, 15% and 14%, respectively, of such total amount as of December 31, 2014. In addition, in fiscal 2013, our top five partners by revenue accounted for approximately 82% of our total revenue. The sudden loss of any of our partners, or the renegotiation of any of our partner contracts, could adversely affect our operating results. For example, as a result of an April 2015 amendment to our agreement with one of our four largest partners, we expect this partner to contribute only modestly to revenues commencing in 2017. In connection with the amendment, the partner has also agreed to sell its interest in us to certain of our existing investors.

Because we rely on a limited number of partners for a significant portion of our revenues, we depend on the creditworthiness of these partners. If the financial condition of our partners declines, our credit risk could increase. Should one or more of our significant partners declare bankruptcy, it could adversely affect the collectability of our accounts receivable and affect our bad debt reserves and net income.

Although we have long-term contracts with our partners, these contracts may be terminated before their term expires for various reasons, such as changes in the regulatory landscape and poor performance by us, subject to certain conditions. For example, after a specified period, certain of these contracts are terminable for convenience by our partners after a notice period has passed and the partner has paid a termination fee. Certain of our contracts are terminable immediately upon the occurrence of certain events. For example, certain of our contracts may be terminated by the partner immediately following repeated failures by us to provide specified levels of service over periods ranging from six months to more than a year. One of our contracts may be terminated immediately by the partner if we lose applicable licenses, go bankrupt, lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities. In addition, one of our contracts may be terminated immediately if we become insolvent or file for bankruptcy. If any of our contracts with our partners is terminated, we may not be able to recover all fees due under the terminated contract, which may adversely affect our operating results.

If we are unable to offer new and innovative products and services or our products and services fail to keep pace with advances in industry standards, technology and our partners’ needs, our partners may terminate or fail to renew their relationship with us and our revenue and results of operations may suffer.

Our success depends on providing high-quality products and services that healthcare providers use to improve clinical, financial and operational performance. If we cannot adapt to rapidly evolving industry standards, technology and increasingly sophisticated and varied partner needs, our existing technology could become undesirable, obsolete or harm our reputation. We must continue to invest significant resources in our personnel and technology in a timely and cost-effective manner in order to enhance our existing products and services and introduce new high-quality products and services that existing partners and potential new partners will want. Our operating results would also suffer if our innovations are not responsive to the needs of our existing partners or potential new partners, are not appropriately timed with market opportunity, are not effectively brought to market or significantly increase our operating costs. If our new or modified product and service innovations are not responsive to partner preferences, emerging industry standards or regulatory changes, are not appropriately timed with market opportunity or are not effectively brought to market, we may lose existing partners or be unable to obtain new partners and our results of operations may suffer. In addition, should any of our partners terminate their relationship with us after implementation has begun, we would not only lose our

 

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time, effort and resources invested in that implementation, but we would also have lost the opportunity to leverage those resources to build a relationship with other partners over that same period of time.

We also engage third-party vendors to develop, maintain and enhance our technology solutions, and our ability to develop and implement new technologies is therefore dependent on our ability to engage suitable vendors. We may also need to license software or technology from third parties in order to maintain, expand or modify our technology platform. However, there is no guarantee we will be able to enter into such agreements on acceptable terms or at all. The functionality of our platform depends, in part, on our ability to integrate it with third-party applications and data management systems that our partners use and from which they obtain data. These third parties may terminate their relationships with us, change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications, data management systems and application programming interfaces and access to those applications and platforms in an adverse manner.

The growth of our business relies, in part, on the growth and success of our partners and certain revenues from our engagements, which are difficult to predict and are subject to factors outside of our control.

We enter into agreements with our partners under which a significant portion of our fees are variable, including fees which are dependent upon the number of members that are covered by our partner’s healthcare plan each month, expansion of our partners and the services that we provide. The number of members covered by a partner’s healthcare plan is often impacted by factors outside of our control, such as the actions of our partner or third parties. Accordingly, revenue under these agreements is uncertain and unpredictable. If the number of members covered by one or more of our partner’s plans were to be reduced by a material amount, such decrease would lead to a decrease in our revenue, which could harm our business, financial condition and results of operations. In addition, growth forecasts of our partners are subject to significant uncertainty and are based on assumptions and estimates that may prove to be inaccurate. Even if the markets in which our partners compete meet the size estimates and growth forecasted, their health plan membership could fail to grow at similar rates, if at all.

In addition, the transition to value-based care may be challenging for our partners. For example, fully capitated provider risk arrangements have had a history of financial challenges for providers. Our partners may also have difficulty in value-based care if premium pricing is under pressure. Furthermore, revenue under our partner contracts may differ from our projections because of the termination of the contract for cause or at specified life cycle events, or because of fee reductions that are occasionally given after the contract is initially signed.

If we do not continue to attract new partners, we may not achieve our revenue projections, and our results of operations would be harmed.

In order to grow our business, we must continually attract new partners. Our ability to do so depends in large part on the success of our sales and marketing efforts. Potential partners may seek out other options. Therefore, we must demonstrate that our products and services provide a viable solution for potential partners. If we fail to provide high-quality solutions and convince individual partners of our value proposition, we may not be able to retain existing partners or attract new partners. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of the market for our products and services due in part to the rapidly evolving nature of the healthcare and technology industries and the substantial resources available to our existing and potential competitors. If the market for our products and services declines or grows more slowly than we expect, or if the number of individual partners that use our solutions declines or fails to increase as we expect, our revenue, results of operations, financial condition, business and prospects could be harmed.

 

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We typically incur significant upfront costs in our partner relationships, and if we are unable to develop or grow these partner relationships over time, we are unlikely to recover these costs and our operating results may suffer.

We devote significant resources to establish relationships with our partners and for fiscal 2014, our business development expenses represented approximately 10% of our total revenues. Some of our partners undertake a significant and prolonged evaluation process, including to determine whether our products and services meet their unique health system needs, which has in the past resulted in extended periods of time to establish a long-term partner relationship. Our efforts involve educating our partners about the use, technical capabilities and benefits of our products and services. Accordingly, our operating results will depend in substantial part on our ability to deliver a successful partner experience and persuade our partners to grow their relationship with us over time. There is no guarantee that we will be able to successfully convert a customer of our transformation services into a partner of our platform and operations services. If we are unable to sell additional products and services to existing partners, enter into and maintain favorable relationships with new partners or sufficiently grow our partners’ lives on platform, it could have a material adverse effect on our business, financial condition and results of operations. As we expect to grow rapidly, our customer acquisition costs could outpace our build-up of recurring revenue, and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability. In addition, we estimate the costs and timing for completing the transformation phase, including the Blueprint phase, of the partner relationship. These estimates reflect our best judgment. Any increased or unexpected costs or unanticipated delays, including delays caused by factors outside our control, could cause our operating results to suffer.

If the estimates and assumptions we use to determine the size of our target market are inaccurate, our future growth rate may be impacted and our business would be harmed.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus relating to the size and expected growth of the market for our services may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

The principal assumptions relating to our market opportunity include health insurance expenditures, the total percentage of payments providers receive under value-based contracting, the size of the provider-sponsored health plan market and the fees we believe we can charge. Our market opportunity is also based on the assumption that the strategic approach that our solution enables for our potential partners will be more attractive to our partners than competing solutions. The solution we offer our target market contemplates one strategic option—to pursue clinical and technological integration to reduce utilization and total cost—among several such options our potential partners may pursue to achieve their objectives. Our potential partners may elect to pursue a different strategic option.

If these assumptions prove inaccurate, our business, financial condition and results of operations could be adversely affected. For more information regarding our estimates of market opportunity and the forecasts of market growth included in this prospectus, see “Market data and industry forecasts and projections”.

If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations will be harmed.

We believe that maintaining and enhancing our reputation and brand recognition is critical to our relationships with existing partners and to our ability to attract new partners. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be

 

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successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our partners, could make it substantially more difficult for us to attract new partners. Similarly, because our existing partners often act as references for us with prospective new partners, any existing partner that questions the quality of our work or that of our employees could impair our ability to secure additional new partners. If we do not successfully maintain and enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with partners, which would harm our business, results of operations and financial condition.

Consolidation in the healthcare industry could have a material adverse effect on our business, financial condition and results of operations.

Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems with greater market power. We expect regulatory and economic conditions to result in additional consolidation in the healthcare industry in the future. As consolidation accelerates, the economies of scale of our partners’ organizations may grow. If a partner experiences sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its demand for our products and services. In addition, as healthcare providers consolidate to create larger and more integrated healthcare delivery systems with greater market power, these providers may try to use their market power to negotiate fee reductions for our products and services. Finally, consolidation may also result in the acquisition or future development by our partners of products and services that compete with our products and services. Any of these potential results of consolidation could have a material adverse effect on our business, financial condition and results of operations.

We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business and operating results will be harmed.

The market for our products and services is fragmented, competitive and characterized by rapidly evolving technology standards, customer needs and the frequent introduction of new products and services. Our competitors range from smaller niche companies to large, well-financed and technologically-sophisticated entities.

We compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. Some of our competitors are more established, benefit from greater brand recognition, have larger client bases and have substantially greater financial, technical and marketing resources. Other competitors have proprietary technology that differentiates their product and service offerings from ours. Our competitors are constantly developing products and services that may become more efficient or appealing to our existing partners and potential partners. Additionally, some healthcare information technology providers have begun to incorporate enhanced analytical tools and functionality into their core product and service offerings used by healthcare providers. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products and services and make more attractive offers to our existing partners and potential partners.

We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other things, competition within the industry, consolidation of healthcare industry participants, practices of managed care organizations, government action and financial stress experienced by our partners. If our pricing

 

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experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected.

We cannot be certain that we will be able to retain our current partners or expand our partner base in this competitive environment. If we do not retain current partners or expand our partner base, or if we have to renegotiate existing contracts, our business, financial condition and results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the healthcare information technology and healthcare industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business, financial condition and results of operations.

Exclusivity and right of first refusal clauses in some of our partner and founder contracts may prohibit us from partnering with certain other providers in the future, and as a result may limit our growth.

Some of our partner and founder contracts include exclusivity and right of first refusal clauses. Any founder contracts with exclusivity, right of first refusal or other restrictive provisions may limit our ability to conduct business with certain potential partners, including competitors of our founders. For example, under the UPMC IP Agreement, if we were to conduct business with certain precluded providers, it would result in the loss of the license thereunder. Partner contracts with exclusivity or other restrictive provisions may limit our ability to partner with or provide services to other providers or purchase services from other vendors within certain time periods. These exclusivity or other restrictive provisions often apply to specific competitors of our health system partners or specific geographic areas within a particular state or an entire state. Accordingly, these exclusivity clauses may prevent us from entering into long-term relationships with potential partners and could cause our business, financial condition and results of operations to be harmed. See “Certain relationships and related transactions—Commercial agreements with certain investors”.

In addition, we entered into a services, reseller and non-competition agreement with The Advisory Board, which we refer to as The Advisory Board Reseller Agreement, that, among other things, prohibits us from promoting, marketing, offering or selling unbundled software or technology services. Accordingly, that agreement prohibits us from selling such software or technology services on a standalone basis, but permits us to sell such services if they are part of an integrated offering to our partners and are incidental to the other products and services we are providing to our partners. The Advisory Board Reseller Agreement also prohibits us from promoting, marketing, offering or selling consulting services that are not intended to be a part of our Blueprint services or any services that are substantially similar to or competitive with certain Advisory Board services. These restrictions are in effect until the earlier of June 27, 2020 and the date on which The Advisory Board no longer holds shares of our common stock. We have also entered into a reseller, services and non-competition agreement with an affiliate of UPMC, which we refer to as the UPMC Reseller Agreement, pursuant to which we are prohibited from contracting with third parties to provide certain TPA services for a certain time period. These restrictions could cause our business, financial condition and results of operations to be harmed if we found it advantageous to obtain TPA services from a third party or offer certain services, including unbundled software or technology services, during the restricted period. See “Certain relationships and related transactions—Commercial agreements with certain investors—Services, reseller and non-competition agreements”.

The healthcare regulatory and political framework is uncertain and evolving.

Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could adversely affect our financial condition and results of operations. For example, in March 2010, the ACA was adopted, which is a healthcare reform measure that provides healthcare insurance for approximately 30 million more Americans. The ACA includes a variety of healthcare reform provisions and requirements that will become effective at varying times through 2018 and substantially changes the way healthcare is financed by both

 

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governmental and private insurers, which may significantly impact our industry and our business. Many of the provisions of the ACA will phase in over the course of the next several years, and we may be unable to predict accurately what effect the ACA or other healthcare reform measures that may be adopted in the future, including amendments to the ACA, will have on our business. In addition, provisions of the ACA may be challenged in the courts. For example, in 2015 the U.S. Supreme Court is expected to determine whether the IRS can extend tax credits to federal health insurance exchanges established by the Department of Health and Human Services despite language in the ACA that allegedly authorizes tax credits only for health insurance exchanges established by states.

In addition, we are subject to various other laws and regulations, including, among others, the Stark Law relating to self-referrals, anti-kickback laws, antitrust laws and the privacy and data protection laws described below. See “Business—Healthcare laws and regulations”. If we were to become subject to litigation or liabilities under these or other laws, our business could be adversely affected. See “—We may become subject to litigation, which could have a material adverse effect on our business, financial condition and results of operations.”

We are subject to privacy and data protection laws governing the transmission, security and privacy of health information, which may impose restrictions on the manner in which we access personal data and subject us to penalties if we are unable to fully comply with such laws.

As described below, we are required to comply with numerous federal and state laws and regulations governing the collection, use, disclosure, storage and transmission of individually identifiable health information that we may obtain or have access to in connection with the provision of our services. These laws and regulations, including their interpretation by governmental agencies, are subject to frequent change and could have a negative impact on our business.

 

    The Health Insurance Portability and Accountability Act, or HIPAA, expanded protection of the privacy and security of personal health information and required the adoption of standards for the exchange of electronic health information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security, electronic signatures, privacy and enforcement. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.

 

    The Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the “Stimulus Bill”, effective February 22, 2010, set forth health information security breach notification requirements and increased penalties for violation of HIPAA. The HITECH Act requires individual notification for all breaches, media notification of breaches for over 500 individuals and at least annual reporting of all breaches to the Department of Health and Human Services. The HITECH Act also replaced the prior penalty system of one tier of penalties of $100 per violation and an annual maximum of $25,000 with a four-tier system of sanctions for breaches. Penalties now range from the original $100 per violation and an annual maximum of $25,000 for the first tier to a minimum of $50,000 per violation and an annual maximum of $1.5 million for the fourth tier. Failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.

 

   

Numerous other federal and state laws may apply that restrict the use and protect the privacy and security of individually identifiable information, as well as employee personal information. These include state medical privacy laws, state social security number protection laws and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to

 

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varying interpretations by the courts and government agencies, creating complex compliance issues for us and our partners and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.

 

    Federal and state consumer protection laws are increasingly being applied by the United States Federal Trade Commission, or FTC, and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or individually identifiable information, through websites or otherwise, and to regulate the presentation of website content.

There is ongoing concern from privacy advocates, regulators and others regarding data protection and privacy issues, and the number of jurisdictions with data protection and privacy laws has been increasing. Also, there are ongoing public policy discussions regarding whether the standards for deidentified, anonymous or pseudonomized health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. These discussions may lead to further restrictions on the use of such information. There can be no assurance that these initiatives or future initiatives will not adversely affect our ability to access and use data or to develop or market current or future services.

Despite the security measures that we have in place to ensure compliance with privacy and data protection laws, our facilities and systems, and those of our third-party vendors and subcontractors, are vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and human errors or other similar events. Under the HITECH Act, as a business associate we may also be liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate protections through our agreements with our subcontractors, we still have limited control over their actions and practices. A breach of privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including criminal and civil liability, against us. Due to the recent enactment of the HITECH Act, we are not able to predict the extent of the impact such incidents may have on our business. Our failure to comply may result in criminal and civil liability because the potential for enforcement action against business associates is now greater. Enforcement actions against us could be costly and could interrupt regular operations, which may adversely affect our business. While we have not received any notices of violation of the applicable privacy and data protection laws and believe we are in compliance with such laws, there can be no assurance that we will not receive such notices in the future.

If we are unable to obtain, maintain and enforce intellectual property protection for our technology and products or if the scope of our intellectual property protection is not sufficiently broad, others may be able to develop and commercialize technology and products substantially similar to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our business depends on proprietary technology and content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of trademark, trade-secret, and copyright laws and confidentiality procedures and contractual provisions to protect our intellectual property rights in our proprietary technology and content. We are pursuing the registration of our trademarks and service marks in the United States. We may, over time, increase our investment in protecting our intellectual property through additional trademark, patent and other intellectual property filings that could be expensive and time-consuming. Effective trademark, trade-secret and copyright protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. These measures, however, may not be sufficient to offer us meaningful protection. If we are unable to protect our intellectual property and other proprietary rights, our competitive position and our business could be harmed, as third parties may be able to commercialize and use technologies and software products that are substantially the same as ours without incurring the development and licensing costs that we have incurred. Any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated,

 

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our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain offerings or other competitive harm.

Monitoring unauthorized use of our intellectual property is difficult and costly. From time to time, we seek to analyze our competitors’ products and services, and may in the future seek to enforce our rights against potential infringement. However, the steps we have taken to protect our proprietary rights may not be adequate to prevent infringement or misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully protect our intellectual property rights could result in harm to our ability to compete and reduce demand for our technology and products. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities. Also, some of our products and services rely on technologies and software developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

We may also be required to protect our proprietary technology and content in an increasing number of jurisdictions, a process that is expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property protection may not be available to us in every country, and the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

The registered or unregistered trademarks or trade names that we own or license may be challenged, infringed, circumvented, declared generic, lapsed or determined to be infringing on or dilutive of other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential partners. In addition, third parties may in the future file for registration of trademarks similar or identical to our trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we are not successful in challenging such third-party rights, we may not be able to use these trademarks to commercialize our technologies or products in certain relevant countries. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely affected.

Third parties may initiate legal proceedings alleging that we are infringing or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business, financial condition and results of operations.

Our commercial success depends on our ability to develop and commercialize our services and use our proprietary technology without infringing the intellectual property or proprietary rights of third parties. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. As the market for healthcare in the United States expands and more patents are issued, the risk increases that there may be patents issued to third parties that relate to our products and technology of which we are not aware or that we must challenge to continue our operations as currently contemplated. Whether merited or not, we may

 

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face allegations that we, our partners, our licensees or parties indemnified by us have infringed or otherwise violated the patents, trademarks, copyrights or other intellectual property rights of third parties. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. We may also face allegations that our employees have misappropriated the intellectual property or proprietary rights of their former employers or other third parties. It may be necessary for us to initiate litigation to defend ourselves in order to determine the scope, enforceability and validity of third-party intellectual property or proprietary rights, or to establish our respective rights. Regardless of whether claims that we are infringing patents or other intellectual property rights have merit, such claims can be time-consuming, divert management’s attention and financial resources and can be costly to evaluate and defend. Results of any such litigation are difficult to predict and may require us to stop commercializing or using our products or technology, obtain licenses, modify our services and technology while we develop non-infringing substitutes or incur substantial damages, settlement costs or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. If we require a third-party license, it may not be available on reasonable terms or at all, and we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property rights for our products and services. We may also have to redesign our products or services so they do not infringe third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our technology and products may not be available for commercialization or use. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not obtain a third-party license to the infringed technology at all, license the technology on reasonable terms or obtain similar technology from another source, our revenue and earnings could be adversely impacted.

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. We are not currently subject to any claims from third parties asserting infringement of their intellectual property rights. Some third parties may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Class A common stock. Moreover, any uncertainties resulting from the initiation and continuation of any legal proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations. Assertions by third parties that we violate their intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.

Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.

We may use open source software in connection with our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the use of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code, which could include valuable proprietary code of the user, on unfavorable terms or at no cost. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open

 

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source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations and could help our competitors develop products and services that are similar to or better than ours.

If we are unable to protect the confidentiality of our trade secrets, know-how and other proprietary information, the value of our technology and products could be adversely affected.

We may not be able to protect our trade secrets, know-how and other proprietary information adequately. Although we use reasonable efforts to protect this proprietary information and technology, our employees, consultants and other parties may unintentionally or willfully disclose our information or technology to competitors. Enforcing a claim that a third party illegally obtained and is using any of our proprietary information or technology is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets, know-how and other proprietary information. We rely, in part, on non-disclosure, confidentiality and invention assignment agreements with our employees, consultants and other parties to protect our trade secrets, know-how and other intellectual property and proprietary information. These agreements may not be self-executing, or they may be breached and we may not have adequate remedies for such breach. Moreover, third parties may independently develop similar or equivalent proprietary information or otherwise gain access to our trade secrets, know-how and other proprietary information.

We depend on certain technologies that are licensed to us. We do not control the intellectual property rights covering these technologies and any loss of our rights to these technologies or the rights licensed to us could prevent us from developing and/or commercializing our products.

We are a party to a number of license agreements under which we are granted rights to intellectual property that is important to our business, and we expect that we may need to enter into additional license agreements in the future. We rely on these licenses to use various proprietary technologies that are material to our business, including without limitation those technologies licensed under an intellectual property and development services license agreement between us and UPMC, or the UPMC IP Agreement, a technology license agreement between us and UPMC, or the UPMC Technology Agreement, and an intellectual property license and data access agreement with The Advisory Board, or The Advisory Board IP Agreement. Under the UPMC IP Agreement, certain of UPMC’s proprietary analytics models and know-how are licensed to us on a non-exclusive basis from UPMC; pursuant to the UPMC Technology Agreement, UPMC’s proprietary technology platform, associated know-how and the Identifi® trademark are licensed to us on an irrevocable, non-exclusive basis from UPMC; in each case, subject to certain ongoing territorial, time and use restrictions. Under The Advisory Board IP Agreement, we hold a license to use a business plan and operating model designed by The Advisory Board, a right to access certain analysis, data and proprietary information of The Advisory Board, we obtain a membership in The Advisory Board’s healthcare industry program, and the right to access key Advisory Board personnel and assistance in our promotion and sales efforts. Our rights to use these technologies and know-how and employ the software claimed in the licensed technologies are subject to the continuation of and our compliance with the terms of those licenses. Our existing license agreements impose, and we expect that future license agreements will impose on us, various exclusivity obligations. If we fail to comply with our obligations under these agreements, the applicable licensor may have the right to terminate our license, in which case we may not be able to develop or commercialize the products or technologies covered by the license.

Disputes may arise between us and our licensors regarding intellectual property rights subject to a license agreement, including:

 

    the scope of rights granted under the license agreement and other interpretation-related issues;

 

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    whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;

 

    our obligations with respect to the use of the licensed technology in relation to our services and technologies, and which activities satisfy those obligations;

 

    whether our activities are in compliance with the restrictions placed upon our rights to use the licensed technology by our licensors; and

 

    the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

If disputes over intellectual property rights that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected products and technologies.

The risks described elsewhere pertaining to our intellectual property rights also apply to the intellectual property rights that we license, and any failure by us or our licensors to obtain, maintain and enforce these rights could have a material adverse effect on our business. In some cases, we do not have control over the prosecution, maintenance or enforcement of the intellectual property rights that we license, and may not have sufficient ability to consult and input into the prosecution and maintenance process with respect to such intellectual property, and our licensors may fail to take the steps we feel are necessary or desirable in order to obtain, maintain and enforce the licensed intellectual property rights and, as a result, our ability to retain our competitive advantage with respect to our products and technologies may be materially affected.

Any restrictions on our use of, or ability to license, data, or our failure to license data and integrate third-party technologies, could have a material adverse effect on our business, financial condition and results of operations.

We depend upon licenses from third parties for some of the technology and data used in our applications, and for some of the technology platforms upon which these applications are built and operate, including under the UPMC IP Agreement, the UPMC Technology Agreement and The Advisory Board IP Agreement. We expect that we may need to obtain additional licenses from third parties in the future in connection with the development of our products and services. In addition, we obtain a portion of the data that we use from government entities, public records and from our partners for specific partner engagements. We believe that we have all rights necessary to use the data that is incorporated into our products and services. However, we cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated applications and products. In addition, certain of our products depend on maintaining our data and analytics platform, which is populated with data disclosed to us by our partners with their consent. If these partners revoke their consent for us to maintain, use, de-identify and share this data, consistent with applicable law, our data assets could be degraded.

In the future, data providers could withdraw their data from us or restrict our usage for any reason, including if there is a competitive reason to do so, if legislation is passed restricting the use of the data or if judicial interpretations are issued restricting use of the data that we currently use in our products and services. In addition, data providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, our ability to provide products and services to our partners would be materially adversely impacted, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source software. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace once integrated into our own proprietary applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain, maintain or comply with any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which would harm our business, financial condition and results of operations.

Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.

Data loss or corruption due to failures or errors in our systems or service disruptions at our data centers may adversely affect our reputation and relationships with existing partners, which could have a negative impact on our business, financial condition and results of operations.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our partners regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our existing software. Despite testing by us, we may discover defects or errors in our software. Any defects or errors could expose us to risk of liability to partners and the government and could cause delays in the introduction of new products and services, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or partner satisfaction with our products and services or cause harm to our reputation.

Furthermore, our partners might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation and lead to significant partner relations problems.

Our business is subject to online security risks, and if we are unable to safeguard the security and privacy of confidential data, our reputation and business will be harmed.

Our services involve the collection, storage and analysis of confidential information. In certain cases such information is provided to third parties, for example, to the service providers who provide hosting services for our technology platform, and we may be unable to control the use of such information or the security protections employed by such third parties. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches. Despite our implementation of security measures, techniques used to obtain unauthorized access to information or to

 

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sabotage information technology systems change frequently. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any compromise or perceived compromise of our security (or the security of our third-party service providers who have access to confidential information) could damage our reputation and our relationship with our partners, could reduce demand for our products and services and could subject us to significant liability as well as regulatory action. In addition, in the event that new data security laws are implemented, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could subject us to liability for non-compliance.

We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our partners, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with partners, adversely affecting our brand and our business.

Our ability to deliver our products and services, particularly our cloud-based solutions, is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. Our services are designed to operate without interruption in accordance with our service level commitments.

However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our services, and we may experience more significant interruptions in the future. We rely on internal systems as well as third-party suppliers, including bandwidth and telecommunications equipment providers, to provide our services. We do not maintain redundant systems or facilities for some of these services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our services and prevent or inhibit the ability of our partners to access our services. 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 providers or any failure of or by third-party providers’ systems or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over our third-party suppliers, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with partners and adversely affect our business and could expose us to third-party liabilities. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

 

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The reliability and performance of our Internet connection may be harmed by increased usage or by denial-of-service attacks. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services.

We rely on third-party vendors to host and maintain our technology platform.

We rely on third-party vendors to host and maintain our technology platform, including Identifi®. Our ability to offer our services and operate our business is therefore dependent on maintaining our relationships with third-party vendors, particularly UPMC, and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors or our failure to enter into agreements with vendors in the future could harm our business, results of operations and financial condition. Despite precautions taken at our vendors’ facilities, the occurrence of a natural disaster, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our service. These service interruption events could cause our platform to be unavailable to our partners and impair our ability to deliver services and to manage our relationships with new and existing partners, which in turn could materially affect our results of operations.

If our vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. Two of our vendor agreements may be unilaterally terminated by the licensor for convenience, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business.

We depend on our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our key executive officers. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

In addition, competition for qualified management in our industry is intense. Many of the companies with which we compete for management personnel have greater financial and other resources than we do. We have not entered into employment agreements with our executive officers. All of our employees are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason and without notice and without the payment of any severance. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. In addition, volatility or lack of performance in our stock price may affect our ability to attract replacements should key personnel depart. If we are not able to retain any of our key management personnel, our business could be harmed.

 

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We may make future acquisitions and investments which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.

Part of our business strategy is to acquire or invest in companies, products or technologies that complement our current products and services, enhance our market coverage or technical capabilities or offer growth opportunities. Future acquisitions and investments could pose numerous risks to our operations, including:

 

    difficulty integrating the purchased operations, products or technologies;

 

    substantial unanticipated integration costs;

 

    assimilation of the acquired businesses, which may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;

 

    the loss of key employees, particularly those of the acquired operations;

 

    difficulty retaining or developing the acquired business’ customers;

 

    adverse effects on our existing business relationships;

 

    failure to realize the potential cost savings or other financial benefits or the strategic benefits of the acquisitions, including failure to consummate any proposed or contemplated transaction; and

 

    liabilities from the acquired businesses for infringement of intellectual property rights or other claims and failure to obtain indemnification for such liabilities or claims.

In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets or large and immediate write-offs, assume liabilities or issue stock that would dilute our current stockholders’ ownership. We may be unable to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.

We may need to obtain additional financing which may not be available or, if it is available, may result in a reduction in the ownership of our stockholders.

We may need to raise additional funds in order to:

 

    finance unanticipated working capital requirements;

 

    develop or enhance our technological infrastructure and our existing products and services;

 

    fund strategic relationships, including joint ventures and co-investments;

 

    fund additional implementation engagements;

 

    respond to competitive pressures; and

 

    acquire complementary businesses, technologies, products or services.

Additional financing may not be available on terms favorable to us, or at all. If adequate funds are unavailable or are unavailable on acceptable terms, our ability to fund our expansion strategy, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond to competitive pressures could be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the ownership of our then-existing stockholders may be reduced, and holders of these securities may have rights, preferences or privileges senior to those of our then-existing stockholders. In addition, any indebtedness we incur and restrictive covenants contained in the agreements related thereto could:

 

    make it difficult for us to satisfy our obligations, including interest payments on any debt obligations;

 

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    limit our ability to obtain additional financing to operate our business;

 

    require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital expenditures and working capital and other general operational requirements;

 

    limit our flexibility to plan for and react to changes in our business and the healthcare industry;

 

    place us at a competitive disadvantage relative to our competitors;

 

    limit our ability to pursue acquisitions; and

 

    increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy.

The occurrence of any one of these events could cause a significant decrease in our liquidity and impair our ability to pay amounts due on any indebtedness, and could have a material adverse effect on our business, financial condition and results of operations.

We have experienced net losses in the past and we may not achieve profitability in the future.

After giving pro forma effect to the offering reorganization, we would have experienced a net loss of $         million for fiscal 2014. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to grow our business and build relationships with partners, develop our platform, develop new solutions and comply with being a public company. We expect to incur significant additional expenses as a public company. These efforts may prove to be more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. In addition, to the extent we are successful in increasing our partner base, we could incur increased losses because significant costs associated with entering into partner agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. We may also fail to improve the gross margins of our business. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company”.

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a negative effect on our business, financial condition and results of operations.

As a public company, we will be subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we may need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth as a public company will also require us to commit additional management, operational and financial resources to identify new professionals to join our company and to maintain appropriate operational and financial systems to

 

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adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

As an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

Our pro forma financial information may not be representative of our future performance.

In preparing the unaudited pro forma consolidated financial information included in this prospectus, we have made adjustments to our historical financial information based upon currently available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the offering reorganization and as further adjusted for this offering and the contemplated use of the estimated net proceeds from this offering. The unaudited pro forma consolidated financial information also reflects the application of purchase accounting. The estimates and assumptions used in the calculation of the unaudited pro forma consolidated financial information in this prospectus may be materially different from our actual experience. Accordingly, the unaudited pro forma consolidated financial information included in this prospectus does not purport to indicate the results that would have actually been achieved had the offering reorganization been completed on the assumed date or for the periods presented, or which may be realized in the future, nor does it give effect to any events other than those described in our unaudited pro forma consolidated financial statements and notes thereto.

We may become subject to litigation, which could have a material adverse effect on our business, financial condition and results of operations.

We may become subject to litigation in the future. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we are not, or cannot be, insured against. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having a material adverse effect on our business, financial condition, results of operations, cash flow and per share trading price of our Class A common stock. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured and adversely impact our ability to attract directors and officers.

Risks relating to our structure

We will be a holding company and our only material asset after completion of the offering reorganization and this offering will be our interest in Evolent Health LLC and, accordingly, we will be dependent upon distributions from Evolent Health LLC to pay taxes and other expenses.

We will be a holding company and will have no material assets other than our ownership of Class A common units of Evolent Health LLC. We will have no independent means of generating revenue. Evolent Health LLC will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, will not itself be subject to U.S. federal income tax. Instead, its net taxable income will generally be allocated to its members,

 

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including us, pro rata according to the number of common units each member owns. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Evolent Health LLC and also will incur expenses related to our operations. We intend to cause Evolent Health LLC to distribute cash to its members, including us, in an amount sufficient to cover all of our tax liabilities and dividends, if any, declared by us, as well as any payments due under the tax receivables agreements, as described under “The reorganization of our corporate structure—Tax receivables agreements”. To the extent that we need funds to pay our tax or other liabilities or to fund our operations, and Evolent Health LLC is restricted from making distributions to us under applicable agreements, laws or regulations or does not have sufficient cash to make these distributions, we may have to borrow funds to meet these obligations and operate our business, and our liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the tax receivables agreements for any reason, such payments will be deferred and will accrue interest until paid.

We will be required to pay our existing investors for certain tax benefits we may claim in the future, and these amounts are expected to be material.

The Class B common units held upon consummation of the transactions described in “The reorganization of our corporate structure” may in the future be exchanged (together with an equal number of shares of our Class B common stock) for shares of our Class A common stock. The exchanges may result in increases in the tax basis of the assets of Evolent Health LLC that otherwise would not have been available. In addition, we expect that certain net operating losses will be available to us as a result of the transactions described in “The reorganization of our corporate structure”. These increases in tax basis and net operating losses may reduce the amount of tax that we would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, may challenge all or a part of the tax basis increases and net operating losses, and a court could sustain such a challenge.

We will enter into a tax receivables agreement related to the tax basis step-up of the assets of Evolent Health LLC, which we refer to as the basis tax receivables agreement, with the holders of Class B common units and certain of our other current investors, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of these possible increases in tax basis resulting from our exchanges of Class B common units (calculated assuming that any post-offering transfer of Class B common units (other than the exchanges) had not occurred) as well as certain other benefits attributable to payments under the basis tax receivables agreement itself.

We will also enter into a tax receivables agreement related to certain net operating losses of the former members of Evolent Health LLC, which we refer to as the NOL tax receivables agreement, with certain of our current investors that will provide for the payment to them of 85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of the utilization of the net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG attributable to periods prior to this offering and the deduction of any imputed interest attributable to our payment obligations under the NOL tax receivables agreement. We refer to the basis tax receivables agreement and the NOL tax receivables agreement collectively as the tax receivables agreements.

The payments that we make under the tax receivables agreements could be substantial. Assuming no material changes in relevant tax law and based on our current operating plan and other assumptions, including our estimate of the tax basis of our assets as of             , if all of the Class B common units were acquired by us in taxable transactions at the time of the closing of this offering for a price of $         (the midpoint of the price range set forth on the cover page of this prospectus) per Class B common unit, we estimate that the amount that we would be required to pay under the basis tax receivables agreement could be approximately $        . Assuming no material changes in relevant tax law and based on our current operating plan and other assumptions, we estimate that the amount that we would be required to pay under the NOL tax receivables

 

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agreement could be approximately $        . The actual amounts may be materially greater than these hypothetical amounts as potential future payments will vary depending on a number of factors, including the timing of exchanges, the price of our Class A common stock at the time of the exchanges, the amount, character and timing of our income and the tax rates then applicable. Payments under the tax receivables agreement are not conditioned on our existing investors’ continued ownership of any of our equity after this offering.

We will not be reimbursed for any payments made to our existing investors under the tax receivables agreements in the event that any tax benefits are disallowed.

If the IRS successfully challenges the tax basis increases or the existence or amount of the net operating losses at any point in the future after payments are made under the tax receivables agreements, we will not be reimbursed for any payments made under the applicable tax receivables agreement (although future payments under the applicable tax receivables agreement, if any, would be netted against any unreimbursed payments to reflect the result of any such successful challenge by the IRS). As a result, in certain circumstances, we could be required to make payments under the tax receivables agreements in excess of our cash tax savings.

We may not be able to realize all or a portion of the tax benefits that are currently expected to result from future exchanges of Class B common units for our Class A common stock, the utilization of certain tax attributes previously held by Evolent Health Holdings, Inc. and an affiliate of TPG and from payments made under the tax receivables agreements.

Our ability to realize the tax benefits that we currently expect to be available as a result of the increases in tax basis created by any future exchanges of Class B common units (together with an equal number of shares of our Class B common stock) for our Class A common stock and by the payments made pursuant to the basis tax receivables agreement, and our ability to utilize the pre-offering net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG and the interest deductions imputed under the tax receivables agreements all depend on a number of assumptions, including that we earn sufficient taxable income each year during the period over which such deductions are available and that there are no adverse changes in applicable law or regulations. If our actual taxable income were insufficient or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected. See “The reorganization of our corporate structure—Tax receivables agreements”.

In certain circumstances, Evolent Health LLC will be required to make distributions to us and the existing owners of Evolent Health LLC and the distributions that Evolent Health LLC will be required to make may be substantial.

Evolent Health LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to its members, including us. We intend to cause Evolent Health LLC to make pro rata cash distributions, or tax distributions, to its members in an amount sufficient to allow each member to pay taxes on such member’s allocable share of the net taxable income of Evolent Health LLC. Funds used by Evolent Health LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, these tax distributions may be substantial, and will likely exceed (as a percentage of Evolent Health LLC’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. As a result of the potential differences in the amount of net taxable income allocable to us and the Class B common unit holders, it is possible that we will receive distributions significantly in excess of our tax liabilities and obligations to make payments under the tax receivables agreements. To the extent we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to Evolent Health LLC, the Class B common unit holders would benefit from any value attributable to such accumulated cash balances as a result of its ownership of Class A common stock following an exchange of its Class B common units in Evolent Health LLC (including any exchange upon an acquisition of us). See “Dividend policy”.

 

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In certain cases, payments by us under the tax receivables agreements may be accelerated or significantly exceed the tax benefits we realize in respect of the tax attributes subject to the tax receivables agreements.

The tax receivables agreements will provide that upon certain changes of control, or if, at any time, we elect an early termination of the tax receivables agreements or are in material breach of our obligations under the tax receivables agreements, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits to the existing holders of Class B common units, the former stockholders of Evolent Health Holdings, Inc. and the former stockholders of an affiliate of TPG. Such payment would be based on certain valuation assumptions and deemed events set forth in the tax receivables agreements, including the assumption that we have sufficient taxable income to fully utilize such tax benefits. The benefits would be payable even though, in certain circumstances, no Class B common units are actually exchanged and no net operating losses are actually used at the time of the accelerated payment under the tax receivables agreement, thereby resulting in no corresponding tax basis step up at the time of such accelerated payment under the basis tax receivables agreement. Accordingly, payments under the tax receivables agreements may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the tax attributes subject to the tax receivables agreements. In these situations, our obligations under the tax receivables agreements could have a substantial negative impact on our liquidity. We may not be able to finance our obligations under the tax receivables agreements and any indebtedness we incur may limit our subsidiaries’ ability to make distributions to us to pay these obligations. In addition, our obligations under the tax receivables agreements could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control that could be in the best interests of holders of our Class A common stock.

Different interests among our investors or between our investors and us, including with respect to related party transactions, could prevent us from achieving our business goals.

For the foreseeable future, we expect that a majority of our board of directors will include directors who are affiliated with entities that may have commercial relationships with us. See “Certain relationships and related transactions”. Certain of our existing investors could have business interests that conflict with those of the other investors, which may make it difficult for us to pursue strategic initiatives that require consensus among our owners.

Our relationship with our existing investors, who will own     % of our Class A common stock,     % of our Class B common stock and a     % economic interest in Evolent Health LLC, following the completion of the offering reorganization and this offering, could create conflicts of interest among our investors, or between our investors and us, in a number of areas relating to our past and ongoing relationships. For example, certain of our products and services compete (or may compete in the future) with various products and services of our investors. In addition, our existing investors may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivables agreements that we intend to enter into in connection with this offering, and whether and when Evolent Health, Inc. should terminate the tax receivables agreements and accelerate its obligations thereunder. In addition, the structuring of future transactions may take into consideration these existing investors’ tax or other considerations even where no similar benefit would accrue to us. Except as set forth in the tax receivables agreements and the stockholders’ agreement that we intend to enter into with our existing investors, which we refer to as the stockholders’ agreement, there are not any formal dispute resolution procedures in place to resolve conflicts between us and our existing investors or among our existing investors. We may not be able to resolve any potential conflicts between us and an existing investor and, even if we do, the resolution may be less favorable to us than if we were negotiating with an unaffiliated party.

 

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The agreements between us and certain of our existing investors were made in the context of an affiliated relationship and may contain different terms than comparable agreements with unaffiliated third parties.

The contractual agreements that we have with certain of our existing investors were negotiated in the context of an affiliated relationship in which representatives of such existing investors and their affiliates comprised a significant portion of our board of directors. As a result, the financial provisions, and the other terms of these agreements, such as covenants, contractual obligations on our part and on the part of such existing investors and termination and default provisions may be less favorable to us than terms that we might have obtained in negotiations with unaffiliated third parties in similar circumstances, which could have a material adverse effect on our business, financial condition and results of operations. See “Certain relationships and related transactions—Commercial agreements with certain investors”.

We expect to be a “controlled company” within the meaning of the NYSE rules and, as a result, we will qualify for exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Certain of our existing investors that we expect to be a party to a stockholders’ agreement upon the completion of this offering will own a majority of the voting power of our outstanding common stock following the completion of this offering. Accordingly, we expect to be considered a “controlled company” under the NYSE rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of listing of our Class A common stock:

 

    we have a board that is composed of a majority of “independent directors” as defined under the NYSE rules; and

 

    we have a compensation committee and a nominating and corporate governance committee that is composed of independent directors.

We intend to take advantage of these exemptions following the completion of this offering. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements. See “Management—Controlled company”.

Risks relating to this offering and ownership of our Class A common stock

There may not be an active, liquid trading market for our Class A common stock.

Prior to this offering, there has been no public market for shares of our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any shares of our Class A common stock that you purchase, or the price at which you may be able to sell such shares may decline. The initial public offering price of shares of our Class A common stock is, or will be, determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The market price of shares of our Class A common stock may decline below the initial public offering price, and you may not be able to resell your shares of our Class A common stock at or above the initial public offering price.

 

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We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price.

The trading price of our Class A common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

    market conditions in the broader stock market in general, or in our industry in particular;
    actual or anticipated fluctuations in our quarterly financial reports and results of operations;
    our ability to satisfy our ongoing capital needs and unanticipated cash requirements;
    indebtedness incurred in the future;
    introduction of new products and services by us or our competitors;
    issuance of new or changed securities analysts’ reports or recommendations;
    sales of large blocks of our stock;
    additions or departures of key personnel;
    regulatory developments;
    litigation and governmental investigations; and
    economic and political conditions or events.

These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

The trading market for our Class A common stock will also be influenced by the research and reports that industry or securities analysts publish about us or our business. As a new public company, we do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our stock, or if our results of operations do not meet their expectations, our stock price could decline.

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our Class A common stock could decline.

If our existing stockholders sell substantial amounts of our Class A common stock in the public market following this offering, the market price of our Class A common stock could decrease significantly. The perception in the public market that our existing stockholders might sell shares of Class A common stock could also depress our market price. Upon the completion of this offering, we will have              shares of Class A common stock outstanding. In addition,              options that are held by our employees are currently exercisable or will be exercisable in 2015. Our executive officers and directors will be subject to the lock-up agreements described under “Underwriting” and the Rule 144 holding period requirements described under “Shares eligible for future sale”. After all of these lock-up periods have expired, the holding periods have elapsed and, in the case of restricted stock, the shares have vested, additional shares will be eligible for sale in the public market. The market price of shares of our Class A common stock may drop significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of shares of our Class A common stock might impede our ability to raise capital through the issuance of additional shares of our Class A common stock or other equity securities.

 

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The market price of our Class A common stock could decline due to the large number of shares of Class A common stock eligible for future sale upon the exchange of Class B common units.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B common units (together with an equal number of shares of our Class B common stock), or the perception that such sales could occur. These sales, or the possibility that these sales may occur, may also make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

After the completion of this offering,              Class A common units and              Class B common units of Evolent Health LLC will be outstanding. Each Class B common unit, together with one share of our Class B common stock, will be exchangeable for one share of Class A common stock, as described under “The reorganization of our corporate structure—Third amended and restated operating agreement of Evolent Health LLC”. Pursuant to a registration rights agreement, we will grant registration rights to the holders of the Class B common units with respect to their shares of Class A common stock delivered in exchange for their Class B common units, as well as certain other holders of our Class A common stock. See “The reorganization of our corporate structure—Registration rights agreement”.

Some provisions of Delaware law, our amended and restated certificate of incorporation and amended and restated bylaws and certain of our contracts may deter third parties from acquiring us.

We expect that our amended and restated certificate of incorporation and amended and restated bylaws will, among other things:

 

    divide our board of directors into three staggered classes of directors that are each elected to three-year terms;

 

    prohibit stockholder action by written consent after the date on which TPG, The Advisory Board and UPMC cease to collectively own at least a majority in voting power of shares of our common stock;

 

    authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;

 

    prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

    provide that special meetings of the stockholders may be called only by or at the direction of the board of directors, the chairman of our board, the chief executive officer or, so long as TPG, The Advisory Board and UPMC collectively own at least a majority in voting power of shares of our common stock, any such stockholder, subject to certain limitations;

 

    require advance notice to be given by stockholders for any stockholder proposals or director nominees;

 

    after the date on which TPG, The Advisory Board and UPMC cease to collectively own at least a majority in voting power of shares of our common stock, require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to amend certain provisions of our amended and restated certificate of incorporation and any provision of our amended and restated bylaws; and

 

    after the date on which TPG, The Advisory Board and UPMC cease to collectively own at least a majority in voting power of shares of our common stock, require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to remove directors and only for cause.

 

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In addition, Section 203 of the General Corporation Law of the State of Delaware, or DGCL, may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder”. We intend to elect in our amended and restated certificate of incorporation not to be subject to Section 203 of the DGCL. Nevertheless, our amended and restated certificate of incorporation will contain provisions that have the same effect as Section 203 of the DGCL, except that they will provide that each of TPG, UPMC and The Advisory Board and their transferees will not be deemed to be “interested stockholders”, and accordingly will not be subject to such restrictions.

These and other provisions could have the effect of discouraging, delaying or preventing a transaction involving a change in control of our company or could make it more difficult for you and other stockholders to elect directors of your choosing or to cause us to take other corporate actions that you desire. See “Description of capital stock”. Provisions in certain of our contracts may also deter third parties from acquiring us. For example, under the UPMC IP Agreement, Evolent Health LLC’s license to certain intellectual property of UPMC would cease if we are acquired by certain specified acquirers. In addition, our contracts with certain customers would terminate if we are acquired by certain competitors or if UPMC ceases to be a subcontractor of our data and technology services. See “Certain relationships and related transactions—Commercial agreements with certain investors—License agreements”.

Our amended and restated certificate of incorporation and stockholders’ agreement will contain provisions renouncing our interest and expectation to participate in certain corporate opportunities identified by or presented to certain of our existing investors.

Each of TPG, The Advisory Board and UPMC and their respective affiliates may engage in activities similar to ours or lines of business or have an interest in the same areas of corporate opportunities as we do. Our amended and restated certificate of incorporation and stockholders’ agreement will provide that such stockholders and their respective affiliates will not have any duty to refrain from (1) engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us, or (2) doing business with any of our clients, customers or vendors. In the event that TPG, The Advisory Board or UPMC or any of their respective affiliates acquires knowledge of a potential business opportunity which may be a corporate opportunity for us, they will have no duty to communicate or offer such corporate opportunity to us. Our amended and restated certificate of incorporation and stockholders’ agreement will also provide that, to the fullest extent permitted by law, none of such stockholders or their respective affiliates will be liable to us, for breach of any fiduciary duty or otherwise, by reason of the fact that any such stockholder or any of its affiliates directs such corporate opportunity to another person, or otherwise does not communicate information regarding such corporate opportunity to us, and we will waive and renounce any claim that such business opportunity constituted a corporate opportunity that should have been presented to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive business opportunities are allocated by TPG, The Advisory Board or UPMC to themselves or their respective affiliates instead of to us. See “Description of capital stock—Corporate opportunity”.

Our amended and restated certificate of incorporation will designate courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation will provide that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (c) any action asserting a claim against us

 

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arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws, (d) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws or (e) any other action asserting a claim against us that is governed by the internal affairs doctrine. We refer to each of these proceedings as a covered proceeding. In addition, our amended and restated certificate of incorporation will provide that if any action the subject matter of which is a covered proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors, which we refer to as a foreign action, the claiming party will be deemed to have consented to (1) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (2) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the foreign action as agent for such claiming party. Our amended and restated certificate of incorporation will also provide that, except to the extent prohibited by the DGCL, in the event that a claiming party initiates, asserts, joins, offers substantial assistance to or has a direct financial interest in any foreign action without the prior approval of our board of directors, each such claiming party will be obligated jointly and severally to reimburse us and any officer, director or other employee made a party to such proceeding for all fees, costs and expenses of every kind and description (including, but not limited to, all attorneys’ fees and other litigation expenses) that the parties may incur in connection with such foreign action. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Our amended and restated bylaws will provide that if a claiming party brings certain actions against us and is not successful on the merits then it will be obligated to pay our litigation costs, which could have the effect of discouraging litigation, including claims brought by our stockholders.

Our amended and restated bylaws will provide that, except to the extent prohibited by the DGCL, and unless our board of directors otherwise approves, in the event that any claiming party (a) initiates, asserts, joins, offers substantial assistance to or has a direct financial interest in a covered proceeding and (b) such claiming party does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought by such claiming party, then each such claiming party will be obligated to reimburse us and any applicable director, officer or other employee for all fees, costs and expenses of every kind and description (including, but not limited to, all attorneys’ fees and other litigation expenses) that we or any such director, officer or other employee actually incurs in connection with the covered proceeding. While application of this standard will necessarily need to take into account the particular facts, circumstances and equities of any particular claim, we would expect a claiming party to be required to prevail on the merits on substantially all of the claims asserted in the complaint and, as a result, receive substantially the full remedy that it was seeking (including, if applicable, any equitable remedy) in order to avoid responsibility for reimbursing such fees, costs and expenses. Any person or entity purchasing or otherwise acquiring any interest in the shares of our capital stock will be deemed to have notice of and consented to this provision. This provision could have the effect of discouraging litigation against us, including claims brought by our stockholders and including claims that are partially (but not wholly) successful on the merits. However, it is currently unclear whether the Delaware legislature will take action to eliminate or limit the ability of stock corporations to implement provisions such as this, or whether Delaware courts will enforce in full a provision such as this for a Delaware stock corporation. If the Delaware legislature takes action to limit or eliminate our ability to include this provision in our amended

 

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and restated bylaws or a court were to find this provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

We do not anticipate paying any cash dividends in the foreseeable future.

We currently intend to retain our future earnings, if any, for the foreseeable future to fund the development and growth of our business. We do not intend to pay any dividends to holders of our Class A common stock. As a result, capital appreciation in the price of our Class A common stock, if any, will be your only source of gain on an investment in our Class A common stock. See “Dividend policy”.

New investors in our Class A common stock will experience immediate and substantial book value dilution after this offering.

The initial public offering price of our Class A common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding Class A common stock immediately after this offering. Based on an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and our net tangible book value as of             , if you purchase our Class A common stock in this offering you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $         per share in pro forma net tangible book value. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.

In preparation of this offering, we identified a material weakness in our internal control over financial reporting, and if we are unable to remedy our material weakness, or if we fail to establish and maintain effective internal controls, we may be unable to produce timely and accurate financial statements, and we may conclude that our internal control over financial reporting is not effective, which could adversely impact our investors’ confidence and our stock price.

Prior to the completion of this offering, we have been a private company and had limited accounting personnel to fully execute our accounting processes and address our internal control over financial reporting. We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly-traded company, we will be required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. We will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Pursuant to the JOBS Act, our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until the later of (1) the year following our first annual report required to be filed with the SEC or (2) the date we are no longer an emerging growth company.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. During the course of preparing for this offering, we determined that we had a material weakness in the design and operating effectiveness of our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over

 

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financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we identified was that we did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training to address accounting for complex, non-routine transactions.

We are currently in the process of remediating the material weakness and are taking numerous steps that we believe will address the underlying causes of the material weakness, primarily through the hiring of additional accounting and finance personnel with technical accounting and financial reporting experience, enhancing our training programs within our accounting and finance department, and enhancing our internal review procedures during the financial statement close process. This initiative will place significant demands on our financial and operational resources, as well as our IT systems. Our current efforts to design and implement an effective control environment may not be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring. During the course of the design and implementation, we may identify additional control deficiencies, which could give rise to other material weaknesses, in addition to the material weakness described above. The material weakness described above or any newly identified material weakness could result in a misstatement of our financial statements or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and all instances of fraud will be detected. If we fail to effectively remediate deficiencies in our control environment, if we identify future material weaknesses in our internal controls over financial reporting or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. In addition, if we are unable to assert that our internal control over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, if and when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected. We also could become subject to investigations by the NYSE, the SEC or other regulatory authorities.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. During the course of preparing for this offering, we concluded that we had a material weakness in the design and operating effectiveness of our internal control over financial reporting. We also intend to take advantage of reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, which may make it more difficult for investors and securities analysts to evaluate our company, and exemptions from the requirement of holding advisory “say on pay” votes on executive compensation and advisory votes on golden parachute compensation. In addition, we have elected to report only two years of audited annual financial statements and to present management’s discussion and analysis of financial condition and results of operations for only those two years. We cannot predict if investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more

 

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volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be up to five years. See “Prospectus summary—Implications of being an emerging growth company”.

Our operating subsidiary will have broad discretion in using the net proceeds of this offering contributed by us and may not effectively expend the proceeds.

We expect that Evolent Health LLC will use the net proceeds of this offering contributed by us for working capital and other general corporate purposes. Evolent Health LLC will have broad discretion in the application of such proceeds and we may not apply such proceeds effectively. Management might not be able to yield a significant return, or any return, on any investment of these proceeds. You will not have the opportunity to influence decisions on the use of these proceeds. See “Use of proceeds”.

Our business and stock price may suffer as a result of our lack of public company operating experience.

We have been a privately-held company since we began operations in 2011. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our prospects, financial condition, results of operations and stock price may be harmed.

 

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Special note regarding forward-looking statements

We have made statements under the captions “Prospectus summary”, “Risk factors”, “Management’s discussion and analysis of financial condition and results of operations”, “Unaudited Pro Forma Consolidated Financial Statements”, “Business” and in other sections of this prospectus that are forward-looking statements. All statements other than statements of historical fact included in this prospectus are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “may”, “might”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “aims”, “predicts”, “potential” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. We believe the risks attending any forward-looking statements include, but are not limited to, those described under “Risk factors” and include, among other things:

 

    the structural change in the market for healthcare in the United States;

 

    our ability to effectively manage our growth;

 

    the significant portion of revenues we derive from our largest partners;

 

    our ability to offer new and innovative products and services;

 

    the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control;

 

    our ability to attract new partners;

 

    our ability to recover the significant upfront costs in our partner relationships;

 

    our ability to estimate the size of our target market;

 

    our ability to maintain and enhance our reputation and brand recognition;

 

    consolidation in the healthcare industry;

 

    competition which could limit our ability to maintain or expand market share within our industry;

 

    our ability to partner with providers due to exclusivity provisions in our contracts;

 

    uncertainty in the healthcare regulatory framework;

 

    restrictions and penalties as a result of privacy and data protection laws;

 

    adequate protection of our intellectual property;

 

    any alleged infringement, misappropriation or violation of third-party proprietary rights;

 

    our use of “open source” software;

 

    our reliance on third parties;

 

    our ability to use, disclose, de-identify or license data and to integrate third-party technologies;

 

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    data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;

 

    breaches or failures of our security measures;

 

    our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;

 

    our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;

 

    risks related to future acquisition opportunities;

 

    our future indebtedness and our ability to obtain additional financing;

 

    our ability to achieve profitability in the future;

 

    the requirements of being a public company;

 

    our pro forma financial information may not be representative of our future performance;

 

    the risk of potential future litigation; and

 

    our ability to remediate the material weakness in our internal control over financial reporting.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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The reorganization of our corporate structure

Overview

Evolent Health, Inc. was incorporated as a Delaware corporation on December 12, 2014. Immediately prior to the completion of this offering, we will complete a reorganization, which we refer to as the offering reorganization, pursuant to which we will amend and restate our certificate of incorporation to, among other things, authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described under “Description of capital stock”. Pursuant to the offering reorganization, we will also merge with Evolent Health Holdings, Inc. and an affiliate of TPG. In accordance with the terms of the mergers, each of the then-existing stockholders of Evolent Health Holdings, Inc., including UPMC and The Advisory Board, as well as certain of our existing partners and employees, will receive a certain number of shares of our Class A common stock and the right to certain payments under the tax receivables agreements in exchange for each share of common stock it holds in Evolent Health Holdings, Inc. and TPG will receive a certain number of shares of our Class A common stock and the right to certain payments under the tax receivables agreements in exchange for 100% of the common stock that it holds in its affiliate. In addition, pursuant to the offering reorganization we will issue shares of our Class B common stock to TPG and The Advisory Board, each of which is a member of Evolent Health LLC. Shares of our Class B common stock will vote together with shares of our Class A common stock as a single class, except as otherwise required by law or pursuant to our amended and restated certificate of incorporation or amended and restated bylaws. See “Description of capital stock—Class B common stock”. After completion of this offering, the existing direct and indirect investors of Evolent Health LLC will beneficially own     % in the aggregate of our outstanding Class A and Class B common stock on a combined basis. As described in more detail below, each Class B common unit of Evolent Health LLC can be exchanged (together with one share of our Class B common stock) for one share of our Class A common stock and is otherwise non-transferrable.

Cravath, Swaine & Moore LLP will deliver an opinion to Evolent Health, Inc., that the mergers described above will each qualify as a “reorganization” under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). The opinion will not address any U.S. state or local, or foreign tax consequences of the mergers and will rely upon customary assumptions and representations by Evolent Health Holdings, Inc. and an affiliate of TPG. The opinion cannot be relied on if any of the assumptions or representations are incorrect, incomplete or inaccurate.

Evolent Health, Inc. was formed for purposes of this offering and has, to date, engaged only in activities in contemplation of this offering. Following this offering, Evolent Health, Inc. will be a holding company and its principal asset will be all of the Class A common units in Evolent Health LLC. Our business began operations in 2011 and, historically, we operated through Evolent Health LLC and its predecessor.

There will be             shares of our Class A common stock outstanding after this offering. These shares will represent 100% of the economic rights of the holders of all classes of our capital stock.

 

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The diagram below shows our organizational structure immediately after the offering reorganization and the completion of this offering described herein.

 

LOGO

Holding company structure

Our only business after this offering will be to act as sole managing member of Evolent Health LLC. We will operate and control all of our businesses and affairs through Evolent Health LLC. Immediately prior to this offering, Evolent Health LLC’s operating agreement will be amended and restated to, among other things, establish two classes of equity: Class A common units held by us and Class B common units held only by persons or entities we permit which, immediately following the completion of this offering, will be TPG and The Advisory Board. Following the completion of this offering, the financial results of Evolent Health LLC will be consolidated in our financial statements.

Third amended and restated operating agreement of Evolent Health LLC

Following the offering reorganization and this offering, we will operate our business through Evolent Health LLC. The operations of Evolent Health LLC, and the rights and obligations of its members, will be governed by the third amended and restated operating agreement of Evolent Health LLC, the form of which will be filed as an exhibit to the registration statement of which this prospectus forms a part. The following is a description of the material terms of the third amended and restated operating agreement.

 

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Governance

We will serve as sole managing member of Evolent Health LLC. As such, we will control its business and affairs and will be responsible for the management of its business. No other members of Evolent Health LLC, in their capacity as such, will have any authority or right to control the management of Evolent Health LLC or to bind it in connection with any matter.

Voting and economic rights of members

Evolent Health LLC will have two series of outstanding equity: Class A common units, which may only be issued to Evolent Health, Inc., as sole managing member, and Class B common units. We refer to these Class A common units and Class B common units of Evolent Health LLC, collectively, as common units. The Class B common units will be held initially by TPG and The Advisory Board. The Class A common units and Class B common units will entitle their holders to equivalent economic rights, meaning an equal share in the profits and losses of, and distributions from, Evolent Health LLC. Holders of Class B common units will have no voting rights, except for the right to approve certain amendments to the third amended and restated operating agreement.

Net profits and losses of Evolent Health LLC generally will be allocated, and distributions will be made, to its members pro rata in accordance with the number of common units (Class A or Class B, as the case may be) they hold. Accordingly, net profits and net losses of Evolent Health LLC will initially be allocated, and distributions will be made, approximately     % to us and approximately     % to the holders of Class B common units (or     % and     %, respectively, if the underwriters exercise their over-allotment option in full).

Subject to the availability of net cash flow at the Evolent Health LLC level and to applicable legal and contractual restrictions, we intend to cause Evolent Health LLC to distribute to us, and to the other holders of common units, cash payments for the purposes of funding tax obligations in respect of any net taxable income that is allocated to us and the other holders of common units as members of Evolent Health LLC to fund dividends, if any, declared by us and to make any payments due under the tax receivables agreements, as described below. See “—Tax consequences”. Regardless of whether Evolent Health LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to holders of our Class A common stock will be made by our board of directors except as described in “Dividend policy”. We do not, however, expect to declare or pay any cash or other dividends in the foreseeable future on our Class A common stock, as we intend to reinvest any cash flow generated by operations in our business. Class B common stock will not be entitled to any dividend payments.

Coordination of Evolent Health, Inc. and Evolent Health LLC

Whenever we issue one share of Class A common stock for cash, the net proceeds will be transferred promptly either to Evolent Health LLC in exchange for one Class A common unit, or to a holder of Class B common units in exchange for a Class B common unit and a share of our Class B common stock. If we issue other classes or series of equity securities, we will contribute to Evolent Health LLC the net proceeds we receive in connection with such issuance, and Evolent Health LLC will issue to us an equal number of equity securities with designations, preferences and other rights and terms that are substantially the same as our newly issued equity securities. Conversely, if we repurchase any shares of Class A common stock (or equity securities of other classes or series) for cash, Evolent Health LLC will, immediately prior to our repurchase, redeem an equal number of Class A common units (or its equity securities of the corresponding classes or series), upon the same terms and for the same price, as the shares of our Class A common stock (or our equity securities of such other classes or series) that are repurchased. Common units and shares of our common stock will be subject to equivalent stock splits, dividends and reclassifications.

We will not conduct any business other than the management and ownership of Evolent Health LLC, or own any other material assets (other than on a temporary basis), although we may take such actions and own such

 

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assets as are necessary to comply with applicable law, including compliance with our responsibilities as a public company under the U.S. federal securities laws, and may incur indebtedness and take other actions if we determine that doing so is in our best interest.

Issuances of common units

Class A common units may be issued only to us as the sole managing member of Evolent Health LLC. Class B common units may be issued only to persons or entities we permit which, immediately following the completion of this offering, will be TPG and The Advisory Board. Such issuances shall be made in exchange for cash or other consideration. Class B common units may not be transferred as Class B common units except to certain permitted transferees and in accordance with the restrictions on transfer set forth in the third amended and restated operating agreement of Evolent Health LLC. Any such transfer must be accompanied by the transfer of an equal number of shares of our Class B common stock.

Exchange agreement

Immediately prior to the completion of this offering, we will enter into an exchange agreement with Evolent Health LLC, TPG and The Advisory Board, which are the existing holders of Class B common units. Pursuant to and subject to the terms of the exchange agreement and the third amended and restated operating agreement of Evolent Health LLC, holders of Class B common units, at any time and from time to time, may exchange one or more Class B common units, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis. Such exchange may be completed, at the election of Evolent Health LLC, by us or Evolent Health LLC. If Evolent Health LLC completes such exchange, we will contribute Class A common stock to Evolent Health LLC prior to the exchange. The amount of Class A common stock issued or conveyed will be subject to equitable adjustments for stock splits, stock dividends and reclassifications.

Holders will not have the right to exchange Class B common units if we determine that such exchange would be prohibited by applicable law or regulation, would violate other agreements to which we may be subject or would pose a material risk that Evolent Health LLC would be treated as a “publicly traded partnership” for U.S. federal income tax purposes. If the IRS were to contend successfully that Evolent Health LLC should be treated as a “publicly traded partnership” for U.S. federal income tax purposes, Evolent Health LLC would be treated as a corporation for U.S. federal income tax purposes and thus would be subject to entity-level tax on its taxable income.

A holder that exchanges Class B common units will also be required to deliver an equal number of shares of our Class B common stock. In connection with each exchange, Evolent Health LLC will cancel the delivered Class B common units and issue to us Class A common units on a one-for-one basis. Thus, as holders exchange their Class B common units for Class A common stock, our interest in Evolent Health LLC will increase.

The third amended and restated operating agreement will prohibit certain business combination transactions in which our Class A common stock is exchanged for consideration unless each holder of shares of Class A common stock or Class B common stock is allowed to participate equally in the transaction as if the Class B common stock, together with the corresponding number of Class B units, had been exchanged for shares of Class A common stock pursuant to the exchange agreement immediately prior to the transaction.

We, Evolent Health LLC and the exchanging holder will each generally bear our own expenses in connection with an exchange, except that, subject to a limited exception, we are required to pay any transfer taxes, stamp taxes or duties or other similar taxes in connection with such an exchange.

We have reserved for issuance             shares of our Class A common stock for potential exchange in the future for Class B common units, which is the aggregate number of Class B common units to be outstanding after completion of the offering reorganization and this offering.

 

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Exculpation and indemnification

The third amended and restated operating agreement of Evolent Health LLC will contain provisions limiting the liability of Evolent Health LLC’s members (including Evolent Health, Inc.), officers and their respective affiliates to Evolent Health LLC or any of its members. Moreover, the third amended and restated operating agreement will contain broad indemnification provisions for Evolent Health LLC’s members (including Evolent Health, Inc.), officers and their respective affiliates. Because Evolent Health LLC is a limited liability company, these provisions are not subject to the limitations on exculpation and indemnification contained in the DGCL with respect to the indemnification that may be provided by a Delaware corporation to its directors and officers.

Voting rights of Class A stockholders and Class B stockholders

Each share of our Class A common stock or our Class B common stock will entitle its holder to one vote. Immediately after this offering, our Class B stockholders will collectively hold approximately     % of the total voting power of our common stock (or     % if the underwriters exercise their over-allotment option in full).

Tax consequences

Holders of common units, including Evolent Health, Inc., generally will incur U.S. federal, state and local and foreign income taxes on their allocable shares of any net taxable income of Evolent Health LLC. We expect that the third amended and restated operating agreement of Evolent Health LLC will provide for cash distributions to its members in an amount at least equal to the members’ assumed tax liability attributable to Evolent Health LLC. We expect that distributions in respect of the members’ assumed tax liability generally will be computed based on our estimate of the net taxable income of Evolent Health LLC allocable per common unit multiplied by an assumed tax rate. As a result, these distributions will be pro rata in accordance with the number of common units (Class A or Class B) held. Funds used by Evolent Health LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, these tax distributions may be substantial, and will likely exceed (as a percentage of Evolent Health LLC’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. In addition, as a result of potential differences in the amount of net taxable income allocable to us and to the existing owners of Evolent Health LLC, as well as the use of an assumed tax rate in calculating Evolent Health LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the tax receivables agreements described below. In accordance with the third amended and restated operating agreement, Evolent Health LLC intends to make distributions to its members in respect of such assumed tax liability and to fund dividends, if any, declared by us, as well as any payments we are obligated to make under the tax receivables agreements described below.

Evolent Health LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, or the Code, which will be effective for 2015 and for each taxable year in which an exchange of Class B common units occurs, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock. We expect that, as a result of this election, any future exchanges of Class B common units, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock, will result in increases in the tax basis in our share of the tangible and intangible assets of Evolent Health LLC at the time of such exchange, which will increase the tax depreciation and amortization deductions available to us and which could create other tax benefits. Any such increases in tax basis and tax depreciation and amortization deductions or other tax benefits could reduce the amount of tax that we would otherwise be required to pay in the future.

In addition, we expect that certain net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG will be available to us as a result of the offering reorganization. We will be required to pay a portion of the cash

 

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savings we actually realize from such increase in the tax basis of the tangible and intangible assets of Evolent Health LLC or from the utilization of such net operating losses to certain holders of Class B common units or contributors of the net operating losses pursuant to the NOL tax receivables agreement.

Furthermore, payments under each of the tax receivables agreements, as described below, will themselves give rise to additional tax benefits and therefore, to additional payments under the applicable tax receivables agreement. To the extent that we are unable to make payments under the tax receivables agreements for any reason, such payments will be deferred and will accrue interest until paid. See “—Tax receivables agreements”.

Tax receivables agreements

This offering is not anticipated to result in an increase in the tax basis in our share of the tangible and intangible assets of Evolent Health LLC. However, subsequent exchanges of Class B common units, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock, are expected to increase our tax basis in our share of Evolent Health LLC’s tangible and intangible assets. These increases in tax basis are expected to increase our depreciation and amortization deductions and create other tax benefits and therefore may reduce the amount of tax that we would otherwise be required to pay in the future. In addition, we expect that certain net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG will be available to us as a result of the offering reorganization. See “—Third amended and restated operating agreement of Evolent Health LLC—Tax consequences”.

Immediately prior to the completion of this offering, we will enter into the basis tax receivables agreement with the current holders of Class B common units, TPG and The Advisory Board, and certain of our other current investors. The agreement will require us to pay to such holders 85% of the cash savings, if any, in U.S. federal, state and local and foreign income tax we realize as a result of any deductions attributable to future increases in tax basis following the exchanges described above (calculated assuming that any post-offering transfer of Class B common units (other than the exchanges) had not occurred) or deductions attributable to imputed interest or future increases in tax basis following payments made under the basis tax receivables agreement.

Immediately prior to the completion of this offering, we will also enter into the NOL tax receivables agreement, pursuant to which we will pay the former stockholders of Evolent Health Holdings, Inc. and TPG 85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of the utilization of the net operating losses of Evolent Health Holdings, Inc. and the affiliate of TPG attributable to periods prior to this offering, as well as deductions attributable to imputed interest on any payments made under the NOL tax receivables agreement.

The obligations under the tax receivables agreements will be our obligations and not obligations of Evolent Health LLC. We will benefit from the remaining 15% of any realized cash savings. For purposes of the tax receivables agreements, cash savings in income tax will be computed by comparing our actual income tax liability with our hypothetical liability had we not been able to utilize the tax benefits subject to the applicable tax receivables agreement. Additionally, for purposes of the basis tax receivables agreement, the amount of the increase in tax basis following an exchange of Class B common units will be calculated assuming that any pre-exchange (but post-offering) transfer of such Class B common units had not occurred. Therefore we may be required to make payments under the basis tax receivables agreement that are attributable to the increase in tax basis caused by such a pre-exchange transfer. The tax receivables agreements will become effective upon the completion of this offering and will remain in effect until all such tax benefits have been used or expired, unless the agreement is terminated early, as described below. Estimating the amount of payments to be made under the tax receivables agreements cannot be done reliably at this time because any increase in tax basis, as

 

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well as the amount and timing of any payments under the tax receivables agreements, will vary depending on a number of factors, including:

 

    the timing of exchanges of Class B common units (together with an equal number of shares of our Class B common stock) for shares of our Class A common stock—for instance, the increase in any tax deductions will vary depending on the fair market value of the depreciable and amortizable assets of Evolent Health LLC at the time of the exchanges, and this value may fluctuate over time;

 

    the price of our Class A common stock at the time of exchanges of Class B common units (together with an equal number of shares of our Class B common stock) for shares of our Class A common stock—the increase in our share of the basis in the assets of Evolent Health LLC, as well as the increase in any tax deductions, will be related to the price of our Class A common stock at the time of these exchanges;

 

    the tax rates in effect at the time we use the increased amortization and depreciation deductions or realize other tax benefits;

 

    any limitation on our utilization of the net operating losses formerly held by Evolent Health Holdings, Inc. or an affiliate of TPG under Section 382 of the Code; and

 

    the amount, character and timing of our taxable income.

We will be required under the tax receivables agreements to pay 85% of the tax savings, described above, if any, as and if realized. Except in certain circumstances, if in a given taxable year we do not have taxable income, before taking into account any tax benefits subject to the tax receivables agreements, we will not be required to make payments under these agreements for that taxable year because no tax savings will have been realized.

The payments that we make under the tax receivables agreements could be substantial. Assuming no material changes in relevant tax law and based on our current operating plan and other assumptions, including our estimate of the tax basis of our assets as of             , if all of the Class B common units were acquired by us in taxable transactions at the time of the completion of this offering for a price of $         (the midpoint of the price range set forth on the cover page of this prospectus) per Class B common unit, we estimate that the amount that we would be required to pay under the basis tax receivables agreement could be approximately $        . Assuming no material changes in relevant tax law and based on our current operating plan and other assumptions, we estimate that the amount that we would be required to pay under the NOL tax receivables agreement could be approximately $        . The actual amount we will be required to pay under the tax receivables agreements may be materially greater than these hypothetical amounts, as potential future payments will vary depending on a number of factors, including those listed above.

Payments under the tax receivables agreements are generally due within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, but interest on such payments will begin to accrue at a rate of LIBOR plus          basis points from the due date (without extensions) of such tax return. Late payments will generally accrue interest at a rate of LIBOR plus         basis points. However, to the extent that we do not have available cash to satisfy our payment obligations under the tax receivables agreements for certain enumerated reasons, such deferred payments would accrue interest at a rate of LIBOR.

The tax receivables agreements will provide that upon certain changes of control, or if, at any time, we elect an early termination of the tax receivables agreements or are in material breach of our obligations under the tax receivables agreements, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits to the existing holders of Class B common units and the former stockholders of Evolent Health Holdings, Inc. Such payment would be based on certain valuation assumptions and deemed events

 

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set forth in the tax receivables agreements, including the assumptions that we have sufficient taxable income to fully utilize such tax benefits. The benefits would be payable even though, in certain circumstances, no Class B common units are actually exchanged for our Class A Common Stock and no net operating losses would actually be used at the time of the accelerated payment under the tax receivables agreements. Accordingly, payments under the tax receivables agreements may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the tax attributes subject to the tax receivables agreements.

Were the IRS to successfully challenge the tax basis increases or the existence or amount of net operating losses described above, we would not be reimbursed for any payments previously made under the tax

receivables agreements, but future payments under the tax receivables agreements, if any, would be netted against any unreimbursed payments to reflect the result of any such successful challenge by the IRS. As a result, we could make payments under the tax receivables agreements in excess of our actual cash savings in income tax.

Registration rights agreement

Upon the completion of this offering, we intend to enter into a registration rights agreement with TPG, UPMC and The Advisory Board to register for sale under the Securities Act shares of our Class A common stock, including those delivered in exchange for Class B common units in the circumstances described above. Subject to certain conditions and limitations, this agreement will provide TPG, The Advisory Board and UPMC with certain registration rights as described below. An aggregate of                  shares of Class A common stock, including such shares reserved for potential exchange in the future for Class B common units, will be entitled to these registration rights.

Demand registration rights

At any time after the completion of this offering, each of TPG, The Advisory Board and UPMC will have the right to demand that we file up to two registration statements on Form S-1. These registration rights are subject to specified conditions and limitations, including the right of the underwriters, if any, to limit the number of shares included in any such registration under specified circumstances. Upon such a request, we will be required to use reasonable best efforts to effect the registration within 60 days.

Piggyback registration rights

At any time after the completion of this offering, if we propose to register any shares of our equity securities under the Securities Act either for our own account or for the account of any other person, then TPG, The Advisory Board and UPMC will be entitled to notice of the registration and will be entitled to include their shares of Class A common stock in the registration statement. These piggyback registration rights are subject to specified conditions and limitations, including the right of the underwriters, if any, to limit the number of shares included in any such registration under specified circumstances.

Shelf registration rights

At any time after we become eligible to file a registration statement on Form S-3, TPG, The Advisory Board and UPMC will be entitled to have their shares of Class A common stock registered by us on a Form S-3 registration statement at our expense. These shelf registration rights are subject to specified conditions and limitations.

Expenses and indemnification

We will pay all expenses relating to any demand, piggyback or shelf registration, other than underwriting discounts and commissions and any transfer taxes, subject to specified conditions and limitations. The

 

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registration rights agreement will include customary indemnification provisions, including indemnification of the participating holders of shares of Class A common stock and their directors, officers and employees by us for any losses, claims, damages or liabilities in respect thereof and expenses to which such holders may become subject under the Securities Act, state law or otherwise.

Termination of registration rights

The registration rights granted under the registration rights agreement will terminate upon the date the holders of shares that are a party thereto no longer hold any such shares that are entitled to registration rights.

Stockholders’ agreement

Upon the completion of this offering, we intend to enter into a stockholders’ agreement with TPG, UPMC and The Advisory Board. The stockholders’ agreement will contain provisions related to the composition of our board of directors, the committees of our board of directors and our corporate governance. Under the stockholders’ agreement, TPG, UPMC and The Advisory Board will be entitled to nominate a majority of the members of our board of directors. Specifically, for so long as each of TPG, UPMC and The Advisory Board owns at least 40% of the shares of common stock held by it following the completion of this offering, such stockholder will be entitled to nominate two directors to serve on our board of directors. When such stockholder owns less than 40% but at least 5% of the shares of common stock held by it following the completion of this offering, such stockholder will be entitled to nominate one director. TPG, UPMC and The Advisory Board will agree in the stockholders’ agreement to vote for each other’s board nominees.

The stockholders’ agreement will provide that each of TPG, The Advisory Board and UPMC and their respective affiliates will not have any duty to refrain from (1) engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us, or (2) doing business with any of our clients, customers or vendors. In the event that TPG, The Advisory Board or UPMC or any of their respective affiliates acquires knowledge of a potential business opportunity which may be a corporate opportunity of us, they will have no duty to communicate or offer such corporate opportunity to us. See “Description of capital stock—Corporate opportunity”.

The stockholders’ agreement will prohibit certain business combination transactions in which our Class A common stock is exchanged for consideration unless each holder of shares of Class A common stock or Class B common stock is allowed to participate equally in the transaction as if the Class B common stock, together with the corresponding number of Class B units, had been exchanged for shares of Class A common stock pursuant to the exchange agreement immediately prior to the transaction.

 

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Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $        , or approximately $         if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, by $         (assuming no exercise of the underwriters’ over-allotment option).

The principal purposes of this offering are to create a public market for our Class A common stock, obtain additional capital, facilitate our future access to the public equity markets, increase awareness of our company among potential partners, improve our competitive position, facilitate the use of our Class A common stock as consideration for future acquisitions and provide liquidity to existing members of Evolent Health LLC.

We intend to use all of the net proceeds of this offering to purchase Class A common units of Evolent Health LLC from Evolent Health LLC at a price per Class A common unit equal to the public offering price per share of our Class A Common Stock, after deducting underwriting discounts and commissions. Upon the completion of this offering, we will have acquired Class A common units representing a     % economic interest in Evolent Health LLC (or Class A common units representing a     % economic interest if the underwriters exercise their over-allotment option in full). We will not retain any of the net proceeds used to purchase the Class A common units from Evolent Health LLC.

The net proceeds from any exercise of the underwriters’ over-allotment option will be used to purchase a corresponding additional number of Class A common units from Evolent Health LLC at a price per Class A common unit equal to the public offering price per share of our Class A common stock, after deducting underwriting discounts and commissions.

We expect that Evolent Health LLC will use the net proceeds of this offering contributed by us for working capital and other general corporate purposes. Evolent Health LLC will have broad discretion in the application of such proceeds and may not apply the proceeds effectively. However, as of the date of this prospectus, we cannot specify with certainty the particular uses of these proceeds for such purposes. Management might not be able to yield a significant return, or any return, on any investment of these proceeds. You will not have the opportunity to influence decisions on the use of these proceeds.

 

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Dividend policy

We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. However, we will be required to pay cash dividends out of our future earnings to the extent that cash distributions from Evolent Health LLC are materially in excess of our assumed tax liability and our obligations under the tax receivables agreements. The declaration and payment of all other future dividends to holders of our Class A common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements and any debt agreements we are then party to, and other factors our board of directors deems relevant. See “Risk Factors—Risks relating to our structure—We will be a holding company and our only material asset after completion of the offering reorganization and this offering will be our interest in Evolent Health LLC and, accordingly, we will be dependent upon distributions from Evolent Health LLC to pay taxes and other expenses”.

Our Class B common stock will not be entitled to any dividend payments.

 

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Capitalization

The following table sets forth the cash and current investments and capitalization as of December 31, 2014 of:

 

    our predecessor, Evolent Health Holdings, Inc., on an actual basis;

 

    Evolent Health, Inc. on a pro forma basis to give effect to the offering reorganization described under “The reorganization of our corporate structure”; and

 

    Evolent Health, Inc. on a pro forma as adjusted basis to give further effect to the issuance and sale of             shares of Class A common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and the application of the net proceeds of this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as set forth under “Use of proceeds”.

This table should be read in conjunction with the sections of this prospectus titled “The reorganization of our corporate structure”, “Unaudited pro forma consolidated financial information”, “Selected historical financial and operational data” and “Management’s discussion and analysis of financial condition and results of operations” and the audited annual financial statements and notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus.

 

   As of December 31, 2014  
   Actual   Pro forma for
offering
reorganization
  Pro forma for
offering
reorganization
and as adjusted
for offering(1)
 
  (in thousands)  
             

Cash and cash equivalents and current investments(2)

$    $                     $                    
  

 

 

 

 

 

Redeemable preferred stock

Series A redeemable preferred stock

  12,847   

Series B redeemable preferred stock

  24,833   

Series B-1 redeemable preferred stock

  1,593   
  

 

 

   

 

 

    

 

 

 

Total redeemable preferred stock

  $39,273    $      $     
  

 

 

   

 

 

    

 

 

 

Equity (Deficit)

Series A preferred stock

  2   

Class A common stock, $0.001 par value; 8,453,202 shares authorized, 1,011,871 shares issued and outstanding, actual;             shares authorized,             shares issued and outstanding, pro forma;             shares authorized,             shares issued and outstanding, pro forma as adjusted

  1   

Class B common stock, $0.01 par value; no shares authorized, no shares issued and outstanding, actual;             shares authorized,             shares issued and outstanding, pro forma;             shares authorized,         shares issued and outstanding, pro forma as adjusted

    

Additional paid in capital

  23,733   

(Accumulated Deficit)/Retained Earnings

  (25,806

Non-controlling interests

    
  

 

 

   

 

 

    

 

 

 

Total equity (Deficit)

  (2,070
  

 

 

   

 

 

    

 

 

 

Total capitalization

  $37,203    $      $     

 

 

 

 

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(1)    Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) our total stockholders’ equity (deficit) and total capitalization by $         (assuming no exercise of the underwriters’ over-allotment option), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)    Current investments consist of marketable securities with original maturities greater than three months and maturity dates within twelve months of the balance sheet date.

The foregoing table does not give effect to the following:

 

                shares of Class A common stock that are issuable upon exchanges of Class B common units (together with an equal number of shares of our Class B common stock) that will be outstanding immediately after the completion of this offering;

 

                shares of our Class A common stock issuable upon the exercise of options outstanding under our 2011 Equity Incentive Plan at a weighted average exercise price of $        ,             restricted stock awards granted under our 2011 Equity Incentive Plan that have not yet vested and             shares of our Class A common stock reserved for issuance under our 2015 Omnibus Incentive Compensation Plan (see “Executive compensation”); and

 

    the exercise by the underwriters of their over-allotment option.

 

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Dilution

After giving pro forma effect to the offering reorganization described under “The reorganization of our corporate structure”, our pro forma net tangible book value as of December 31, 2014 was $         or $         per share of our Class A and Class B common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets, less the amount of our total liabilities, divided by the aggregate number of shares of Class A and Class B common stock outstanding. After giving pro forma effect to the offering reorganization, the sale by us of the shares of Class A common stock in this offering, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, the receipt and application of the net proceeds and assuming all Class B common units, together with an equal number of shares of our Class B common stock, are exchanged for an equal number of shares of Class A common stock, our pro forma net tangible book value as of December 31, 2014 would have been $         or $         per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share and an immediate dilution to new investors of $         per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of Class A common stock sold in this offering and the pro forma net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of December 31, 2014

$                
  

 

 

    

Increase in pro forma net tangible book value per share attributable to new investors

Adjusted pro forma net tangible book value per share after offering

     

 

 

 

Dilution per share to new investors

$                

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of our Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) would not impact our net tangible book value or our pro forma as adjusted net tangible book value because all of the net proceeds of this offering will be used to purchase Class A common units from Evolent Health LLC. A $1.00 increase in the assumed initial public offering price of $         per share of Class A common stock would result in an increase in the dilution to new investors of $         a share or a total dilution of $         per share. A $1.00 decrease in the assumed initial public offering price of $         per share of Class A common stock would result in a decrease in the dilution to new investors of $         or a total dilution of $         per share.

The following table sets forth, on a pro forma basis after giving effect to the offering reorganization, as of December 31, 2014, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, assuming all Class B common units, together with an equal number of our Class B common shares, are exchanged for an equal number of shares of Class A common stock, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

   Shares purchased   Total consideration   Average
price per
share
 
   Number Percent   Amount   Percent  

Existing stockholders

      %    $                       %    $                

New investors(1)

      %          %   
  

 

 

Total

  100%    $                   100%    $                

 

 

 

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(1)   A $1.00 increase (decrease) in the assumed offering price of $         per share of Class A common stock would increase (decrease) total consideration paid by investors in this offering by $         million, assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same.

The foregoing tables do not give effect to the following:

 

                shares of our Class A common stock issuable upon the exercise of options outstanding under our 2011 Equity Incentive Plan at a weighted average exercise price of $        ,             restricted stock awards granted under our 2011 Equity Incentive Plan that have not yet vested and             shares of our Class A common stock reserved for issuance under our 2015 Omnibus Incentive Compensation Plan (see “Executive compensation”); and

 

    the exercise by the underwriters of their over-allotment option.

 

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Unaudited pro forma consolidated financial information

The unaudited pro forma consolidated balance sheet as of December 31, 2014 presents the consolidated financial position of Evolent Health, Inc. after giving pro forma effect to the offering reorganization and as further adjusted for this offering and the contemplated use of the net proceeds from this offering as described under “The reorganization of our corporate structure” and “Use of proceeds” as if such transactions occurred as of the balance sheet date.

The unaudited pro forma consolidated statements of operations for the year ended December 31, 2014 present the consolidated results of operations of Evolent Health, Inc. after giving pro forma effect to the offering reorganization and as further adjusted for this offering as described under “The reorganization of our corporate structure” and “Use of proceeds” as if such transactions had occurred on January 1, 2014. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the offering reorganization and as further adjusted for this offering, on the historical financial information of Evolent Health Holdings, Inc.

The unaudited pro forma consolidated financial information contained in this prospectus is subject to completion due to the fact that information related to our offering reorganization and this offering is not currently determinable. We intend to complete this pro forma consolidated financial information, including amounts related to pro forma adjustments set forth in the accompanying unaudited pro forma statements of operations and pro forma balance sheet, at such time that we update this prospectus and such information related to the stock price and overall valuation of the business is available.

Evolent Health Holdings, Inc. is considered our predecessor for accounting purposes. Evolent Health, Inc. will be the successor, and its financial statements will be our historical financial statements following the completion of the offering reorganization and this offering. The unaudited pro forma consolidated financial information reflects the manner in which Evolent Health, Inc. will account for the offering reorganization. Specifically, the offering reorganization described under the heading “The reorganization of our corporate structure” will be accounted for as a purchase and the purchase price will be reflected on the financial statements of Evolent Health, Inc. and will be accounted for as a business combination using the acquisition method of accounting. The pro forma information presented, including the allocation of the purchase price, is based on preliminary estimates of the fair values of assets acquired and liabilities assumed, available information as of the date of this prospectus and management assumptions, and will be revised as additional information becomes available. The actual adjustments to our consolidated financial statements upon the offering reorganization will depend on a number of factors, including additional information available and the actual balance of our net assets on the closing date. Therefore, the actual adjustments will differ from the pro forma adjustments, and the differences may be material.

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our financial condition or results of operations had the offering reorganization and this offering and the contemplated use of the net proceeds from this offering as described under “The reorganization of our corporate structure” and “Use of proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of their over-allotment option.

 

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As described in greater detail under “The reorganization of our corporate structure—Tax receivables agreements”, we will enter into the basis tax receivables agreement with the holders of Class B common units, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of these possible increases in tax basis resulting from our exchanges of Class B common units (calculated assuming that any post-offering transfer of Class B common units (other than the exchanges) had not occurred) as well as certain other benefits attributable to payments under the basis tax receivables agreement itself. We will also enter into the NOL tax receivables agreement with certain of our current investors that will provide for the payment to them of 85% of the amount of the cash savings, if any, in U.S. federal, state and local and foreign income tax that we realize as a result of the utilization of the net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG attributable to periods prior to this offering and the deduction of any imputed interest attributable to our payment obligations under the NOL tax receivables agreement. No exchanges or other tax benefits have been assumed in the unaudited pro forma consolidated financial information and therefore no pro forma adjustment related to the tax receivables agreements is necessary.

You should read the following unaudited pro forma consolidated balance sheet and statements of operations together with the sections of this prospectus titled “Use of proceeds”, “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and the audited annual financial statements and notes thereto included elsewhere in this prospectus.

 

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Evolent Health, Inc.

Unaudited pro forma consolidated balance sheet as of December 31, 2014

(in thousands)

 

     Evolent Health
Holdings, Inc.
historical(A)
    Evolent
Health LLC
historical(B)
     Offering
reorganization
adjustments(1)
         Evolent Health,
Inc. pro forma
for offering
reorganization
    Offering
adjustments(2)
         Evolent Health,
Inc. pro forma
for offering
reorganization
and as
adjusted for
offering
 
                                              

Assets

                

Current Assets

                

Cash

  $  —      $ 15,134       $          —        $                               $                           (a)   $                

Restricted cash

           3,470                          

Accounts receivable

           9,477                          

Prepaid expenses and other current assets

           2,218                          

Investments

           26,419                          

Deferred tax assets, net

    1,074                  
 

 

 

 

Total Current Assets

  $ 1,074      $ 56,718       $        $        $          $     

Restricted cash

           2,508                          

Property, equipment, net

           22,774                          

Intangible assets, net

           647         (c.i)             

Goodwill

                   (c.i)             

Other long term assets

           1,657                          

Equity method investment

    37,203                (37,203   (c.ii)                  
 

 

 

 

Total Assets

  $ 38,277      $ 84,304       $          $        $          $     
 

 

 

 

Liabilities

                

Current Liabilities

                

Accounts payable

           7,694                          

Accrued liabilities

           18,178                    (b)  

Deferred revenue

           23,256         (c.i)             

Other current liabilities

           901                          
 

 

 

 

Total Current Liabilities

  $      $ 50,029       $          $        $          $     

Deferred rent

           5,772                          

Deferred tax liabilities, net

    1,074                (c.i)             
 

 

 

 

Total Liabilities

  $ 1,074      $ 55,801       $          $        $          $     
 

 

 

 

Redeemable Preferred Stock and Units

                

Series A redeemable preferred stock

    12,847                (12,847   (a)        

Series B redeemable preferred stock

    24,833                (24,833   (a)        

Series B redeemable preferred units

           15,734         (15,734   (a)        

Series B-1 redeemable preferred stock

    1,593                (1,593   (a)        

Series B-1 redeemable preferred units

                        (a)        
 

 

 

 

Total Redeemable Preferred Stock and Units

  $ 39,273      $ 15,734       $          $        $          $     
 

 

 

 

Equity

                

Series A preferred stock

    2                (2   (a)        

Series A preferred units

                        (a)             

Series B preferred units

           12,769         (12,769   (a)             

Class A common stock

    1                (a)       (a)(c)  

Class A common units

                        (a)             

Class B common stock

                   (b)             

Additional paid in capital

    23,733                (a)(b)       (a)(b)(c)  

(Accumulated Deficit)/Retained Earnings

    (25,806             (c.iii)       (c)  

Non-controlling interests

                   (c.ii)             
 

 

 

 

Total Equity (Deficit)

  $ (2,070   $ 12,769       $          $        $          $     
 

 

 

 

Total Liabilities, Redeemable Preferred Stock and Units, and Equity (Deficit)

  $ 38,277      $ 84,304       $          $        $          $     

 

 

 

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Evolent Health, Inc.

Unaudited pro forma consolidated statement of operations

for the year ended December 31, 2014

(in thousands, except per share data)

 

     Evolent Health
Holdings, Inc.
historical(A)
    Evolent
Health LLC
historical(B)
    Offering
reorganization
adjustments(1)
         Evolent Health,
Inc. pro forma
for offering
reorganization
    Offering
adjustments(2)
    Evolent Health,
Inc. pro forma
for offering
reorganization
and as adjusted
for offering
 
                                         

Revenue

             

Transformation

  $      $ 36,289      $      (a)   $           —      $           —      $           —   

Platform and operations

           64,599             (a)                     
 

 

 

 

Total Revenue

           100,888                                 
 

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

           73,122             (a)           

Selling, general and administrative expenses

           76,521             (a)           

Depreciation and amortization expenses

           3,694        (a)(c)      
 

 

 

 

Total Operating Expenses

           153,337                  
 

 

 

 

Operating Loss

           (52,449               
 

 

 

 

Interest (income) / expense, net

           (195          (a)           

Other (income) / expense, net

           9             (a)           

(Loss) income from equity investees

    (25,246            25,246      (b)           
 

 

 

 

Income (Loss) Before Income Tax

    (25,246     (52,263 )                 

Income tax expense

             (a)      
 

 

 

 

Net (Loss) Income and Comprehensive (Loss) Income

  $ (25,246   $ (52,263   $        $      $      $   
 

 

 

 

Net (Loss) Attributable to Non–controlling Interest

                       (d)                     

Net (Loss) Attributable to the Company

  $ (25,246   $ (52,263   $        $      $      $   
 

 

 

 

Net (Loss) Income Available for Common Stockholders (2a)

             

Basic

  $ (31,137            

Diluted

  $ (31,137            

Net (Loss) Income Per Share Available for Common Stockholders (2a)

             

Basic

  $ (53.83            

Diluted

  $ (53.83            

Weighted average common shares outstanding (2a)

             

Basic

    578               

Diluted

    578               

 

 

 

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Evolent Health, Inc.

Notes to unaudited pro forma consolidated financial information

Unaudited pro forma consolidated balance sheet—As of December 31, 2014

 

  A.   Represents the historical financial statements of Evolent Health Holdings, Inc., the predecessor for accounting purposes.

 

  B.   Represents the historical financial statements of Evolent Health LLC. As a result of the offering reorganization, Evolent Health, Inc. will operate and control all of the business and affairs of Evolent Health LLC and will consolidate the financial results of Evolent Health LLC. Immediately prior to the offering reorganization, Evolent Health Holdings, Inc. accounted for its investment in Evolent Health LLC using the equity method of accounting.

 

1.   Offering Reorganization and Other Adjustments

 

  a.   As part of the offering reorganization, the preferred stockholders of Evolent Health Holdings, Inc. will convert their preferred stock to Class A common stock of Evolent Health Holdings, Inc. Subsequently, as part of a merger, each then-existing stockholder of Evolent Health Holdings, Inc. will receive one share of Evolent Health, Inc. Class A common stock in exchange for each share of Class A common stock it holds in Evolent Health Holdings, Inc.

 

  b.   As part of the offering reorganization, the second amended and restated operating agreement of Evolent Health LLC will be further amended and restated to establish two classes of equity: voting Class A common units and non-voting Class B common units. After the amendment, the pre-reorganization members of Evolent Health LLC (other than Evolent Health Holdings, Inc.) will hold 100% of the Class B common units and Evolent Health Holdings, Inc. and an affiliate of TPG will hold only Class A common units. As a result, Evolent Health Holdings, Inc. will control Evolent Health LLC and Evolent Health LLC will become a consolidated entity of Evolent Health Holdings, Inc. Subsequently, as part of the merger pursuant to the offering reorganization, Evolent Health Holdings, Inc. and an affiliate of TPG will merge into Evolent Health, Inc. and, in connection with the merger, Evolent Health, Inc. will issue shares of its Class B common stock to TPG and The Advisory Board, each of which was a member of Evolent Health LLC prior to the offering reorganization, and Class A common stock to the pre-reorganization stockholders of Evolent Health Holdings, Inc. and an affiliate of TPG. See “The reorganization of our corporate structure” for more information.

The Class B common units of Evolent Health LLC will be reflected as non-controlling interests. See footnote c.ii.

 

  c.   As noted above, as a result of the offering reorganization, Evolent Health, Inc. will operate and control all of the business and affairs of Evolent Health LLC and will consolidate the financial results of Evolent Health LLC. The consolidation of Evolent Health LLC will be accounted for as a purchase and the purchase price of $             million will be allocated to the net assets of Evolent Health LLC as part of the consolidated financial statements.

The pro forma purchase price allocation has been developed based on preliminary estimates of fair value using the historical financial statements of Evolent Health LLC as of December 31, 2014. In addition, the allocation of the purchase price to acquired intangible assets is based on preliminary fair value estimates and is subject to final management analysis, with the assistance of third party valuation advisers, after the completion of this offering. The estimated intangible

 

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asset values and their useful lives could be impacted by a variety of factors that may become known in the future. The residual amount of the purchase price after preliminary allocation to identifiable net assets represents goodwill.

Below is the preliminary purchase price allocation for the transaction:

 

   Amount

Current assets

Goodwill

Other intangible assets

  

 

Total assets acquired

  

 

Current liabilities

Long-term liabilities

  

 

Total liabilities assumed

  

 

Net assets acquired

 

Specific adjustments recorded include the following:

 

  i. The adjustments to goodwill and intangible assets represent the net amounts for goodwill and other intangible assets that will be recognized from the preliminary purchase price allocation as a result of the consolidation transaction. The preliminary goodwill that will be recognized in connection with the transaction is $         million. The preliminary value of other intangible assets is $         million. The partner relationships intangible asset was valued using an excess earnings model based on expected future revenues derived from the existing customers of Evolent Health LLC. The trademarks/tradenames were valued using a royalty savings model based on future projected revenues of Evolent Health LLC. The technology intangible asset was valued using a royalty savings model based on future projected revenues of Evolent Health LLC. These intangible assets will be amortized on a straight-line basis over the determined useful lives. An adjustment is also recorded to reduce deferred revenue to fair value in order to reflect the value of deferred revenue as the incremental cost to fulfill the services under the contract.

 

  

Fair value

(in thousands)

Useful life

Partner relationships

Trademarks/tradenames

Technology

 

 

  ii. As a result of the consolidation of Evolent Health LLC by Evolent Health, Inc., the existing equity method investment will be removed from the consolidated financial statements. Additionally, the Class B common units in Evolent Health LLC which are held by TPG and The Advisory Board are reflected as non-controlling interests on the consolidated financial statements.

 

  iii. As a result of the consolidation of Evolent Health LLC, a gain will be recorded for the difference between the carrying value and the fair value of the previously held equity interest, which is reflected within retained earnings (accumulated deficit) on the balance sheet.

 

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2.   Offering Adjustments

 

  a.   Reflects net proceeds of $         million from this offering through the issuance of Class A common stock at an assumed initial public offering price of $         per common share (the midpoint of the price range set forth on the cover page of this prospectus), less estimated underwriting discounts and commissions of $         million, with a corresponding increase to equity. The net cash proceeds reflect a reduction of $         million for expenses of this offering that Evolent Health, Inc. will bear or reimburse to Evolent Health LLC.

 

  b.   Offering expenses of approximately $         million are expected to be deducted against the proceeds received by Evolent Health, Inc. in this offering. At December 31, 2014, $1.6 million had been paid or accrued and deferred. As a result, $         million of additional costs were accrued for pro forma purposes.

 

  c.   Upon the completion of this offering, all outstanding restricted stock awards will automatically vest and will be freely transferable shares of our Class A common stock. As a result, there is an increase of             Class A common stock and additional paid-in capital and the acceleration of expense of $         million is reflected as an adjustment to retained earnings (accumulated deficit).

Unaudited pro forma consolidated statement of operations—Year ended December 31, 2014

 

  A.   Represents the historical financial statements of Evolent Health Holdings, Inc., the predecessor for accounting purposes, for the year ended December 31, 2014.

 

  B.   Represents the historical financial statements of Evolent Health LLC for the year ended December 31, 2014. As a result of the offering reorganization, Evolent Health, Inc. will operate and control all of the business and affairs of Evolent Health LLC and will consolidate the financial results of Evolent Health LLC.

 

1.   Offering Reorganization and Other Adjustments

 

  a.   As part of the offering reorganization, the second amended and restated operating agreement of Evolent Health LLC will be further amended and restated to establish two classes of equity: voting Class A common units and non-voting Class B common units. After the amendment, the pre-reorganization members of Evolent Health LLC (other than Evolent Health Holdings, Inc.) will hold 100% of the Class B common units and Evolent Health Holdings, Inc. and an affiliate of TPG will hold only Class A common units. As a result of this, Evolent Health Holdings, Inc. will control Evolent Health LLC and Evolent Health LLC will be consolidated by Evolent Health Holdings, Inc. As a result, the pro forma consolidated statement of operations reflects the full year of operations of Evolent Health LLC as the entities are consolidated for the full period.

 

  b.   As a result of the consolidation noted above, the loss from equity investees, representing Evolent Health Holdings, Inc.’s historical proportionate losses in the operations of Evolent Health LLC, are eliminated. Immediately preceding the completion of this offering, as a result of the amendment to the Evolent Health LLC operating agreement, Evolent Health, Inc. will control Evolent Health LLC, resulting in the consolidation of the operations of Evolent Health LLC. As a result of this consolidation, a gain of $         million will be recorded to reflect the fair value of Evolent Health LLC in excess of the carrying value of Evolent Health Holdings, Inc.’s equity method investment in Evolent Health LLC. It is noted that this consolidation gain is not recorded within the pro forma statement of operations as this represents a one-time adjustment.

 

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  c.   Adjustments have been included to record the estimated net increase in amortization expense for intangible assets. The incremental amortization expense was calculated using estimated lives of         years for the partner relationship intangibles, with an estimated value of $         million;         years for the customer contract intangibles, with an estimated value of $         million; and         years for the technology, with an estimated value of $         million. The incremental amortization expense recorded is $         million.

 

  d.   In order to reflect the offering reorganization and this offering as if they occurred on January 1, 2014, an adjustment has been made to reflect the inclusion of non-controlling interests in consolidated entities representing Evolent Health LLC Class B common units that are held directly by TPG and The Advisory Board after this offering. Such Evolent Health LLC Class B common units represent     % of all common units outstanding immediately following this offering.

 

2.   Offering Adjustments

 

  a.   The shares of Class B common stock do not share in our earnings or losses and are therefore not included in the weighted average shares outstanding or net loss available per share. The pro forma basic net loss per share calculation includes             shares assumed to be sold in this offering. In addition, our restricted stock will immediately vest upon the completion of this offering and as such are included in the outstanding shares used to calculate pro forma basic and diluted loss per share.

The pro forma diluted net loss per share calculation includes the basic weighted average shares of Class A common stock outstanding and excludes the impacts of all other potential shares of Class A common stock as they are anti-dilutive.

 

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Selected historical financial and operational data

The following tables present the selected financial and other data of Evolent Health LLC and Evolent Health Holdings, Inc. as of and for the periods indicated. The selected financial information of Evolent Health Holdings, Inc. reflects the historical results of Evolent Health LLC through September 23, 2013 and reflects the results of Evolent Health LLC as an equity method investment subsequent to such date due to a deconsolidation that occurred as a result of a round of equity financing. Accordingly, we have included the historical financial statements of both Evolent Health LLC and Evolent Health Holdings, Inc. in order to provide a consistent presentation for the periods before and after September 23, 2013. The selected statement of operations data for the years ended December 31, 2014 and December 31, 2013 and the balance sheet data as of December 31, 2014 and December 31, 2013 have been derived from the audited annual financial statements included elsewhere in this prospectus.

Evolent Health Holdings, Inc. is the predecessor to the registrant. Its results of operations include its equity in the losses of Evolent Health LLC in 2014 and subsequent to the deconsolidation of Evolent Health LLC for the year ended December 31, 2013. The results of operations prior to the deconsolidation in 2013 reflect the results of Evolent Health LLC. Its balance sheet includes its equity interest in Evolent Health LLC at December 31, 2014 and December 31, 2013.

You should read the following selected financial and other data together with the sections of this prospectus titled “Use of proceeds”, “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and the audited annual financial statements and notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus.

Evolent Health LLC

 

Results of operations

(in thousands)

 

  Year ended
December 31,
 
2014   2013  
         

Revenue:

Transformation

$ 36,289    $ 34,560   

Platform and operations

  64,599      5,721   
  

 

 

 

Total Revenue

  100,888      40,281   
  

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

  73,122      46,327   

Selling, general and administrative expenses

  76,521      24,103   

Depreciation and amortization expense

  3,694      1,838   
  

 

 

 

Total Operating Expenses

  153,337      72,268   
  

 

 

 

Operating Loss

  (52,449   (31,987
  

 

 

 

Interest (income) / expense, net

  (195   820   

Other (income) / expense, net

  9      (1
  

 

 

 

Loss before income tax

  (52,263   (32,806

Income tax (benefit) / expense

       8   
  

 

 

 

Net loss and comprehensive loss

$ (52,263 $ (32,814

 

 

 

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Evolent Health LLC        
Balance sheet data As of December 31,  
(in thousands) 2014   2013  

Cash and cash equivalents and short-term investments

$ 41,553    $ 67,891   

Other current assets

  15,165      12,401   

Long-term assets

  27,586      21,683   

Total assets

  84,304      101,975   

Deferred revenue

  23,256      16,374   

Other current liabilities

  26,773      12,948   

Long-term liabilities

  5,772      3,358   

Total liabilities .

  55,081      32,680   

Total redeemable preferred units .

  15,734      38,251   

Total equity

  12,769      31,044   
  

 

 

    

 

 

 

Total liabilities, redeemable preferred stock, and equity

$ 84,304    $ 101,795   

 

  

 

 

    

 

 

 

 

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Evolent Health Holdings, Inc.

 

Results of operations

(in thousands, except per share data)

 

  Year ended
December 31,
 
2014   2013  
              

Revenue:

    

Transformation

   $      $ 22,130   

Platform and operations

            3,541   
  

 

 

 

Total Revenue

       25,671   
  

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

       30,018   

Selling, general and administrative expenses

       15,600   

Depreciation and amortization expense

       1,208   
  

 

 

 

Total Operating Expenses

       46,826   
  

 

 

 

Operating Loss

       (21,155
  

 

 

 

Interest (income) / expense, net

       820   

Other (income) / expense, net

       (1

Gain on deconsolidation

       46,246   

Loss from equity investees

  (25,246   (4,241
  

 

 

 

(Loss) income before income tax

  (25,246   20,031   
  

 

 

 

Income tax (benefit) / expense

       8   
  

 

 

 

Net (Loss) Income and Comprehensive (Loss) Income

$ (25,246 $ 20,023   
  

 

 

 

Net (Loss) Income Available for Common Stockholders

  

 

 

   

 

 

 

Basic

$ (31,137 $ 2,418   
  

 

 

   

 

 

 

Diluted

$ (31,137 $ 2,957   
  

 

 

   

 

 

 

Net (Loss) Income Per Share Available for Common Stockholders

  

 

 

 

Basic

$ (53.83 $ 10.03   
  

 

 

 

Diluted

$ (53.83 $ 3.96   
  

 

 

 

Weighted average common shares outstanding:

Basic

  578      241   

Diluted

  578      747   

 

 

Evolent Health Holdings, Inc.

 

Balance sheet data

(in thousands)

December 31,  
            2014               2013  
                 

Cash

   $      $   

Total Current Assets

     1,074          

Equity method investment

     37,203        50,940   

Total Assets

     38,277        50,940   

Total Liabilities

     1,074          

Total Redeemable Preferred Stock

     39,273        37,680   

Total Equity (Deficit)

     (2,070     13,260   
  

 

 

 

Total Liabilities, Redeemable Preferred Stock and Equity

$ 38,277    $ 50,940   

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

This discussion of our financial condition and results of operations should be read together with the audited annual financial statements and the notes thereto with respect to each of Evolent Health LLC and Evolent Health Holdings, Inc. included elsewhere in this prospectus. The following discussion contains forward-looking statements. Our actual results may differ materially from those contained in or implied by forward-looking statements. See “Risk factors” and “Special note regarding forward-looking statements”.

Overview

We are a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve. Our purpose-built platform, powered by our technology, proprietary processes and integrated services, enables providers to migrate their economic orientation from FFS reimbursement to value-based payment models. By partnering with providers to accelerate their path to value-based care, we enable our provider partners to expand their market opportunity, diversify their revenue streams, grow market share and improve the quality of the care they provide.

We consider value-based care to be the necessary convergence of healthcare payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS healthcare, a regulatory environment that is incentivizing value-based care models, a rapid expansion of retail insurance driven by the emergence of the health insurance exchanges and innovation in data and technology. We believe providers are positioned to lead this transition to value-based care because of their control over large portions of healthcare delivery costs, their primary position with consumers and their strong local brand.

We market and sell our services primarily to major providers throughout the United States. We work with our partners in two phases. In the transformation phase, we initially work with our partners to develop a strategic plan for their transition to a value-based care model. During the first portion of the transformation phase, which typically takes four months to complete, we size the market opportunity for our partner and create a Blueprint for executing that opportunity. During the second portion of the transformation phase, which typically lasts twelve to fifteen months, we generally work with our partner to implement the Blueprint by establishing the resources necessary to launch its strategy and capitalize on the opportunity. During the transformation phase, we seek to enter into long-term agreements with our partners. During the term of such long-term agreement, which we call the platform and operations phase and which typically is in place for three to ten years, we deliver a wide range of services that support our partner in the execution of its new strategy. In the platform and operations phase we establish a local market presence and embed our resources alongside our partners. To date, we have secured ten long-term contracts representing over $             million in future total contract value from our platform and operations revenue based on current pricing and membership as of April 30, 2015, with additional growth as current partners grow and expand the membership in their value-based care offerings. Although the revenue from these long-term contracts is not guaranteed because certain of these contracts are terminable for convenience by our partners after a specified period of time, the partner would be required to pay us a termination fee in certain circumstances.

We collect a fixed fee from our partners during the transformation phase, and these revenues are recognized based on proportionate performance over the life of the engagement. During the platform and operations phase, our revenue structure shifts to a primarily variable fee structure. The variable fee is typically a monthly payment that is linked to the number of lives that our partners are managing under a value-based care arrangement and is recognized in the month in which services are provided. Our revenues during the platform

 

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and operations phase vary depending on the population covered by our partners and the scope of our services. Transformation revenue can fluctuate based on both the timing of when contracts are executed with partners and the timing of work being performed. Platform and operations revenue can fluctuate based on the timing of new populations transitioning to our platform. Our total revenues for fiscal 2014 were $100.9 million, compared to $40.3 million for fiscal 2013. Our deferred revenue, which consists of billed but unrecognized revenue, was $23.3 million as of December 31, 2014, compared to $16.4 million as of December 31, 2013. As of December 31, 2014, we had entered into long-term contractual relationships with eight partners and we have subsequently entered into long-term contractual relationships with two additional partners. Our four largest partners, Indiana University Health, WakeMed Health and Hospitals, Piedmont WellStar Health Plan and Premier Health Partners, comprised approximately 25%, 21%, 16% and 14%, respectively, of our revenue for fiscal 2014, or 76% in the aggregate. At times our contracts are amended to change the nature of the services and/or the time period over which they are provided. For example, as a result of an April 2015 amendment to our agreement with one of our four largest partners, we expect this partner to contribute only modestly to revenues commencing in 2017. In connection with the amendment, the partner has also agreed to sell its interest in us to certain of our existing investors. We may also enter into amendments to partner contracts in the future that may expand our relationship with our partners to include additional products and services.

Our cost of revenues refers to direct expenses incurred to execute our client contracts as well as our shared resources who directly support our platform. Our selling, general and administrative expenses, which we refer to as SG&A expenses, include costs associated with our centralized infrastructure, corporate overhead and business development activities as well as shared resources including personnel focused on research and development and codifying best practices. Other than capitalized software development costs, our expenses are expensed as incurred.

We have incurred significant losses since our inception, as we have invested heavily in resources to support our revenue growth. We have also increased the number of our employees from six at our inception to 836 as of April 30, 2015. We intend to continue to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities.

Basis of presentation

Evolent Health LLC

The financial statements included elsewhere in this prospectus include the balance sheets, statements of operations and comprehensive loss, statements of cash flows and statements of changes in members’ equity and redeemable preferred units of Evolent Health LLC. All of our historical operations have been conducted in Evolent Health LLC or its predecessor. Accordingly, unless otherwise indicated, the financial information described in this prospectus, including in this “Management’s discussion and analysis of financial condition and results of operations” section, represents the historical financial information of Evolent Health LLC. These financial statements are required to be included in this prospectus pursuant to the reporting requirements discussed in Regulation S-X Rule 3-09 under the Securities Act.

Evolent Health Holdings, Inc.

The financial statements included elsewhere in this prospectus also include the balance sheets, statements of operations and comprehensive income (loss), statements of cash flows and statements of changes in equity and redeemable preferred stock of Evolent Health Holdings, Inc. Evolent Health Holdings, Inc. is a holding company and its sole asset is its equity ownership in Evolent Health LLC. Prior to September 23, 2013, Evolent Health Holdings, Inc. accounted for its investment in Evolent Health LLC by consolidating the financial information of Evolent Health LLC. On and after September 23, 2013, Evolent Health Holdings, Inc. accounted for its investment in Evolent Health LLC using the equity method of accounting. As a result of the deconsolidation of Evolent Health LLC, the presentation for periods before and after September 23, 2013 are not comparable for Evolent

 

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Health Holdings, Inc. Accordingly, we have included a discussion of the results of operations of both Evolent Health LLC and Evolent Health Holdings, Inc. in order to provide meaningful information for all periods presented. Pursuant to the merger described below, Evolent Health Holdings, Inc. will be merged with and into Evolent Health, Inc. with Evolent Health, Inc. continuing as the surviving entity.

Evolent Health Holdings, Inc. is the predecessor to the registrant. Its results of operations include its equity in the losses of Evolent Health LLC in 2014 and subsequent to the deconsolidation of Evolent Health LLC for the year ended December 31, 2013. The results of operations prior to the deconsolidation in 2013 reflect the results of Evolent Health LLC. Its balance sheet includes its equity interest in Evolent Health LLC at December 31, 2014 and December 31, 2013.

Evolent Health, Inc.

We have not included the historical financial statements of Evolent Health, Inc. in this prospectus because Evolent Health, Inc. has engaged to date only in activities in contemplation of this offering and has no operations or assets. Following the completion of this offering, Evolent Health, Inc. will be a holding company and its principal asset will be all of the Class A common units in Evolent Health LLC. Accordingly, following the completion of this offering, we intend to include the financial statements of Evolent Health, Inc. in our periodic reports and other filings as required by applicable law and the rules and regulations of the SEC.

Effects of the offering reorganization

Evolent Health, Inc. was formed for the purpose of this offering and has engaged to date only in activities in contemplation of this offering. Upon the completion of this offering, all of our business will be conducted through Evolent Health LLC, and the financial results of Evolent Health LLC will be consolidated in our financial statements. Evolent Health, Inc. will be a holding company whose principal asset will be its Class A common units in Evolent Health LLC. For more information regarding the offering reorganization and our holding company structure, see “The reorganization of our corporate structure”.

We expect that future exchanges of Class B common units of Evolent Health LLC (together with an equal number of our Class B common shares) for shares of our Class A common stock will result in increases in the tax basis in our share of the tangible and intangible assets of Evolent Health LLC. We expect that these increases in the tax basis, which would not have been available but for our new holding company structure, will reduce the amount of tax that we would otherwise be required to pay in the future. In addition, we expect that we will benefit from the utilization of certain net operating losses of Evolent Health Holdings, Inc. and an affiliate of TPG, which we will inherit in the offering reorganization. See “The reorganization of our corporate structure”. We will be required to pay 85% of the cash savings we actually realize from such increase in tax basis to the holders of Class B common units, TPG and The Advisory Board, and certain of our current investors (calculated assuming that any post-offering transfer of Class B common units (other than the exchanges) had not occurred) or from the utilization of such net operating losses to the stockholders of Evolent Health Holdings, Inc. and an affiliate of TPG prior to the offering reorganization and an affiliate of TPG, pursuant to the basis tax receivables agreement and the NOL tax receivables agreement, respectively. Furthermore, payments under each of the tax receivables agreements will give rise to additional tax benefits and, therefore will give rise to additional payments under each of the applicable tax receivables agreements. See “The reorganization of our corporate structure—Tax receivables agreements”.

Evolent Health LLC is currently taxed as a partnership for federal income tax purposes and, as a result, the members of Evolent Health LLC pay taxes with respect to their allocable shares of its net taxable income. Following the offering reorganization and this offering, all of the earnings of Evolent Health, Inc. will be subject to federal income taxation.

 

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Trends and key factors affecting our performance and financial condition

Growth within our existing partners.    We believe we have significant opportunities to grow within our existing partner base. Our platform and operations revenue, which is revenue from the long-term ongoing operational phase of our services, is tied to the number of lives our partners are managing under value-based arrangements. We have multiple avenues to grow this revenue base, including through (a) growth in lives in existing covered populations, (b) our partners expanding into new covered populations and (c) our partners utilizing additional capabilities that we offer. We typically experience higher sequential growth in our revenues from platform and operations in our fiscal first quarter ending March 31 due to the timing of the annual enrollment cycle in the health plan industry. Our platform and operations revenue comprised 64.0% of our total revenue for fiscal 2014, compared to 14.2% for fiscal 2013. As our existing partners continue to grow their value-based arrangements and we add new partners, we believe our platform and operations revenue will grow as an overall percentage of our total revenue.

Ability to attract new partners.    Increasing our partner base is an important source of revenue growth for us. Our transformation revenues are derived from work we do with prospective partners for our platform and operations phase. As such, transformation revenues provide us with a pipeline of potential long-term partner relationships. For fiscal 2014, our transformation revenues comprised 36.0% of our total revenue as compared to 85.8% for fiscal 2013. This decline is due to the growth in our platform and operations revenue.

Maturity profile of our partner relationships.    Since inception, we have developed resources at the local market level and also at the national level. At the local market level, we build out a team of executive, clinical and administrative resources that, once established, yields scalable advantages as our partners add lives to the platform. In fiscal 2014, our lives on platform increased to 432,837, representing a 148% increase over the prior year. As our current partners grow the number of lives managed under their value-based arrangements, we expect our cost of revenue to decline as a percentage of our future revenues as a result of our ability to leverage our local market resources. As we attract new partners, we expect our initial margin profile for each new partner to be below that of our mature partners as we build the necessary infrastructure to support our partners. Over time, we expect the margin profile of our new partners to converge with our more mature partners.

Achieving efficiencies in our operations.    We continue to enhance existing service offerings by designing and developing technology and clinical solutions that can be leveraged across all partners. More specifically, our centralized resources and technologies include our network development capabilities, PBM administration, technology infrastructure, clinical program development and data analytics. While our absolute investment in our centralized resources will increase over time, we expect it will decrease as a percentage of revenue as we are able to scale this investment across a broader group of partners.

Key components of our results of operations

Revenue

We collect a fixed fee from our partners during the transformation phase in which revenues are recognized based upon proportionate performance over the life of the engagement. During the platform and operations phase, our revenue structure shifts to a primarily variable fee structure. The variable fee is typically a monthly payment that is calculated based on a specified rate multiplied by the number of members that our partners are managing under a value-based care arrangement, and is recognized in the month in which services are provided. Our revenues during the platform and operations phase vary because the specified rate varies depending on which market-facing solutions the partner has adopted and which populations it is serving. After a specified period, certain of our platform and operations contracts are terminable for convenience by our partners after a notice period has passed and the partner has paid a termination fee. For fiscal 2013 and fiscal

 

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2014, transformation revenues accounted for 85.8% and 36.0% of our total revenue, respectively. Our platform and operations phase revenue accounted for 14.2% and 64.0% of our revenue in the same time periods, respectively. Going forward, the percentage of revenues derived from platform and operations will increase as a percentage of total revenues as we expect our partner base and number of lives on our platform to increase.

Cost of revenue (exclusive of depreciation and amortization)

Our cost of revenue includes direct expenses incurred to execute our client contracts as well as our shared resources who directly support our platform. A substantial portion of these costs are located at the local market level and consist primarily of employee related expenses, third-party contract services provided by one of our current investors, UPMC, in the form of TPA services for our partners’ health plans and other professional fees.

Selling, general and administrative expenses

Our SG&A expenses consist of expenses associated with our centralized infrastructure, corporate overhead and business development including shared resources personnel focused on research and development and codifying best practices. We expect our SG&A expenses to represent a decreasing percentage of our revenue in the long term as we leverage these expenses across a growing number of partners.

Depreciation and amortization expense

Depreciation and amortization expense is primarily related to amortization of intangible assets and software, as well as depreciation of property and equipment used in our business.

Interest (income) / expense, net

Interest (income) / expense consists of expenses incurred in connection with convertible notes that were issued to certain of our current investors and subsequently converted into Series B preferred units in September 2013. Interest income consists of interest income from investing cash in U.S. agency obligations, Treasury bills and certificate of deposits.

Income tax benefit

Evolent Health LLC is currently taxed as a partnership for federal income tax purposes and, as a result, the members of Evolent Health LLC pay taxes with respect to their allocable shares of its net taxable income. Following the offering reorganization and this offering, all of the earnings of Evolent Health, Inc. will be subject to federal income taxation. Evolent Health, Inc. will account for income taxes in accordance with applicable requirements. Based on this guidance, our historical statements of operations would have reflected an immaterial amount of income tax expense for fiscal 2013 and fiscal 2014 if Evolent Health LLC was subject to taxation. Through the date that Evolent Health LLC was deconsolidated from Evolent Health Holdings, Inc. in 2013, income tax expense was immaterial due to the full valuation allowance recorded against net deferred tax assets due to the uncertainty of their ultimate realization.

 

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Results of operations for Evolent Health LLC

The following table summarizes key components of the results of operations of Evolent Health LLC for the periods indicated, both in dollars and as a percentage of our total revenue.

 

      Year ended
December 31,
 

 

 
          2014           2013           Change      
   

(in thousands, except percentages)

 

Revenue:

Transformation

$ 36,289    $ 34,560      5.0%   

Platform and operations

  64,599      5,721      *   
   

 

 

   

 

 

 

Total Revenue

  100,888      40,281      150.5%   
   

 

 

   

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

  73,122      46,327      57.8%   

Selling, general and administrative expenses

  76,521      24,103      *   

Depreciation and amortization expense

  3,694      1,838      101.0%   
   

 

 

   

 

 

 

Total Operating Expenses

  153,337      72,268      112.2%   
   

 

 

   

 

 

 

Operating Loss

  (52,449   (31,987   64.0%   
   

 

 

   

 

 

 

Interest (income) / expense, net

  (195   820      (123.8%

Other (income) / expense, net

  9      (1   *   
   

 

 

   

 

 

 

Loss before income tax

  (52,263   (32,806   59.3%   

Income tax (benefit) / expense

       8      *   
   

 

 

   

 

 

 

Net Loss and Comprehensive Loss

$ (52,263 $ (32,814   59.3%   
   

 

 

   

 

 

 

Percentage of Revenue:

Revenue:

Transformation

  36.0%      85.8%   

Platform and operations

  64.0%      14.2%   
   

 

 

   

 

 

 

Total Revenue

  100.0%      100.0%   
   

 

 

   

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

  72.5%      115.0%   

Selling, general and administrative expenses

  75.8%      59.8%   

Depreciation and amortization expense

  3.7%      4.6%   
   

 

 

   

 

 

 

Total Operating Expenses

 

 

 

152.0%

 

  

  179.4%   
   

 

 

   

 

 

 

Operating Loss

 

 

 

-52.0%

 

  

  -79.4%   
   

 

 

   

 

 

 

Interest (income) / expense, net

  -0.2%      2.0%   

Other (income) / expense, net

  0.0%      0.0%   
   

 

 

   

 

 

 

Loss before income tax

  -51.8%      -81.5%   

Income tax (benefit) / expense

       0.0%   
   

 

 

   

 

 

 

Net Loss and Comprehensive Loss

  -51.8%      -81.5%   

 

   

 

 

 

 

*   Represents a percentage of revenue in excess of 200%.

 

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Comparison of fiscal 2014 and fiscal 2013 for Evolent Health LLC

Revenue

Revenue increased $60.6 million, or 150.5%, to $100.9 million for fiscal 2014, as compared to $40.3 million for fiscal 2013. This increase primarily was due to additional partners going live on the platform and operations phase in early 2014 and growth at existing partners amounting to $58.9 million. The remaining increase was due to new contracts and growth in revenue from existing contracts in the transformation phase of $1.7 million.

Cost of revenue (exclusive of depreciation and amortization)

Cost of revenue increased $26.8 million, or 57.8%, to $73.1 million for fiscal 2014, as compared to $46.3 million for fiscal 2013. The increase in cost of revenue was primarily due to additional personnel costs totaling $14.7 million to support our revenue growth. The remaining increase was attributable to an increase of $12.6 million in third-party support services in support of our platform and operations services and offset by a $1.2 million decrease in professional fees. Our third-party contract services are provided primarily by one of our current investors, UPMC, in the form of TPA services for our partners’ health plans.

Selling, general and administrative expenses

SG&A expenses increased $52.4 million, or 217.5%, to $76.5 million for fiscal 2014, as compared to $24.1 million for fiscal 2013. The increase in SG&A expenses was primarily due to continued investment in technology and clinical solutions including research and development. The increase is also attributable to stock based compensation expense due to non-employee accounting treatment and increase in share price. Additionally, we increased hiring in corporate overhead departments including legal, human resources and finance management to support growth in our business and costs related to this offering. Finally, we had increases in selling, marketing, rent and travel to support our growth.

Depreciation and amortization expense

Depreciation and amortization expense increased by $1.9 million to $3.7 million for fiscal 2014, as compared to $1.8 million for fiscal 2013. The increase in depreciation and amortization expense was primarily due to an increase in amortization of internally developed software of $0.9 million, the completion of leasehold improvements for additional corporate office space in July 2014 and October 2014, which resulted in $0.4 million in incremental depreciation expense, and increased amortization and depreciation of $0.5 million for other assets.

Interest (income) / expense

Interest (income) / expense increased by $1.0 million to $0.2 million in interest income for fiscal 2014, as compared to interest expense of $0.8 million for fiscal 2013. The increase in interest (income) / expense was primarily due to the conversion of certain convertible notes into Series B preferred units in September 2013 which resulted in no interest expense being recorded subsequent to conversion, as compared to $0.8 million prior to conversion.

 

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Results of operations for Evolent Health Holdings, Inc.

The following table summarizes key components of the results of operations for Evolent Health Holdings, Inc. for the periods indicated, both in dollars and as a percentage of our total revenues.

 

   Year ended
December 31,
 
   2014  

2013

 
 

(in thousands)

 

Revenue:

Transformation

$    $ 22,130   

Platform and operations

       3,541   
  

 

 

 

Total Revenue

       25,671   
  

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below)

       30,018   

Selling, general and administrative expenses

       15,600   

Depreciation and amortization expense

       1,208   
  

 

 

 

Total Operating Expenses

       46,826   
  

 

 

 

Operating Loss

       (21,155
  

 

 

 

Interest expense / (income), net

       820   

Other income, net

       (1

Gain on deconsolidation

       46,246   

Loss from equity investees

  (25,246   (4,241
  

 

 

 

(Loss) income before income tax

  (25,246   20,031   

Income tax (benefit) / expense

       8   
  

 

 

 

Net (loss) income and comprehensive (loss) income

$ (25,246 $ 20,023   

 

 

 

Comparison of fiscal 2014 and fiscal 2013 for Evolent Health Holdings, Inc.

Due to the deconsolidation of Evolent Health LLC, as a result of the issuance of a round of equity financing in which Evolent Health Holdings, Inc. was deemed to no longer control Evolent Health LLC for accounting purposes in the third quarter of 2013, the financial statements of Evolent Health Holdings, Inc. for fiscal 2014 and fiscal 2013 are not comparable. Evolent Health Holdings, Inc. did not recognize any revenue, cost of revenue, SG&A expense or depreciation and amortization expense for fiscal 2014 due to the deconsolidation. Subsequent to deconsolidating Evolent Health LLC, Evolent Health Holdings, Inc. has not engaged in any operations or investments other than the ownership of its interest in Evolent Health LLC and actions incidental thereto.

Gain on deconsolidation

Evolent Health Holdings, Inc. recognized a $46.3 million gain on deconsolidation related to the 2013 reorganization and related issuance of Series B preferred units, including Series B preferred units that were issued as a result of the conversion of certain convertible notes, that reflected the difference between the fair value of its retained ownership in Evolent Health LLC and its carrying value.

 

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Loss from equity investees

The $21.0 million increase in loss from equity investees was primarily related to the 2013 reorganization. In accordance with the equity method of accounting, the carrying amount of the investment was initially recorded at cost and was increased to reflect its proportionate share of Evolent Health LLC’s income and was reduced to reflect its proportionate share of Evolent Health LLC’s losses. During fiscal 2014, Evolent Health Holdings, Inc.’s proportionate share of the losses of Evolent Health LLC was $25.2 million, which included $2.0 million related to the amortization of the basis differential. During fiscal 2013, Evolent Health Holdings, Inc.’s proportionate share of the losses of Evolent Health LLC was $4.2 million, which reflects just over three months of results subsequent to the deconsolidation of Evolent Health Holdings, Inc. and includes $0.7 million related to the amortization of the basis differential.

Quarterly revenue for Evolent Health LLC

The following table sets forth the unaudited quarterly revenue for Evolent Health LLC for each of the eight quarters presented below. We have prepared this unaudited quarterly data on a consistent basis with the audited annual financial statements included in this prospectus. This information should be read in conjunction with our audited annual financial statements and the related notes included elsewhere in this prospectus. The revenue for these historical periods are not necessarily indicative of the revenue for a full year or any future period. We experience higher sequential growth in our revenues from platform and operations in our fiscal first quarter ending March 31 due to the timing of the annual enrollment cycle in the health plan industry.

 

   Three months ended  
  March 31,   June 30,   September 30,   December 31,   March 31,   June 30,   September 30,   December 31,  
(in thousands) 2013                  2014  
              (unaudited)                  

Revenue:

Transformation

$ 4,428    $ 6,329    $ 13,183    $ 10,621    $ 7,420    $ 8,532    $ 11,885    $ 8,452   

Platform and operations

  1,029      1,198      1,437      2,056      12,656      15,657      18,011      18,275   

Total Revenue

$ 5,457    $ 7,527    $ 14,620    $ 12,677    $ 20,076    $ 24,189    $ 29,896    $ 26,727   

Liquidity and capital resources

Evolent Health Holdings, Inc. is the managing member of Evolent Health LLC and the financial statements of Evolent Health Holdings, Inc. include the consolidated results and cash flows of Evolent Health LLC through September 23, 2013 and reflect the results of Evolent Health LLC as an equity method investment subsequent to such date due to deconsolidation that occurred as a result of a round of equity financing. The cash flows for Evolent Health Holdings, Inc. subsequent to the deconsolidation include the loss from equity method investee and therefore a discussion of such liquidity and capital resources have not been included herein. In this section, unless the context otherwise requires, the “company”, “we”, “us” and “our” refers to Evolent Health LLC.

Since its inception, Evolent Health LLC has incurred net losses and negative cash flows from operations. Evolent Health LLC incurred net losses of $52.3 million, $32.8 million and $19.3 million for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. Net cash used in operating activities was $12.1 million and $19.3 million for fiscal 2014 and fiscal 2013, respectively. As of December 31, 2014, Evolent Health LLC had $41.6 million of cash, cash equivalents and current investments. Since inception, we have financed our operations primarily through private placements of convertible notes and convertible preferred units.

 

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In September 2013, Evolent Health LLC issued Series B preferred units, the net proceeds of which totaled $72.1 million. As of December 31, 2014, approximately $26.4 million of the net proceeds remained invested in highly liquid U.S. Agency obligations, treasury bills and certificates of deposit classified as short-term investments. Evolent Health LLC intends to hold the investments to the respective maturity dates unless it is needed for working capital purposes in the interim.

We believe our current cash, short-term investments and sources of liquidity will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 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. To the extent that existing cash and current investments and cash flows from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Cash, cash equivalents and current investments

As of December 31, 2014, Evolent Health LLC had $41.6 million of cash, cash equivalents and current investments and $5.9 million in restricted cash. Since inception, we have financed our operations primarily through private placements of convertible notes and convertible preferred units and, to a lesser extent, cash flows from operations.

Our indebtedness

As of December 31, 2014, neither Evolent Health LLC nor Evolent Health Holdings, Inc. had any indebtedness.

Cash flows

The following summary of cash flows of Evolent Health LLC for the periods indicated has been derived from our financial statements included elsewhere in this prospectus:

 

   Year ended
December 31,
 
(in thousands) 2014   2013  

Net cash used in operating activities

$ (12,121 $ (19,292

Net cash used in investing activities

  (38,779   (13,132

Net cash (used in) provided by financing activities

  (1,857   95,063   

 

 

Cash flows from operating activities

Net cash flows used in operating activities were $12.1 million for fiscal 2014 and $19.3 million for fiscal 2013. The improvement in net cash used in operating activities was driven by the growth in the size of our business, including improvements in working capital. For fiscal 2014, the results were primarily related to an increase in accounts payable and accrued liabilities of $13.4 million, an increase in deferred revenue of $6.9 million associated with an increased number of partners, an increase in deferred rent of $2.4 million related to new office space, an increase in stock-based compensation expense of $11.1 million due to non-employee accounting treatment requiring remeasurement to fair value at each reporting period, depreciation and amortization expenses of $3.7 million, decreases in other assets of $1.8 million and a decrease in accounts receivable of $1.0 million partially offset by a net loss of $52.3 million. For fiscal 2013, the results were primarily related to an

 

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increase in accounts payable and accrued liabilities of $5.3 million, an increase in deferred revenue of $11.8 million primarily due to advanced billing for certain customers, an increase in stock compensation expense of $1.2 million due to non-employee accounting treatment requiring remeasurement to fair value at each reporting period, depreciation and amortization expenses of $1.8 million and an increase in deferred rent of $3.4 million associated with our expanded office space partially offset by an increase in accounts receivable of $8.6 million, an increase in other assets of $1.7 million and a net loss of $32.8 million.

Cash flows from investing activities

During fiscal 2014, cash used in investing activities was $38.8 million as compared to $13.1 million for fiscal 2013. The increase in investing activities was driven by investing cash proceeds from the issuance of Series B preferred units and investment in property and equipment. For fiscal 2014, the results were primarily related to an increase in purchases of property and equipment and the payment of salaries related to the development of software for internal use of $11.0 million and net purchases of short-term investments of $24.2 million. For fiscal 2013, the results were primarily related to an increase in purchases of property and equipment and the payment of salaries related to the development of software for internal use of $11.0 million.

Cash flows from financing activities

Our financing activities have consisted primarily of the issuance of convertible preferred units and convertible notes offset by the payment of deferred offering costs.

During fiscal 2014, cash used in financing activities was $1.9 million, as compared to cash provided by financing activities of $95.1 million for fiscal 2013. For fiscal 2014, the results were primarily related to a repurchase of Series A preferred units and the payment of deferred offering costs, partially offset by an issuance of Series B-1 preferred units. For fiscal 2013, the results were primarily related to the issuance of Series B preferred units of $72.1 million and cash proceeds from convertible notes of $23.0 million.

Contractual obligations

The principal commitments of Evolent Health LLC primarily consist of obligations under leases for office space and reseller agreements. As of December 31, 2014, the future non-cancelable minimum payments under these commitments were as follows:

 

   Payments due by period (in thousands)  
   Total   Less than
1 year
  1-3 years   3-5 years   More than
5 years
 

Operating leases for facilities

$ 19,969    $ 2,866    $ 6,589    $ 6,922    $ 3,592   

Reseller Guarantees*

  2,699      2,699                  

Other

  444      242      202             

 

 

 

*   Relates to the UPMC Reseller Agreement and The Advisory Board Reseller Agreement. See “Certain relationships and related transactions”.

Letters of credit

Restricted cash of $5.9 million is carried at cost and includes $3.7 million in letters of credit for facility leases, $2.2 million in collateral with a financial institution for certain services that the financial institution provides to us and other restricted balances as of December 31, 2014.

 

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Off-balance sheet arrangements

Through December 31, 2014, neither Evolent Health LLC nor Evolent Health Holdings, Inc. had entered into any off-balance sheet arrangements, other than the operating leases noted above, and neither had any holdings in variable interest entities.

Related party transactions

In the ordinary course of business, we enter into transactions with related parties, primarily our existing investors, TPG, UPMC and The Advisory Board. Information regarding transactions and amounts with related parties is discussed in Note 14 to the financial statements of Evolent Health LLC included elsewhere in this prospectus. See also “Certain relationships and related transactions”.

Quantitative and qualitative disclosures about market risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

Interest rate risk

As of December 31, 2014, cash, restricted cash and current investments of Evolent Health LLC was $47.5 million, which consisted of bank deposits with FDIC participating banks of $21.1 million and investments of $26.4 million. The cash on deposit with banks is not susceptible to interest rate risk.

U.S. agency obligations, certificates of deposit and Treasuries are classified as held-to-maturity based on the maturity dates and intent to hold.

There were no identified events or changes in circumstances that had a significant adverse effect on the values of these investments. If there was evidence of a decline in value, which is other than temporary, the amounts would be written down to their estimated recoverable value.

As of December 31, 2014, neither Evolent Health LLC nor Evolent Health Holdings, Inc. had any indebtedness.

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.

Inflation risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Critical accounting policies

Evolent Health Holdings, Inc.’s and Evolent Health LLC’s financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and

 

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judgments could change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below. Actual results could differ. These critical accounting policies apply to both Evolent Health Holdings, Inc. and Evolent Health LLC, as applicable to the manner of presentation of each in any period.

Revenue recognition

Revenue from our services is recognized when there is persuasive evidence of an arrangement, delivery has taken place, revenue is fixed or determinable and collectability of the associated receivable is reasonably assured. Deferred revenue represents billings or payments received in advance of providing the requisite services or instances where revenue recognition criteria have not been met.

We apply the Financial Accounting Standards Board’s, or FASB, guidance for revenue arrangements with multiple deliverables and evaluate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) if the delivered item has value to our partner on a standalone basis and (b) if the contract includes a general right of return relative to the delivered item, and delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. Revenue is then allocated to the units of accounting based on each unit’s relative selling price.

We enter into different types of contracts with our partners depending on where the partner is on its transition towards value-based care. Our contracts generally have multiple deliverables; however, typically there is only one unit of accounting because the deliverables do not have standalone value. Our contracts may provide for the delivery of a combination of one or more of our service offerings. In these situations, we determine whether such arrangements with multiple service offerings should be treated as separate units of accounting based on how the elements are bid or negotiated, whether the partner can accept separate elements of the arrangement and the relationship between the pricing on the elements individually and combined. Because of the unique nature of our services, neither vendor specific objective evidence nor third-party evidence is available. Therefore, we utilize best estimates of selling prices to allocate arrangement consideration in multiple element arrangements. As of December 31, 2014, Blueprint contracts have required allocation to the units of accounting as discussed further below. In addition, one contract with multiple deliverables for transformation and platform and operations services was executed during 2014 and we allocated value based upon the best estimate of selling price.

Transformation

We enter into two different types of contracts during the transformation phase: Blueprint contracts and implementation contracts. Blueprint contracts are fee-for-service and fixed fee in nature, where we provide a strategic assessment for our partners in exchange for a fixed fee that is paid over the term of the engagement. We recognize revenue associated with Blueprint contracts based on proportionate performance. Revenue is recognized each period in proportion to the amount of the contract completed during that period based upon the level of effort expended to date compared to the total estimated level of effort necessary over the term of the contract as the output of the contract is not reflective of the value of the contract delivered each period. These contracts may contain credits for fees related to signing a future long-term agreement by a certain date. The credits are assessed to determine whether they reflect significant and incremental discounts compared to discounts in the original Blueprints. If discounts are significant and incremental, we allocate the discount between the Blueprint contract and future purchases. If the future credit expires unused, it is recognized as revenue at that time.

 

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Depending on the strategic assessment generated in a Blueprint, a partner may decide to move forward with a population health or health plan strategy. In these cases, the partner enters into an implementation contract with us in which we provide all services related to the launch of this strategy. These contracts last twelve to fifteen months and are typically fixed fee in nature. We recognize revenue associated with implementation contracts based on proportionate performance. Revenue is recognized each period in proportion to the amount of the contract completed during that period, based upon the level of effort expended to date compared to the total estimated level of effort necessary over the term of the contract as the output of the contract is not reflective of the value of the contract delivered each period. Billings associated with these contracts are typically scheduled in installments over the term of the agreement.

Platform and operations

After the transformation phase, we enter into multi-year service contracts with our partners where various population health, health plan operations and PBM services are provided on an ongoing basis to the members of our partners’ plans in exchange for a monthly service fee. Members are individuals that are covered by the respective member service contracts and typically include the partners’ employees and its customers. Revenue from these contracts is recognized in the month in which the services are delivered. In some cases, there is an “at risk” portion of the service fee that could be refunded to the partner if certain service levels are not

attained. We monitor our compliance with service levels to determine whether a refund will be provided to the partner and record an estimate of these refunds. To date, our history is limited for these contracts; therefore, the full potential refund is generally deferred until all obligations are met.

Income taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income based on assumptions that are consistent with our future plans.

Evolent Health LLC was subject to income taxes in the United States for periods prior to September 23, 2013 and Evolent Health Holdings, Inc. is subject to income taxes for all periods. Each recognized deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its respective financial statements and tax returns. Deferred tax assets and liabilities were determined based upon the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and for loss and credit carryforwards, using enacted tax rates expected to be in effect in the year in which the differences were expected to reverse. Deferred tax assets were reduced by a valuation allowance if it was more likely than not that these assets would not be realized.

On September 23, 2013, Evolent Health LLC completed a legal entity and tax restructuring pursuant to which its federal and state income tax status and classification changed from a corporation, subject to federal and state income taxes, to a partnership, whereby its members are responsible for reporting income or loss based on such member’s respective share of our income and expenses as reported for tax purposes. As a result of this restructuring, Evolent Health LLC ceased recognizing all of its federal and state deferred tax assets and liabilities as of September 23, 2013. In fiscal 2014 and fiscal 2013, all entities, as applicable, recorded a full valuation allowance against deferred tax assets, as significant doubt existed related as to their ability to be realized.

 

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Impairment of long lived assets

We periodically review the carrying value of our long-lived assets, including capitalized software development costs, property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairments are recognized when the carrying amount of a long-lived asset group is not recoverable and exceeds fair value. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset group exceeds its fair value. We are required to make subjective judgments in determining the events or changes that may give rise to an impairment. We also make estimates in assessing the future undiscounted cash flows related to those assets or assets groups to determine if an asset has been impaired. We make those judgments and estimates based on management’s best knowledge of its future operating plans, business strategies, as well as the legal, environmental, industrial, technological and operational environment in which we operate.

Based on those judgments, we concluded that there was no impairment of long-lived assets for fiscal 2014 or fiscal 2013.

Impairment of equity method investment

Evolent Health Holdings, Inc. has accounted for its investment in Evolent Health LLC under the equity basis of accounting. Equity method investments are reviewed for impairment on a regular basis. An equity method investment is written down to fair value if there is evidence of a loss in value which is other than temporary. We may estimate the fair value of our equity method investment by considering recent investee equity transactions, discounted cash flow analysis and recent operating results. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline has occurred. The estimation of fair value and whether an other-than temporary impairment has occurred requires the application of significant judgment and future results may vary from current assumptions.

Based on those judgments, we concluded that there was no impairment of equity method investment for fiscal 2014 or fiscal 2013.

Stock-based compensation

Employees of Evolent Health LLC are granted stock-based awards in Evolent Health Holdings, Inc., and Evolent Health LLC is contractually required to issue a similar amount and class of membership equity to Evolent Health Holdings, Inc., in accordance with its second amended and restated operating agreement. Evolent Holdings, Inc. accounts for its interest in Evolent Health LLC using equity method of accounting. As such, we apply the guidance applicable to stock-based compensation granted to employees of an equity method investee. Under this guidance, we apply the fair value method to recognize compensation expense for stock-based awards. Using this method, the fair value of the awards is measured on the date that they vest and is recognized on a straight-line basis over the requisite service period. We re-measure the fair value of our unvested stock awards on a quarterly basis until the awards ultimately vest.

We utilize the Black-Scholes option pricing model to estimate the grant-date fair value of option awards. The following weighted-average assumptions are also used to calculate the estimated fair value of option awards:

 

    Fair value of common stock: Our stock is not publicly traded and, therefore, we must estimate the fair value of common stock as described under “—Common Stock Valuation”.

 

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    Expected volatility: The expected volatility of our shares is estimated using the historical volatility of a peer group of public companies over the most recent period commensurate with the estimated expected term of the awards.

 

    Expected term: The estimated term is equal to the weighted period between the vesting period and the contract life of the option. This method is known as the simplified method and is utilized due to our relatively short history.

 

    Dividend yield: We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.

 

    Risk-free interest rate: We base the risk-free interest rate on the implied yield available on a U.S. Treasury note with a term equal to the estimated expected term of the awards.

An estimated forfeiture rate is applied based on an analysis of historical option holder activity. Prior to the 2013 reorganization, stock-based compensation followed an employee model as the awards were granted in the stock of the Company to employees of the Company. Subsequent to the 2013 reorganization, the stock-based compensation awards were granted in the stock of Evolent Health Holdings, Inc., to employees of Evolent Health LLC. As such, we are required to utilize a non-employee model for recognizing stock-based compensation, which requires the awards to be marked-to-market through net income at the end of each reporting period until vesting occurs. Each quarter, the forfeiture rate is revised as needed to reflect the impact of new forfeitures that occurred.

We also may provide restricted stock awards to employees. Stock-based compensation cost for these awards is measured based on the fair value of our common stock on the grant date.

Common Stock Valuation

The historical valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the absence of a public trading market, we considered all relevant facts and circumstances known at the time of valuation, made certain assumptions based on future expectations and exercised significant judgment to determine the fair value of Evolent Health Holdings, Inc.’s common stock. The factors considered in determining the fair value include, but are not limited to, the following:

 

    valuations of our common stock completed on a regular basis;

 

    recent issuances of preferred stock, as well as the rights, preferences and privileges of our preferred stock relative to our common stock;

 

    our historical financial results and estimated trends and projections for our future operating and financial performance;

 

    likelihood of achieving a liquidity event, such as an initial public offering or sale of our company, given prevailing market conditions;

 

    the market performance of comparable, publicly-traded companies; and

 

    the overall economic and industry conditions and outlook.

Prior to December 31, 2014, when estimating the value of our common stock, our board of directors determined the equity value of the business by primarily considering income-based approaches. The income-based approach estimates value based on the expectation of future cash flows that a company will generate and the

 

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residual value of the company after the forecasted period. The future cash flows are discounted using a discount rate derived based upon venture capital rates commensurate with our risk profile. Additionally, we applied a discount to recognize the lack of marketability due to being a closely held company. Finally, we estimated the time to a future liquidity event at each valuation date based upon our expectations at each valuation date.

As of December 31, 2014, we utilized a probability-weighted expected return method, or PWERM, to determine the value of Evolent Health Holdings Inc.’s common stock due to the three distinct liquidity events considered as of the valuation date. An analysis of the future values of Evolent Health Holdings Inc. was performed for each of the potential liquidity events, and the value of the common stock was determined for each liquidity event at the time of each liquidity event and discounted back to the present using a risk-adjusted discount rate. The present values of the common stock under each liquidity event were then weighted based on the probability of each outcome occurring to determine the value of the common stock. We utilized a combination of the income-based approach and market approach for the distinct liquidity events. A discounted cash flow analysis was used for the income approach. Under the market approach, a market multiple was selected based on the estimated exit timing.

In order to determine the fair value of our common stock, we generally first determine our business enterprise value, or BEV, and then allocate the BEV to each element of our capital structure (preferred stock, common stock and options). Our indicated BEV at each valuation date was allocated to the shares of preferred stock, common stock and options using the Black-Scholes option-pricing model. Estimates of the volatility of our common stock were based on available information on the volatility of common stock of comparable, publicly-traded companies and estimates of expected term were based on the estimated time to liquidity event.

Our valuations have progressed as follows:

 

    September 2013:    We determined a fair market value of $4.29 per share of common stock based on an estimated BEV of $130.3 million. Because the Series B preferred unit issuance involved a new investor, we used the implied BEV from this transaction as it represented an arms-length marketplace participant transaction.

 

    December 2014:     We determined a fair market value of $27.46 per share, based on estimated BEV of $394 million. We utilized PWERM to determine the value due to the three distinct liquidity events considered as of the valuation date. The value of each liquidity event at the time of each liquidity event was discounted back to the present using a risk-adjusted discount rate. We utilized a combination of the income-based approach and market approach for the distinct liquidity events.

Recently issued accounting standards

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, in order to clarify the principles of recognizing revenue. This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods or services in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. The FASB defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation. By completing all five steps of the process, the core principles of revenue recognition will be achieved. The amendments in the standard are effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited. We will adopt the requirements of this standard effective January 1, 2017, and are currently evaluating the impact of the adoption on our consolidated financial condition and results of operations.

 

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In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40). This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. It requires an assessment for a period of one year after the date that the financial statements are issued. Further, based on certain conditions and circumstances, additional disclosures may be required. This ASU is effective beginning with the first annual period ending after December 15, 2016, and for all annual and interim periods thereafter. Early application is permitted. We do not expect this ASU to have an impact on our financial statements or related disclosures.

 

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Business

We are a market leader and a pioneer in the new era of healthcare delivery and payment, in which leading providers are taking on increasing clinical and financial responsibility for the populations they serve. Our purpose-built platform, powered by our technology, proprietary processes and integrated services, enables providers to migrate their economic orientation from FFS reimbursement to value-based payment models. By partnering with providers to accelerate their path to value-based care, we enable our provider partners to expand their market opportunity, diversify their revenue streams, grow market share and improve the quality of the care they provide.

We consider value-based care to be the necessary convergence of healthcare payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS healthcare, a regulatory environment that is incentivizing value-based care models, a rapid expansion of retail insurance driven by the emergence of the health insurance exchanges and innovation in data and technology. We believe providers are positioned to lead this transition to value-based care because of their control over large portions of healthcare delivery costs, their primary position with consumers and their strong local brand.

Today, increasing numbers of providers are adopting value-based strategies, including contracting for capitated arrangements with existing insurance companies, governmental payers or large self-funded employers and managing their own captive health plans. Through value-based care, providers are in the early stages of transforming their role in healthcare as they attempt to defend their existing position and capture a greater portion of the more than $2 trillion in annual health insurance expenditures. While approximately 10% of healthcare payments are paid through value-based care programs today, including through models created by systems like UPMC, Kaiser Permanente and Intermountain Healthcare, it is estimated that this number will grow to over 50% by 2020. There were 120 provider-owned health plans as of 2010 and this number continues to grow. The number of ACOs constructed to manage capitated or value-based arrangements with existing insurance companies or government payers grew to 742 by the end of 2014.

We believe the transformation of the provider business model will require a set of core capabilities, including the ability to aggregate and understand disparate clinical and financial data, standardize and integrate technology into care processes, manage population health and build a financial and administrative infrastructure that capitalizes on the clinical and financial value it delivers. We provide an end-to-end, built-for-purpose, technology-enabled services platform for providers to transition their organization and business model to succeed in value-based payment models.

The core elements of our platform include:

 

    Identifi®, our technology platform, delivers the data aggregation and stratification, proven value-based care content, EMR optimization and proprietary applications that allow providers to standardize the delivery of care and enable clinical and financial analytics.

 

    Integrated technology, proprietary process and clinical services model that enables the delivery of a high-performing population health organization, an aligned clinical delivery network to provide high-quality, coordinated care and an efficient administrative infrastructure to administer value-based care payment relationships.

 

    Long-term, embedded and aligned partnerships with health systems to enable us and our provider partners to grow together as we manage increasing populations under value-based care arrangements.

 

    Integration into provider clinical processes allows for traditional cost management solutions, such as PBM, radiology benefit management and patient risk scoring and adjustment, to achieve greater adoption and performance than traditional payer led models.

 

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    Payer-agnostic and a single point of integration between payers and the provider community.    This indispensable single point of integration between a diverse set of payers becomes more valuable over time as our platform becomes the standard for value-based care contracting and operations.

We believe we are pioneers in enabling health systems to succeed in value-based payment models. We were founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board, to enable providers to pursue a value-based business model and evolve their competitive position and market opportunity. Our mission, technology and services were developed with UPMC, which operates the nation’s largest provider-owned health plan after Kaiser Permanente, and The Advisory Board, whose best practice research and technology solutions were available to a membership base of over 3,900 hospitals and providers as of March 2015. Our accomplishments since inception include:

 

    2012:     Signed and converted our first ‘Blueprint’ into a long-term contract with a provider

 

    2013:     Launched first plan to manage a health system’s employee population

 

    2013:     Launched first Medicare Advantage plan to enable a provider to capture entire premium dollar

 

    2013:     Entered four additional markets through long-term contracts with partners

 

    2014:     Payer Value Alliance—created common financial and clinical framework across payers

 

    2014:     Developed first commercial health plan for a health system partner, to launch in 2015

 

    2015:     Grew from six employees at inception to 836 employees as of April 30, 2015

We have developed what we believe is a unique partner development model. Each partner relationship begins with our transformation services, during which a partner engages us to develop a customized value-based care execution plan. This allows us to define the opportunity for our partners and embed our technology and processes while building confidence and trust that we are the best long-term infrastructure partner for the provider’s value-based care strategy. We then transition our partner to our platform and operations phase, which is governed by a long-term contract. We incur significant expenses in securing new partner relationships, and, in fiscal 2014, our business development expenses represented approximately 10% of our total revenues. To date, we have secured ten long-term contracts representing over $             million in future total contract value from our platform and operations revenue based on current pricing and membership as of April 1, 2015, with additional upside as current partners grow and expand the membership in their value-based care offerings. Although the revenue from these long-term contracts is not guaranteed because certain of these contracts are terminable for convenience by our partners after a specified period of time, certain partners would be required to pay us a termination fee in certain circumstances.

We believe our business model provides strong visibility and aligns our partners’ incentives with our own. A large portion of our revenue is derived from our multi-year contracts, which are linked to the number of members that our partners are managing under a value-based care arrangement. This variable pricing model depends on the number of services and technology applications that our partners utilize to advance their value-based care strategies and the number of members they are able to attract over time. We expect to grow with current partners as they increase membership in their existing value-based programs, through expanding the number of services we provide to our existing partners and by adding new partners.

We believe we are in the early stages of capitalizing on these long-term aligned partnerships. Our health system partners’ current value-based care arrangements represent less than 10% of the health system partners’ total

 

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revenue each year. We believe the proportion of value-based care related revenues to total health system revenues will continue to grow, driven by continued price pressure in FFS, new government payment programs, growth in consumer-focused insurance programs, such as Medicare Advantage and the health insurance exchanges, and innovation in data and technology.

Our business model benefits from scale, as we leverage our purpose-built technology platform and centralized resources in conjunction with the growth of our partners’ membership base. These resources include technology development, clinical analytics and network development. While our absolute investment in our centralized resources will increase over time, we expect it will decrease as a percentage of revenue as we are able to scale this investment across a broader group of partners.

The value we deliver to providers has translated into strong growth, as evidenced by Evolent Health LLC’s revenue increasing from $40.3 million for fiscal 2013 to $100.9 million for fiscal 2014. For fiscal 2014, Evolent Health LLC’s net loss was $52.3 million and Evolent Health LLC’s Adjusted EBITDA was approximately $(37.7) million. See “Prospectus summary—Summary financial and operational data” for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss. Evolent Health LLC also incurred net losses of $32.8 million and $19.3 million for fiscal 2013 and fiscal 2012, respectively.

Our market opportunity

In 2014, healthcare spending in the United States is projected to be more than $3 trillion, of which we estimate $1 trillion to be waste. We believe that a fundamental shift to value-based care can address this $1 trillion opportunity. We believe that for the U.S. healthcare system to shift to a value-based care delivery model, providers must be an empowered part of the solution. Our comprehensive technology and services platform enables providers to capitalize on this transition, which we believe will position us to be at the forefront of the transformation to value-based care.

We believe our total market opportunity is over $10 billion today based on health insurance expenditures, the total percentage of payments providers receive under value-based contracting, the size of the provider-sponsored health plan market and the fees we believe we can charge. We believe this opportunity will grow to over $46 billion by 2020 driven by health insurance expenditures increasing from approximately $2.1 trillion in 2013 to approximately $3.2 trillion in 2020, the total percentage of payments providers receive under value-based care models growing from 10% to 50%, and the provider-sponsored health plan market representing 15% of total health plan membership.

Healthcare is in the early stages of structural change

We believe the incentives will grow for health systems to transition to value-based payment models that align the delivery and payment of care in an effort to reduce costs and improve patient health.

It is estimated that over 50% of total healthcare payments will be paid through value-based care programs by 2020. An aging population, expanding coverage and the U.S. and/or state government’s increasing role as payer is expected to drive this growth, which we expect to create significant long-term demand for our offerings. It is expected that Medicare enrollment alone will rise from approximately 53 million people in 2014 to approximately 63 million in 2020. In addition to enrollment growth, the expansion of government value-based care models are aligning healthcare payment and delivery, incentivizing providers to deliver high-quality care in a cost-effective manner. These programs include Medicare ACOs, Medicare Shared Savings Programs, dual eligible (or those that qualify for both Medicare and Medicaid) and Medicare value-based purchasing.

 

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Further supporting the shift is the increase of retail purchasing of healthcare which we expect to grow to approximately 86 million people by 2018. We believe the growth of retail-oriented healthcare creates an opportunity for providers to compete with health insurers for these lives where their brand resonates with consumers and there are lower barriers to entry than the traditional group health model.

Health systems must defend their platform and expand their market opportunity

We believe that the status quo for providers is not sustainable. The operating margins of health systems that do not change their business models are estimated to erode to -8% by 2020. We believe, however, health systems that evolve to a value-based care model can create greater financial stability for their existing hospital business and can expand their market opportunity by gaining access to a greater portion of the healthcare insurance premiums that they do not already receive. Health systems that adopt value-based care models such as ACOs, bundled payments and provider-owned health plans, can compete for these healthcare insurance premiums.

We believe that providers are well-positioned for the opportunity to compete for approximately $1.2 trillion of health insurance spending, which represents the difference in the approximately $2.1 trillion of health insurance spending in the United States and the $937 billion that hospitals received in 2013. In many local markets, health systems are the central hub of healthcare. They directly control approximately 44% of the healthcare costs and indirectly control even larger portions of overall spend through their clinical decision-making.

This opportunity is expected to grow. Health insurance spending is expected to grow from approximately $2.1 trillion in 2013 to approximately $3.2 trillion by 2020, as Medicare Advantage, Medicaid Managed Care, dual eligible beneficiaries and health insurance exchanges grow.

Multiple ways to capitalize on the shift to value-based care

We believe we will benefit from the multiple value-based business models that can be pursued by health systems. Market factors, such as payer mix and local competition, and the health systems’ resources, including financial, clinical and technology, drive their determination of the value-based business model to pursue. Examples of the value-based business models that are typically pursued include (a) shared savings payer risk contracts with existing insurance companies or governmental payers, whereby health systems can receive a portion of the medical costs savings, (b) capitated payer risk contracts, whereby health systems receive a fee to manage populations that is based on the number of members being managed and the scope of their services and (c) owning a health plan, whereby health systems receive the total insurance premium to manage the health of a population.

In our experience, health systems that have had success with value-based care models, including the management of their own employees, or owning a Medicare Advantage health plan, have sought to expand the number and size of value-based care arrangements that they pursue. We believe our ability to enable and support these business models across all populations positions us to benefit from a health system’s transition to value-based care, regardless of the forms of value-based care they choose or populations they target.

Our solution

We provide an end-to-end, built-for-purpose, technology-enabled services platform for providers to succeed in value-based payment models.

Our long-term partnerships begin with a system transformation process called the Blueprint, where we work with a provider’s board of directors and senior management to assess their ability to succeed in value-based payment models. This process acts as a channel for long-term partnerships, as a significant portion of providers that make an investment in a Blueprint continue to partner with us for our Value-Based Operations.

 

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Once our platform is integrated into the clinical and financial systems of our provider partners through the Blueprint and implementation phase, our Value-Based Operations, including our technology-enabled services platform, support the execution and administration of a provider’s value-based care models on an ongoing basis. Value-Based Operations include Identifi®, our technology backbone, Population Health Services to enable provider-led management of the population and Financial and Administrative Management to measure performance and administer and capture the value of improved care.

 

LOGO

Supporting multiple value-based care models

Our platform was built to support a diverse set of provider value-based care strategies. It provides the core technology and services necessary for all models pursued by providers.

Providers partner with us on at least one of three types of value-based contracting models, with most supporting at least the Direct to Employer model and one additional type of contracting arrangement.

 

    Direct to Employer:    Manage costs for self-funded employers including a health system’s own employees

 

    Payer contracts:    Value-based contracts with third-party payers (including commercial insurers and the government) that include a full spectrum of risk for bundled payments, pay for performance to full capitation

 

    Health plan:    Launching a provider-owned health plan allows providers to control the entire premium dollar across multiple populations, including commercial, Medicare and Medicaid

Our partners benefit from a single platform that enables them to utilize our core suite of ongoing solutions, regardless of the size or type of value-based care models they are pursuing. Our platform grows through health systems increasing membership in their existing value-based care payment model, as well as their pursuit of additional payer contracts and health plans.

Identifi®

Identifi® is our proprietary technology platform that aggregates and analyzes data, manages care workflows and engages patients. Identifi® links our processes with those of our provider partners and other third parties in order to create a connected clinical delivery ecosystem, stratify patient populations, standardize clinical work flows and enable high-quality, cost-effective care. The configurable nature and broad capabilities of Identifi® help enhance the benefits our partners receive from our Value-Based Operations and increase the effectiveness of our partners’ existing technology architecture. Highlights of the capabilities of Identifi® include the following:

 

    Data and integration services:    Data from disparate sources, such as EMRs, and lab and pharmacy data, is collected, assembled, integrated and maintained in order to provide healthcare professionals with a holistic view of the patient.

 

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    Clinical and business content:    Clinical and business content is applied to the integrated data to create actionable information in order to optimize clinical and financial performance.

 

    EMR optimization:    Data and clinical insights from Identifi® are fed back into partner EMRs, which are optimized to improve both provider and patient satisfaction, create workflow efficiencies, promote clinical documentation and coding and provide clinical support at the point-of-care.

 

    Applications:    A suite of cloud-based applications manages the clinical, financial and operational aspects of the value-based model. Our applications are individually purchased and scale with the clinical, financial and administrative needs of a provider partners. As additional capabilities are required through our platform, they are often deployed as applications through the Identifi® platform.

Value-Based Operations

Our Value-Based Operations are empowered and supported by Identifi®. Other elements include: (1) an aligned clinical delivery network to provide improved, coordinated care, (2) a high-performing population health organization that drives clinical outcomes and (3) an efficient administrative infrastructure to administer value-based payments. We integrate change management processes and ongoing physician-led transformation into all value-based services to build engagement, integration and alignment within our partners in order to successfully deliver value-based care and sustain performance. We have standardized the processes described below and are able to leverage our expertise across our entire partner base. Through the technological and clinical integration we achieve, our solutions are delivered as ingrained components of our partner’s core operations rather than add-on solutions.

Delivery network alignment.    We help our partners build the capabilities that are required to develop and maintain a coordinated and financially-aligned provider network that can deliver high-quality care necessary for value-based contracts. These capabilities include:

 

    High-performance network:    Supporting the capabilities needed to build, maintain and optimize provider- and clinically-integrated networks

 

    Value compensation models:     Developing and supporting physician incentive payment programs that are linked to quality outcomes, payer shared savings arrangements and health plan performance

 

    Integrated specialty partnerships:    Supporting the technology-enabled strategies, analytics and staff needed to optimize network referral patterns

Population Health Performance.    Population Health Performance is an integrated suite of technology-enabled solutions that supports the delivery of quality care in an environment where a provider’s need to manage health has significantly expanded. These solutions include:

 

    Clinical programs:    Care processes and ongoing clinical innovation that enables providers to target the right intervention at the right time for a given patient

 

    Specialized care team:    Multi-disciplinary team that is deployed telephonically from a centralized location or throughout a local market to operate clinical programs, engage patients and support physicians

 

    Patient engagement:    Integrated technologies and processes that enable outreach to engage patients in their own care process

 

    Quality and risk coding:    Engagement of physicians to identify opportunities to close gaps in care and improve clinical documentation efforts

 

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Financial and administrative management.    We help providers assemble the complete infrastructure required to operate, manage and capitalize on a variety of value-based payment arrangements. These capabilities include:

 

    Payer risk:    The capabilities needed to successfully manage risk from payers, including analysis, data and operational integration with payer processes, and ongoing performance management. Included in this capability is our Payer Value Alliance, which leverages our national scale to support providers with a common, sustainable, financial and clinical framework across contracted payers.

 

    Analytics and reporting:    The ongoing and ad hoc analytic teams and reports required to measure, inform and improve performance, including population health analytics, market analytics, network evaluation, staffing models, physician effectiveness, clinical delivery optimization and patient engagement

 

    Health plan:    The scaled administrative capabilities required to launch and operate a provider-sponsored health plan, including sales and marketing, product development, actuarial, regulatory and compliance, member services, claims administration, provider relations, finance and utilization management

 

    Leadership and management:    Our local and national talent assist our partners in effectively managing the performance of their value-based operations

 

    Pharmacy benefit management.    The team of professionals to support the drug component of providers’ plan offerings with national buying power and dedicated resources that are tightly integrated with the care delivery model. Differentiated from what we consider to be traditional PBMs, our solution is integrated into patient care and engages population health levers including generic utilization, provider management, and utilization management to reduce unit pharmacy costs.

 

 

Centralized infrastructure

Our solution was built to provide operating leverage that benefits from our continued growth. We leverage our purpose-built technology platform and centralized resources in conjunction with the growth in our partners’ membership base. Our centralized resources and technologies include our network development capabilities, PBM administration, technology infrastructure and data analytics.

Case Studies

The below case studies highlight the deployment of our platform at key clients, the scope of our partnership and impact of our solution. In each of the below examples, we have been able to deliver improved patient care and financial returns for our health system partners.

Partner Case Study 1

In 2012, we partnered with a leading hospital system to optimize its existing provider-owned health plan, employee health plan, Medicare ACO and population health infrastructure. We worked with the partner’s physician leadership to foster a value-based services organization and institute a physician-led governance and accountability model. This involved the deployment of our Identifi® platform, which included the following:

 

    integration of the partner’s existing EMR and clinical data, including admission/discharge, lab and biometric data;

 

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    integration of payer data feeds covering the employee, commercial and Medicare Advantage populations; and

 

    implementation of over 1,000 clinical stratification rules and approximately 680 clinical measures to support risk stratification and clinical workflows.

Our proprietary processes and integrated services are currently deployed in the partner’s value-based services organization. These processes and services, together with our centralized staff, provide technology-enabled platform and operations spanning Population Health Performance, Delivery Network Alignment and Financial and Administrative Management.

After implementing our platform, the partner’s Medicare Advantage health plan realized improvements that included a 13% reduction in inpatient per member medical cost, a 6% reduction in outpatient per member medical cost, an 11% reduction in per member medical cost for emergency department visits and a 20% reduction in high-tech radiology per member cost in the first six months of 2014. These clinical improvements contributed to a decrease in medical expense as a percent of premium revenue from 94% to 84% on a year over year basis for the first eight months of 2014. With our management support over this period, the partner’s gross profitability improvement was 2.5 times the fees paid to us to manage this population.

As of January 31, 2015, our fully integrated platform covered over 120,000 lives, including 38,000 employee lives, 12,000 Medicare Advantage health plan lives, 50,000 Medicaid lives and 18,000 commercial lives at the partner.

Partner Case Study 2

In 2013, we partnered with a leading hospital system to drive community health improvement and enhance annual financial performance through the development of a value-based care initiative, which included the implementation of our Payer Value Alliance solution, as well as our health plan operations offering and our offering for health system employees and self-funded employers. The strategy included an approximately 17,000 member employee health plan, the launch of a Medicare Advantage health plan and the development of commercial health plans available on and off the health insurance exchanges.

To execute on this strategy, we partnered with the hospital system to build and operate health plan infrastructure, develop an aligned physician network, develop a clinical improvement program, design new products and employ change-management and transformational processes. Our Identifi® platform, proprietary processes and integrated services deployed across Population Health Performance, Delivery Network Alignment, and Financial and Administrative Management are embedded throughout the partner’s health plan and value-based organization to optimize care management effectiveness.

Following the success of the employee health plan and Medicare Advantage health plan launch, the partner expanded its value-based care initiative to include risk-based contracting with Medicare and commercial payers leveraging the existing connectivity we had through our integrated platform. In order to execute this strategy, the hospital system expanded its partnership with us to leverage our Payer Value Alliance and to establish common, sustainable financial and clinical frameworks across contracted payers.

Our suite of technology-enabled services has contributed to significant improvements for the employee health plan for the first six months of 2014 versus the same period in 2013, including a 20% reduction in total admissions and a 25% reduction in ambulatory care-sensitive admissions, or admissions where appropriate ambulatory care may prevent or reduce the need for admission to the hospital. In addition, the recently-launched Medicare Advantage products have enrolled over 6,900 members during the first enrollment period, which exceeds the first year enrollment of 92% of other Medicare Advantage plans launched between 2010 and 2015.

 

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Partner Case Study 3

In 2012, we partnered with a leading hospital system to develop, design and launch an employee health plan in order to leverage the scale of its existing Managed Medicaid health plan. The hospital system’s historical employee benefit costs had been growing at a compound annual rate of 8.0% from 2010 to 2012. Implementation of our offering for health system employees and self-funded employers, including our Identifi® platform, proprietary processes and integrated services, contributed to improved performance, with actual employee benefit expense declining 0.5% from 2012 to 2013. Additionally, the health system increased its members’ utilization of in-system care through care management, benefit design and network development, with in-system inpatient admissions growing from 82% in 2012 to 91% in 2013.

Following the success of managing the partner’s employees, our partner sought to expand its value strategy and launch a Medicare Advantage health plan. Strengthening its partnership with us while utilizing existing infrastructure that had been established to manage their employees, our partner implemented the Evolent Health Plan Value Edge solution to accelerate the health plan launch, design provider-centric products, gain the benefits of nationally scaled infrastructure and leverage consumer and broker marketing resources. Since we began managing the partner’s Medicare Advantage plan in January 2014, plan enrollment has grown from 214 members to over 6,100 members as of January 9, 2015, which exceeds the third year enrollment of 79% of other Medicare Advantage plans launched between 2010 and 2015. Our partnership with the health system has permitted it to enhance its population health competencies through commercial health plan products and payer contracting as part of the Payer Value Alliance solution.

Competitive strengths

We believe we are well-positioned to benefit from the transformations occurring in healthcare payment and delivery described above. We believe this new environment that rewards the better use of information to drive patient outcomes aligns with our platform, recent investments and other competitive strengths.

Early innovator

We believe we are an innovator in the delivery of a comprehensive value-based care solution for providers. We were founded in 2011, ahead of the implementation of the ACA health insurance exchanges and before the rapid expansion of programs, such as Medicare ACOs or Medicare Bundled Payment Initiatives. Since our inception, we have invested a significant amount in our offerings. Given the required lead time for customer acquisition and solution implementation, the resulting long-term partnership and the value of having delivered financial and clinical outcomes in a nascent market, we are developing brand identity and a growing leadership position in this emerging market segment.

Comprehensive technology platform

Our proprietary technology platform, Identifi®, allows us to deliver a connected delivery ecosystem, implement replicable clinical processes, scale our Value-Based Operations and capitalize on multiple types of value-based payment relationships. The Identifi® platform supports the following capabilities:

 

    data aggregation from internal and external sources, such as EMRs and payer claims;
    algorithmic interpretation of aggregated data to stratify populations and identify high-risk patients;
    standardized workflows and dashboards to enable consistency across disparate clinical resources;
    applications to support value-based business models;
    patient outreach and engagement tools;
    integration into physician workflows to proactively engage high-priority patients; and
    reporting and tracking of clinical and financial outcomes.

 

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We believe we are creating scaled benefits for our provider partners in areas such as data analytics, administrative services and care management. As an example, Identifi® has enabled the creation of our centralized infrastructure in which we employ experts in a variety of subject matters, such as network development and clinical analytics, that are capable of being leveraged by multiple partners. Partners benefit from leveraging one common data model, one data integration engine, one set of clinical applications and a growing set of best practices. We expect Identifi® to enable us to deliver increasing levels of efficiency to our provider partners.

Provider-centric brand identity

We believe our provider-centric brand identity and origins differentiate us from our competitors. We believe our solutions, which have built on capabilities developed at UPMC, resonate with potential partners seeking proven solutions from providers rather than payers or non-healthcare businesses. Our analytical and clinical solutions are rooted in UPMC’s experience in growing a provider-led, integrated delivery network over the past 15 years, and growing to become one of the largest provider-owned health plans in the country. In addition, our deep strategic partnership with The Advisory Board strengthens our brand as a provider-friendly organization. The Advisory Board is well-recognized as an industry thought leader that made its research and technology solutions available to approximately 3,900 hospitals and providers as of March 2015.

Our position as a payer-agnostic services organization allows for the sharing of data across multiple payers and care delivery integration regardless of payer, which we believe is not possible with payer-led solutions. In addition, our independence allows us to work hand-in-hand with our provider partners. The result is the development of innovative programs, such as the Payer Value Alliance, whereby we deliver the value of our network and experience to move health systems quickly and effectively to payer risk contract templates and value-based contracting.

Partnership-driven business model

Our business model is predicated on long-term strategic partnerships with leading providers that are attempting to evolve two of their most critical business functions: how they deliver care and how they are compensated for it. The partnership model enables cultural alignment, integration into the provider care delivery and payment work flow, long-term contractual relationships and a cycle of clinical and cost improvement with shared financial benefit. We devote significant resources, primarily in the form of business development, to establish relationships with our partners. For fiscal 2014, our business development expenses represented approximately 10% of our total revenues. Thereafter, beginning with the Blueprint phase of our engagement with a partner, our costs to serve our partners primarily consist of personnel-related costs for the deployment of our solution. We expect our upfront costs as a percentage of revenue to decline over time. As of April 30, 2015, our average contractual relationship with our partners was over six years, with an average of 5.2 years of performance remaining per contract. As of December 31, 2014, we had entered into long-term contractual relationships with eight partners and we have subsequently entered into long-term contractual relationships with one additional partner. Our four largest partners, Indiana University Health, WakeMed Health and Hospitals, Piedmont WellStar Health Plan and Premier Health Partners, comprised approximately 25%, 21%, 16% and 14%, respectively, of our revenue for fiscal 2014, or 76% in the aggregate.

We have sought to partner with leading providers in sizable markets, which we believe creates a growth cycle that benefits from the secular transition to value-based care. By helping these systems lower clinical and administrative costs, we believe we are positioning them to offer a low cost, effective care setting to payers, employers and consumers, which enables them to capture greater market share. As providers have succeeded in lowering costs and growing market share, this enables them to increase their value-based offerings. By virtue of our business model, we benefit from our partners’ growth.

 

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Channel development

Our heritage, having been founded by UPMC, one of the largest providers in the country, and The Advisory Board with over 3,900 hospital and provider members, along with the relationships fostered by our senior management team, have allowed us to develop a significant channel into leading health systems. Our solution empowers a fundamental shift in a provider’s business model and requires alignment of their senior management and board of directors for success. Having developed relationships with health system leaders, we are able to partner with the key decision makers in provider organizations when they choose to enter value-based care ahead of our competitors.

Our business model creates additional channel development through our Blueprint services. Our Blueprint not only enables providers with a roadmap to value-based care and the financial implications of the transition, it also creates a connection between us and the provider’s senior leadership. As a result, we derive revenues from providers who have completed the Blueprint phase and proceed to partner with us to enable their transition to value-based contracting. A significant portion of providers that make an investment in a Blueprint continue to partner with us for our Value-Based Operations.

Proven leadership team

We have made a significant investment in building an industry-leading management team. The senior leadership team of ten individuals has an average of 15 years of experience in the healthcare industry and a track record of delivering measurable clinical, financial and operational improvement for healthcare providers and payers. Our chief executive officer, Frank Williams, was formerly the chief executive officer of The Advisory Board, where he oversaw the growth of the company and its initial public offering.

Growth opportunities

Multiple avenues for growth with our existing, embedded partner base

We have established a multi-year partnership model with multiple drivers of embedded growth through the following avenues:

 

    growth in lives in existing covered populations;

 

    partners expanding into new lines of value-based care to capture growth in new profit pools; and

 

    partners utilizing our additional capabilities, such as new Identifi® applications, PBM and TPA.

In addition to growth within our existing partner base, opportunities exist with providers utilizing our Blueprint, who sign short-term contracts under which we analyze the opportunities available to them in the value-based care market. Since our inception we have converted the majority of our Blueprints into long-term operating partnerships.

Early stages of a rapidly growing transformational addressable market

We believe that our existing partners represent a small fraction of health systems that could benefit from our solutions. The transformation of the care delivery and payment model in the United States has been rapid, but it is still in the early stages. While approximately 10% of healthcare payments are paid through value-based care programs today, it is estimated that this number will grow to over 50% by 2020. We expect that a significant driver of this shift will be the growth of health system based health plans. While there were approximately 3,000 health systems in the United States as of 2010, there were only 120 health system based health plans. We believe the breadth of our solution, our provider-centric brand, our proven results and our partner-aligned model will allow us to grow our pipeline and penetrate this rapidly growing market.

 

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Capitalize on growth in select government-driven programs

Significant growth is projected in the number of people managed by government-driven programs in the United States over the next 10 years. Specifically, the Centers for Medicare and Medicaid Services project the number of Medicare beneficiaries to grow to approximately 63 million by 2020. We expect health systems to be direct beneficiaries of growth in Medicare Advantage, Medicaid Managed Care, Dual Eligible and health insurance exchanges because those specific markets are well suited for value-based care. We believe that the growth in government programs will create an opportunity for health systems to capture a greater portion of the over $2 trillion in annual health insurance expenditures. The nature of our variable fee economic model enables us to benefit from this growth in government managed lives.

Ability to capture additional value through delivering clinical results

We are capturing only a portion of the administrative dollars in the market through our current solution, which represent over 10% of total premium dollars. We believe there is a significant opportunity to capture a portion of the medical dollar over time—namely the remainder of the premium dollar which goes to medical expenses. As our health system partners continue to own a larger percentage of overall premiums, we have begun to pursue business models that allow us to participate in the medical savings through shared savings agreements that align incentives to reduce costs and improve quality outcomes.

Expand platform offerings to meet evolving market needs

There are multiple business offerings that health systems may require to operate in a value-based care environment that we do not currently provide, including but not limited to:

 

    PBM expansion to include additional specialty pharmacy management capabilities;
    health savings account administration;
    on-site or specialty clinic platforms; and
    consumer engagement and digital outreach.

We believe there is an opportunity to provide these services to our health system partners. By doing so, we believe we can create multiple additional monetization opportunities, including additional fees from existing partners, and can enable our partners to control an even greater portion of total medical costs, of which we can share in the gains. In addition, we believe we could provide these services on a standalone basis to health systems that are not Value-Based Organization partners.

Selectively pursue strategic acquisitions

We believe that the nature of our competitive landscape provides meaningful acquisition opportunities. Our industry is in the early stages of its life cycle and there are multiple firms attempting to capitalize on the transformation of the care delivery model and the various forms of new profit pools. We believe that providers will require an end-to-end solution and we believe we are well positioned to meet this demand by expanding the breadth of our offerings through not only organic growth, but also the acquisition of niche providers and non-core portions of larger enterprises. In addition, given our strong channel access and the potential size of our installed base, we believe there is an opportunity to acquire additional value-added products and services that we can deliver to our existing partners.

 

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Sales and marketing

We market and sell our services to providers throughout the United States. Our dedicated sales team, organized by region, targets provider opportunities for our platform solutions. Our sales team works closely with our leadership team and subject matter experts to foster long-term relationships with our provider partner’s leadership and board of directors given the long-term nature of our partnerships. Our dedicated business development team works closely with our partners to identify additional service opportunities that can be offered from our platform on a continuous basis.

Partner relationships

Our business model is predicated on long-term strategic partnerships with leading providers that are attempting to evolve two of their most critical business functions: how they deliver care and how they are compensated for it. The partnership model enables cultural alignment, integration into the provider care delivery and payment work flow, long-term contractual relationships and a cycle of clinical and cost improvement with shared financial benefit.

We have sought to partner with leading providers in sizable markets, which we believe creates a growth cycle that benefits from the secular transition to value-based care. By helping these systems lower clinical and administrative costs, we believe we are positioning them to offer a low cost, effective care setting to payers, employers and consumers, which enables them to capture greater market share. As providers have succeeded in lowering costs and growing market share, this enables them to increase their value-based offerings. By virtue of our business model, we benefit from our partners’ growth.

As of December 31, 2014, we had entered into long-term contractual relationships with eight partners and we have subsequently entered into long-term contractual relationships with two additional partners. As of April 30, 2015, our average contractual relationship with our partners was over six years, with an average of 5.2 years of performance remaining per contract. The contracts governing the relationships with our partners include key terms that define the period of performance, revenue rates, advanced billing terms, service level agreements, termination clauses, exclusivity clauses and right of first refusal clauses.

Typically, the terms of these contracts provide for a monthly payment that is calculated based on a specified rate multiplied by the number of members that our partners are managing under a value-based care arrangement. The specified rate varies depending on which market-facing solutions the partner has adopted and the number of services and technology applications they are utilizing. Typically, the terms of these contracts allow for advance billing of our partners. In some of our contracts, a defined portion of the revenue is at risk and can be refunded to the partner if certain service levels are not attained. We monitor our compliance with the service levels to determine whether a refund will be provided and record an estimate of these refunds.

Although the revenue from our long-term contracts is not guaranteed because certain of our contracts are terminable for convenience by our partners after a notice period has passed, certain partners would be required to pay us a termination fee in certain circumstances. Termination fees and the related notice period in certain of our contracts are determined based on the scope of the market-facing solutions that the partner has adopted and the duration of the contract. Most of our contracts include cure periods for certain breaches, during which time we may attempt to resolve any issues that would trigger a partner’s ability to terminate the contract. However, certain of our contracts are also terminable immediately on the occurrence of certain events. For example, certain of our contracts may be terminated by the partner immediately following repeated failures by us to provide specified levels of service over periods ranging from six months to more than a year. One of our contracts may be terminated immediately by the partner if we lose applicable licenses, go bankrupt,

 

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lose our liability insurance or receive an exclusion, suspension or debarment from state or federal government authorities. In addition, one of our contracts may be terminated immediately if we become insolvent or file for bankruptcy.

The contracts often contain exclusivity or other restrictive provisions, which may limit our ability to partner with or provide services to other providers or purchase services from other vendors within certain time periods and in certain geographic areas. The exclusivity and other restrictive provisions are negotiated on an individual basis and vary depending on many factors, including the term and scope of the contract. The time limit on these exclusivity and other restrictive provisions typically corresponds to the term of the contract. These exclusivity or other restrictive provisions often apply to specific competitors of our health system partners or specific geographic areas within a particular state or an entire state, subject to certain exceptions, including, for example, exceptions for employer plan entities that have operations in the restricted geographic areas but that are headquartered elsewhere. Accordingly, these exclusivity clauses may prevent us from entering into long-term relationships with certain potential partners.

The contracts with our partners impose other obligations on us. For example, we typically agree that all services provided under the partner contract and all employees providing such services will comply with our partner’s policies and procedures. In addition, in most instances, we have agreed to indemnify our partners against certain third-party claims, which may include claims that our services infringe the intellectual property rights of such third parties.

Competition

The market for our products and services is fragmented, competitive and characterized by rapidly evolving technology standards, customer needs and the frequent introduction of new products and services. Our competitors range from smaller niche companies to large, well-financed and technologically-sophisticated entities.

We compete on the basis of several factors, including breadth, depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. We also compete on the basis of price.

Healthcare laws and regulations

Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations. Various federal and state agencies have discretion to issue regulations and interpret and enforce healthcare laws. While we believe we comply in all material respects with applicable healthcare laws and regulations, these regulations can vary significantly from jurisdiction to jurisdiction, and interpretation of existing laws and regulations may change periodically. Federal and state legislatures also may enact various legislative proposals that could materially impact certain aspects of our business. The following are summaries of key federal and state laws and regulations that impact our operations:

Healthcare reform

In March 2010, the ACA and the Health Care and Education Reconciliation Act of 2010, which we refer to, collectively, as healthcare reform, was signed into law. Healthcare reform contains provisions that have changed and will continue to change the health insurance industry in substantial ways. For example, healthcare reform includes a mandate requiring individuals to be insured or face tax penalties; a mandate that employers with over 50 employees offer their employees group health insurance coverage or face tax penalties; prohibitions against insurance companies that offer Individual Major Medical plans using pre-existing health

 

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conditions as a reason to deny an application for health insurance; medical loss ratio requirements that require each health insurance carrier to spend a certain percentage of their premium revenue on reimbursement for clinical services and activities that improve healthcare quality; establishment of health insurance exchanges to facilitate access to, and the purchase of, health insurance; and subsidies and cost-sharing credits to make health insurance more affordable for those below certain income levels.

Healthcare reform amended various provisions in many federal laws, including the Code, the Employee Retirement Income Security Act of 1974 and the Public Health Services Act. Healthcare reform is being implemented by the Department of Health and Human Services, the Department of Labor and the Department of Treasury. Most of the ACA regulations became effective on January 1, 2014.

Although the United States Supreme Court upheld healthcare reform’s mandate requiring individuals to purchase health insurance in 2012, some uncertainty about whether parts of healthcare reform or ACA regulations will remain in effect or be further amended is expected to continue with the possibility of future litigation with respect to certain provisions as well as legislative efforts to repeal and defund portions of healthcare reform or healthcare reform in its entirety. We cannot predict the outcome of any future legislation or litigation related to healthcare reform. Healthcare reform has resulted in profound changes to the individual health insurance market and our business, and we expect these changes to continue.

Stark law

We are subject to federal and state “self-referral” laws. The Stark Law is a federal statute that prohibits physicians from referring patients for items covered by Medicare or Medicaid to entities with which the physician has a financial relationship, unless that relationship falls within a specified exception. The Stark Law is a strict liability statute and is violated even if the parties did not have an improper intent to induce physician referrals. The Stark Law is relevant to our business because we frequently organize arrangements of various kinds under which (a) physicians and hospitals jointly invest in and own ACOs, clinically integrated networks and other entities that engage in value-based contracting with third-party payers or (b) physicians are paid by hospitals or hospital affiliates for care management, medical or other services related to value-based contracts. We evaluate when these investment and compensation arrangements create financial relationships under the Stark Law and design structures that satisfy exceptions under the Stark Law or Medicare Shared Savings Program waiver.

Anti-kickback laws

In the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for the referral of patients or other health-related business. The United States federal healthcare programs’ Anti-Kickback Statute makes it unlawful for individuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchange for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program or the purchase, lease or order, or arranging for or recommending purchasing, leasing or ordering, any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from federal healthcare programs. The Anti-Kickback Statute raises similar compliance issues as the Stark Law. While there are safe harbors under the Anti-Kickback Statute, they differ from the Stark Law exceptions in that compliance with a safe harbor is not mandatory. If an arrangement falls outside the safe harbors, it must be evaluated on its specific facts to assess whether regulatory authorities might take the position that one purpose of the arrangement is to induce referrals of federal healthcare program business. Our

 

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business arrangements implicate the Anti-Kickback Statute for the same reasons they raise Stark Law issues. We evaluate whether investment and compensation arrangements being developed by us on behalf of hospital partners fall within one of the safe harbors or Medicare Shared Savings Program waiver. If not, we consider the factors that regulatory authorities are likely to consider in attempting to identify the intent behind such arrangements. We also design business models that reduce the risk that any such arrangements might be viewed as abusive and trigger Anti-Kickback Statute claims.

Antitrust laws

The antitrust laws are designed to prevent competitors from jointly fixing prices. However, competitors often work collaboratively in order to reduce the cost of healthcare and improve quality. To balance these competing goals, antitrust enforcement agencies have established a regulatory framework under which claims of per se price fixing can be avoided if a network of competitors (such as an ACO or clinically integrated network) is financially or clinically integrated. In this context, we evaluate the tests for financial and clinical integration that would be applied to the provider networks that we are helping to create and support, including the nature and extent of any financial risk that must be assumed to be deemed financially integrated and the types of programs that must be implemented to achieve clinical integration. However, even if a network is integrated, it is still subject to a “rule of reason” test to determine whether its activities are, on balance, pro-competitive. The key factors in the rule of reason analysis are market share and exclusivity. We focus on network size, composition and contracting policies to strengthen our partners’ position that their networks meet the rule of reason test.

Federal civil False Claims Act and state false claims laws

The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The “qui tam” or “whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. Our future activities relating to the manner in which we sell and market our services may be subject to scrutiny under these laws.

HIPAA, privacy and data security regulations

By processing data on behalf of our partners, we are subject to specific compliance obligations under privacy and data security-related laws, including HIPAA, the HITECH Act and related state laws. We are also subject to federal and state security breach notification laws, as well as state laws regulating the processing of protected personal information, including laws governing the collection, use and disclosure of social security numbers and related identifiers.

The regulations that implement HIPAA and the HITECH Act establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, all of which are referred to as “covered entities”, and their “business associates” (which includes anyone who performs a service on behalf of a covered entity involving the use or disclosure of protected health information and is not a member of the covered entity’s workforce). Our partners’ health plans generally will be covered entities, and, as their business associate, they may ask us to contractually comply with certain aspects of these standards by entering into requisite business associate agreements.

HIPAA healthcare fraud standards

The HIPAA healthcare fraud statute created a class of federal crimes known as the “federal healthcare offenses”, including healthcare fraud and false statements relating to healthcare matters. The HIPAA

 

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healthcare fraud statute prohibits, among other things, executing a scheme to defraud any healthcare benefit program, while the HIPAA false statements statute prohibits, among other things, concealing a material fact or making a materially false statement in connection with the payment for healthcare benefits, items or services. Entities that are found to have aided or abetted in a violation of the HIPAA federal healthcare offenses are deemed by statute to have committed the offense and are punishable as a principal.

Consumer protection laws

Federal and state consumer protection laws are being applied increasingly by the FTC, Federal Communications Commission and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of website content and to regulate direct marketing, including telemarketing and telephonic communication. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access.

State privacy laws

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations, which we refer to as state privacy laws, that govern the use and disclosure of a person’s medical information or records and, in some cases, are more stringent than those issued under HIPAA. These state privacy laws include regulation of health insurance providers and agents, regulation of organizations that perform certain administrative functions, such as utilization review, or UR, or TPA, issuance of notices of privacy practices and reporting and providing access to law enforcement authorities. In those cases, it may be necessary to modify our operations and procedures to comply with these more stringent state privacy laws. If we fail to comply with applicable state privacy laws, we could be subject to additional sanctions.

Other state laws

State insurance laws require licenses for certain health plan administrative activities, including TPA licenses for the processing, handling and adjudication of health insurance claims and UR agent licenses for providing medical management services. Given the nature and scope of services that we provide to certain partners, we are required to maintain TPA and UR agent licenses and ensure that such licenses are in good standing on an annual basis.

Employees

As of April 30, 2015, we employed 836 persons, approximately 52% of whom are based in our headquarters in Arlington, Virginia. We have not experienced any work stoppages and consider our employee relations to be good. None of our employees is represented by a labor union.

Intellectual property

Our continued growth and success depends, in part, on our ability to protect our intellectual property and proprietary technology, including the Identifi® software platform. We primarily protect our intellectual property through a combination of copyrights, trademarks and trade secrets, intellectual property licenses and other contractual rights (including confidentiality, non-disclosure and assignment-of-invention agreements with our with employees, independent contractors, consultants and companies with which we conduct business).

However, these intellectual property rights and procedures may not prevent others from creating a competitive online platform or otherwise competing with us. We may be unable to obtain, maintain and enforce the

 

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intellectual property rights on which our business depends, and assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations. For additional information related to our intellectual property position. see “Risk factors—Risks relating to our business and industry”.

Research and development

Our research and development expenditures primarily consist of our strategic investment in enhancing the functionality and usability of our software, Identifi® and developing programs and processes to maximize care delivery efficiency and effectiveness. We expensed $4.0 million and $2.0 million in research and development cost for the year ended December 31, 2014 and 2013, respectively. We capitalized software development costs of $7.7 million and $7.6 million for fiscal 2014 and fiscal 2013, respectively.

Facilities

We occupy 90,905 square feet of space for our headquarters in Arlington, Virginia under a lease that expires in 2020. In addition, we lease office space in The Advisory Board’s San Francisco office. From time to time, we also rent space in certain market locations near or at partner sites where we have significant staffing.

Legal proceedings

We are not currently a party to any material litigation proceedings. From time to time, however, we may be a party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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Management

Executive officers and directors

The following table sets forth information regarding our executive officers and directors as of April 30, 2015:

 

Name Age   Position
Frank Williams   48    Chief Executive Officer and Director

Seth Blackley

  36    President

Cynthia Cann

  47    Chief Accounting Officer

Nicholas McGrane

  47    Chief Financial Officer

Tom Peterson

  45    Chief Operating Officer

Gary Piefer, MD

  64    Chief Medical Officer

Chad Pomeroy

  49    Chief Technology Officer

Dave Thornton

  39    Chief Talent Officer

Jonathan Weinberg

  47    General Counsel

Steve Wigginton

  49    Chief Development Officer

David Farner

  51    Director

Matthew Hobart

  44    Director

Diane Holder

  64    Director

Michael Kirshbaum

  38    Director

Robert Musslewhite

  45    Director

Norman Payson, MD

  67    Director

 

Frank Williams, our founder, has served as our Chief Executive Officer since August 2011 and has served as a director since August 2011. He also serves as Vice Chairman of The Advisory Board, and served as the Chief Executive Officer of The Advisory Board from June 2001 to September 2008. From September 2008 to August 2011, Mr. Williams was the Chairman of The Advisory Board. Prior to joining The Advisory Board, Mr. Williams served as President of MedAmerica OnCall from September 1999 to March 2000, President of Vivra Orthopedics from 1995 to February 1999, and as a management consultant for Bain & Co. from June 1988 to June 1990. He currently serves on the boards of Privia Health and Head-Royce School. Mr. Williams holds a bachelor of arts degree in political economies of industrial societies from the University of California, Berkeley, and a master of business administration from Harvard Business School. We believe that Mr. Williams is qualified to serve on our board of directors because of his extensive knowledge and experience in all aspects of our business and his extensive experience in the healthcare and consulting services fields, including as Chief Executive Officer of The Advisory Board.

Seth Blackley has served as our President since August 2011. Prior to joining us, Mr. Blackley was the Executive Director of Corporate Development and Strategic Planning at The Advisory Board from May 2004 to August 2011. Mr. Blackley began his career as an analyst in the Washington, D.C. office of McKinsey & Company. Mr. Blackley holds a bachelor of arts degree in business from The University of North Carolina at Chapel Hill, and a master of business administration from Harvard Business School.

 

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Cynthia C. Cann has served as our Chief Accounting Officer since February 2015. Ms. Cann also serves as our Principal Accounting Officer. Prior to joining Evolent, Ms. Cann was Chief Accounting Officer of LivingSocial, Inc. from 2011 to 2014. Prior to joining LivingSocial, Inc., Ms. Cann was Vice President and Controller of Iridium Communications, Inc. from 2009 to 2011. Prior to that, Ms. Cann served in BearingPoint, Inc.’s State and Local Business Unit as Controller from 2005 to 2007 and as Head of Operations from 2008 to 2009. Ms. Cann began her career as an accountant with KPMG and has held various finance and accounting roles in public companies. Ms. Cann serves on the board of Solebrity, Inc. Ms. Cann holds a bachelor of science degree in accounting from the Virginia Polytechnic Institute and State University, and received a six month certification from the Georgetown University International Master of Business Administration Program. Ms. Cann is a Certified Public Accountant.

Nicholas McGrane has served as our Chief Financial Officer since October 2014. Prior to joining Evolent, Mr. McGrane was Managing Director with Riverside Management Group from July 2013 to October 2014. Prior to joining Riverside Management Group, Mr. McGrane was an independent consultant for clients including Evolent Health LLC. He served as Interim Chief Executive Officer and Interim President of Sbarro Inc. from July 2010 to February 2012. Sbarro Inc. was a portfolio company of MidOcean Partners, where Mr. McGrane held various roles, including Managing Director, from 1997 to 2012. Mr. McGrane serves on the board of TastiD-Lite, LLC. Mr. McGrane holds a bachelor of science degree in management from Trinity College Dublin and a master of business administration from Harvard Business School.

Tom Peterson has served as our Chief Operating Officer since August 2011. From June 2009 to August 2011, Mr. Peterson was Chief Executive Officer of Inflect Advisors. From November 1999 to June 2009, Mr. Peterson held executive roles with The Advisory Board. Prior to The Advisory Board, Mr. Peterson was Vice President of HealthSouth Corporation from January 1996 to November 1999. Mr. Peterson holds a bachelor of arts in government from Harvard University and a master degree in mental health counseling from George Washington University.

Gary Piefer, MD has served as our Chief Medical Officer since July 2012. Prior to joining Evolent, Dr. Piefer was Chief Medical Officer with WellMed Medical Management, Inc. from 2007 to 2012. From 1998 to 2007, Dr. Piefer was the physician leader within Seton Healthcare Network in Austin, Texas, where he oversaw the clinical agenda for Seton’s Health Plan. Dr. Piefer holds a bachelor of science in pharmacy from the University of Houston, a master in science in medical management from the University of Texas at Dallas School of Management and his doctorate in medicine from the University of Texas at Houston.

Chad Pomeroy has served as our Chief Technology Officer since September 2011. Prior to joining Evolent, Mr. Pomeroy was Chief Strategy and Marketing Officer of Access Mediquip from May 2010 to September 2011. From 2006 to 2010, Mr. Pomeroy was Vice President of Strategy Planning and Innovation at WellPoint, Inc. From 2000 to 2006, Mr. Pomeroy was Chief Technology Officer for Lumenos. Prior to joining Lumenos, Mr. Pomeroy was Manager of Application Development for Congressional Quarterly, Inc. from 1998 to 2000, and was also Assistant Vice President of Information Technology at the National Committee for Quality Assurance from 1994 to 1998. Mr. Pomeroy holds a bachelor of business administration in information systems from James Madison University.

Dave Thornton has served as our Chief Talent Officer since February 2012. From 2004 to 2012, Mr. Thornton held a variety of human resources executive positions at AOL, Inc. including both line HR and Center of Excellence roles, most recently as the company’s VP of Talent Management. Mr. Thornton began his career as an organizational development consultant at HumanR, Inc. from 1999 to 2004. Mr. Thornton holds a bachelor of arts in psychology from Merrimack College and a master in industrial-organizational psychology from George Mason University.

 

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Jonathan Weinberg has served as our General Counsel since January 2014. Prior to joining Evolent, Mr. Weinberg was a Senior Vice President and Deputy General Counsel for Coventry Health Care, Inc. from 2002 to 2013, and was in charge of the risk management department. Prior to joining Coventry, Mr. Weinberg was an associate and then partner at Epstein Becker and Green, P.C. in the firm’s healthcare practice, specializing in managed care issues from 1992 to 2002. Mr. Weinberg received his bachelor of arts in history and political science from the University of Wisconsin-Madison and his juris doctorate from the Catholic University of America.

Steve Wigginton has served as our Chief Development Officer since 2012. Prior to joining Evolent, Mr. Wigginton served as the founding Chief Executive Officer of Medley Health, a venture-backed technology and services provider for physician practices, from 2010 to 2012. From 2005 to 2010, Mr. Wigginton was the President of Health Integrated, a provider of health management. Prior to Health Integrated, Mr. Wigginton was Executive Vice President of Neoforma from 2000 to 2004. Mr. Wigginton joined Neoforma’s executive team after its acquisition of Pharos Technologies—a company he co-founded. Mr. Wigginton holds a bachelor of science in finance from Indiana University and a master in business administration from the Kelley School of Business, Indiana University.

David Farner has served as a director since September 2014. Mr. Farner has been with UPMC for nearly 30 years, holding various senior leadership positions for the last 20 years, including Chief Financial Officer. Since 2010, Mr. Farner has served as Executive Vice President and Chief Strategic and Transformation Officer of UPMC. Prior to UPMC, Mr. Farner worked as an auditor at Arthur Anderson & Company. Mr. Farner holds a bachelor of science in computer information systems from Westminster College. We believe that Mr. Farner is qualified to serve on our board of directors because of his extensive career in healthcare and finance.

Matthew Hobart has served as a director since September 2013. Mr. Hobart is a Partner with TPG, and leads the Healthcare and Financial Services investments for TPG, the middle market and growth equity investment fund of TPG. Mr. Hobart is currently a board member of Northstar Anesthesia, iMDsoft, Greencross Limited, and his previous board service includes The Vincraft Group, Schiff Nutrition International, Wil Research and Agraquest. From 2001 until he joined TPG Growth in 2004, Mr. Hobart was the Vice President of Corporate Development for Critical Path. Previously, Mr. Hobart co-founded and from 1999 to 2001 served as a Managing Director of Vectis Group. From 1993 to 1997, Mr. Hobart made private equity investments in the United States and Europe for Morgan Stanley Capital Partners III L.P. and helped raise and invest funds for the Morgan Stanley Global Emerging Markets Fund. Mr. Hobart holds a bachelor of arts in economics from Miami University and a master in business administration from Stanford University Graduate School of Business. We believe that Mr. Hobart is qualified to serve on our board of directors because of his extensive experience in leadership, corporate governance and finance.

Diane Holder has served as a director since August 2011. Ms. Holder has been an Executive Vice President of UPMC since 2007, President of the UPMC Insurance Services Division and President and CEO of UPMC Health Plan since 2004. Ms. Holder holds a bachelor of arts in psychology from the University of Michigan and a master of science in social work from Columbia University. We believe that Ms. Holder is qualified to serve on our board of directors because of her extensive career in healthcare.

Michael Kirshbaum has served as a director since September 2013. Mr. Kirshbaum has served as the Chief Financial Officer of The Advisory Board since February 2006. Mr. Kirshbaum joined The Advisory Board in 1998 and became treasurer in March 2007. Prior to his current role, Mr. Kirshbaum held a variety of positions across The Advisory Board’s finance group, including senior director of finance from 2003 to 2005, where he was responsible for most finance operations, including the overall financial strategy and budgeting process, as well as a number of other accounting functions. Mr. Kirshbaum holds a bachelor of science in economics from Duke University. We believe that Mr. Kirshbaum is qualified to serve on our board of directors because of his experience in corporate strategy and finance, including as the Chief Financial Officer of The Advisory Board.

 

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Robert Musslewhite has served as a director since August 2011. Mr. Musslewhite serves as Chairman of the Board of The Advisory Board and has served as the Chief Executive Officer of The Advisory Board since September 2008. Prior to joining The Advisory Board in 2003, Mr. Musslewhite was an associate principal in the Washington, D.C., Amsterdam and Dallas offices of McKinsey & Company, where he served a range of clients across the consumer products industry and other industries and was a co-leader of McKinsey’s Pricing Center. Mr. Musslewhite holds a bachelor of arts in economics from Princeton University and a juris doctorate from Harvard Law School. We believe that Mr. Musslewhite is qualified to serve on our board of directors because of his extensive knowledge and experience in all aspects of our business, his extensive career at The Advisory Board, including in his current roles as Chairman of the Board and Chief Executive Officer, and his experience in the consulting and information services fields.

Norman Payson, MD has served as a director since December 2013. Dr. Payson was co-founder and Chief Executive Officer Healthsource from 1985 to 1997, Chief Executive Officer of Oxford Health Plans from 1998 to 2002, Chairman of Concentra from 2005 to 2008 and Chief Executive Officer of Apria Healthcare from 2008 to 2012. Dr. Payson holds a bachelor of science degree in earth and planetary sciences from the Massachusetts Institute of Technology and received his doctorate in medicine from Dartmouth Medical School. We believe that Dr. Payson is qualified to serve on our board of directors because of his 30-year career as chief executive officer or chairman of multiple healthcare organizations, including publicly-traded companies.

On January 6, 2014, Evolent Health LLC and Evolent Health Holdings, Inc. entered into an Amended and Restated Master Investors’ Rights Agreement, which we refer to as the MIRA, with TPG, UPMC, The Advisory Board and certain other existing investors. Pursuant to the MIRA, each of TPG, UPMC and The Advisory Board are entitled to designate two persons to the board of directors of each of Evolent Health LLC and Evolent Health Holdings, Inc. TPG has designated Matthew Hobart, UPMC has designated Diane Holder and David Farner, and The Advisory Board has designated Robert Musslewhite and Michael Kirshbaum. We expect to nominate one additional director to our board prior to the completion of this offering.

Controlled company

Certain of our existing investors that we expect to be a party to a stockholders’ agreement upon the completion of this offering will own a majority of the voting power of our outstanding common stock following the completion of this offering. Accordingly, we expect to be considered a “controlled company” under the NYSE rules. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of listing of our Class A common stock:

 

    we have a board that is composed of a majority of “independent directors” as defined under the NYSE rules; and

 

    we have a compensation committee and nominating and corporate governance committee that is composed of independent directors.

We intend to take advantage of these exemptions following the completion of this offering. These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the applicable requirements of the Sarbanes-Oxley Act and rules with respect to our audit committee within the applicable time frame.

Board structure

Upon the completion of this offering, our board of directors will consist of eight members. We expect to nominate one additional director to our board within 90 days of the effectiveness of the registration statement of which this prospectus forms a part, and one other additional director to our board within one year of the

 

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effectiveness of such registration statement. Our board of directors has determined that                         is independent under applicable NYSE rules. In accordance with our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the completion of this offering, our board of directors will be divided into three staggered classes of directors, as nearly equal in number as possible. At each annual meeting of our stockholders, our stockholders will elect a class of directors for a three-year term to succeed the directors of the same class whose terms are then expiring. As a result, a portion of our board of directors will be elected each year. The initial division of the three classes and their respective election dates are as follows:

 

    the Class I directors’ term will expire at the annual meeting of our stockholders to be held in 2016 (our Class I directors are David Farner, Norman Payson, MD and Michael Kirshbaum);

 

    the Class II directors’ term will expire at the annual meeting of our stockholders to be held in 2017 (our Class II directors are Diane Holder, Matthew Hobart and Robert Musslewhite); and

 

    the Class III directors’ term will expire at the annual meeting of our stockholders to be held in 2018 (our Class III directors are Frank Williams and                         ).

There will be no limit on the number of terms a director may serve on our board of directors. In case of any increase or decrease, from time to time, in the number of directors, the number of directors in each class will be apportioned as nearly equal as possible. The division of our board of directors into three classes with staggered three-year terms may have the effect of discouraging, delaying or preventing a transaction involving a change in control.

Pursuant to the stockholders’ agreement we intend to enter into with TPG, UPMC and The Advisory Board upon the completion of this offering, for so long as each of TPG, UPMC and The Advisory Board owns at least 40% of the shares of common stock held by it following the completion of this offering, such stockholder will be entitled to nominate two directors to serve on our board of directors. When such stockholder owns less than 40% but at least 5% of the shares of common stock held by it following the completion of this offering, such stockholder will be entitled to nominate one director. TPG, UPMC and The Advisory Board will agree in the stockholders’ agreement to vote for each other’s board nominees.

Board committees

Audit committee

Our audit committee consists of             (Chairman), David Farner, Matthew Hobart and Michael Kirshbaum. The audit committee will assist the board in overseeing our accounting and financial reporting processes and the audits of our financial statements. In addition, the audit committee will be directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. The board of directors has determined that                          qualifies as an “audit committee financial expert”, as such term is defined in the rules of the SEC, and that                          qualifies as independent, as such term is defined in the rules of the SEC. We will rely on the phase-in rules of the SEC and the NYSE with respect to the independence of our audit committee. These rules permit us to have an audit committee that has one member that is independent upon the effectiveness of the registration statement of which this prospectus forms a part, a majority of members that are independent within 90 days thereafter and all members that are independent within one year thereafter.

 

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Compensation committee

Our compensation committee consists of Matthew Hobart (Chairman), Diane Holder and Robert Musslewhite. Our compensation committee is responsible for assisting our board of directors in discharging its responsibilities relating to (1) setting our compensation program and compensation of our executive officers and directors and (2) monitoring our incentive and equity-based compensation plans.

Nominating and corporate governance committee

Prior to the offering, our board of directors intends to designate a nominating and corporate governance committee. Our nominating and corporate governance committee will assist our board of directors in identifying individuals qualified to become members of our board of directors consistent with criteria established by our board and in developing our corporate governance principles. This committee’s responsibilities will include: (1) evaluating the composition, size and governance of our board of directors and its committees and making recommendations regarding the appointment of directors to our committees; (2) considering stockholder nominees for election to our board of directors; (3) evaluating and recommending candidates for election to our board of directors; (4) leading the self-evaluation process of our board of directors; (5) reviewing our corporate governance guidelines and providing recommendations to the board regarding possible changes; and (6) performing any other activities the committee deems appropriate, are set forth in the corporate governance guidelines or are requested by the board.

Compliance and regulatory affairs committee

Our compliance and regulatory affairs committee consists of Diane Holder (chair), Michael Kirshbaum and Norman Payson, MD. Our compliance and regulatory affairs committee will assist our board of directors in carrying out its responsibilities relating to regulatory compliance and ethics. This committee’s responsibilities include: (1) overseeing our compliance program; (2) reviewing and recommending for approval our code of business conduct and ethics; (3) overseeing our response to regulatory actions; and (4) reviewing the processes and procedures for reporting concerns by our partners, our employees and our vendors.

Code of ethics

Our board of directors will adopt a code of business conduct and ethics that applies to all of our directors, officers and other employees, including our principal executive officer, principal financial officer and principal accounting officer. Any waiver of the code for directors or executive officers may be made only by our board of directors and will be promptly disclosed to our stockholders through publication on our website, www.evolenthealth.com. Amendments to the code must be approved by our board of directors and will be promptly disclosed (other than technical, administrative or non-substantive changes). A copy of our code of business conduct and ethics will be posted on our website.

Corporate governance guidelines

Our board of directors will adopt corporate governance guidelines that serve as a flexible framework within which our board of directors and its committees operate. These guidelines will cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman of the Board, Chief Executive Officer and presiding director, meetings of independent directors, committee composition, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning.

 

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Additionally, our board of directors will adopt independence standards as part of our corporate governance guidelines. A copy of our corporate governance guidelines will be posted on our website, www.evolenthealth.com.

Compensation committee interlocks and insider participation

None of our executive officers has served as a member of a compensation committee (or if no committee performs that function, the board of directors) of any other entity that has an executive officer serving as a member of our board of directors.

 

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Executive compensation

Summary compensation table

The following table sets forth information concerning the compensation earned by our chief executive officer and our two other most highly compensated executive officers, who we refer to as our named executive officers, during our fiscal years ended December 31, 2014 and December 31, 2013.

 

Name and principal
position
  Year    

Salary

($)

   

Bonus

($)

   

Stock
award

($)

   

Option
awards

($)(3)

   

Non-equity
incentive plan
compensation

($)

    Nonqualified
deferred
compensation
earnings ($)
   

All other

compensation

($)(1)

   

Total

compensation

($)

 

Frank Williams

(Chief Executive Officer)(2)

   

 

2014

2013

  

  

  $

$

371,000

371,000

  

  

  $

$

259,700

125,000

  

  

   

 


  

  

  $

 

294,624

  

  

   

 


  

  

   

 


  

  

  $

$

10,400

10,200

  

  

  $

$

935,724

506,200

  

  

Seth Blackley

(President)

   

 

2014

2013

  

  

  $

$

291,500

291,500

  

  

  $

$

195,000

120,000

  

  

   

 


  

  

  $

 

196,416

  

  

   

 


  

  

   

 


  

  

  $

$

10,400

10,200

  

  

  $

$

693,316

421,700

  

  

Steve Wigginton

(Chief Development Officer)

   
2014
  
  $
255,000
  
  $
275,000
  
   

  
  $
179,072
  
   

  
   

  
  $
10,400
  
  $
719,472
  

 

 

 

(1)   Amounts reported in this column represent a 401(k) matching contribution provided by the company to each named executive officer. The 401(k) matching contributions are made to each participant in the 401(k) in an amount up to 4% of the participant’s annual base salary, subject to certain limitations, and are fully vested when made. The amounts shown do not include life insurance premiums for coverage offered through programs available on a nondiscriminatory basis to all employees of the company.

 

(2)   Mr. Williams also serves as a director of the company but did not receive any compensation for his role as a director in 2013 or 2014.

 

(3)    The amounts reported in this column represent the aggregate grant-date fair value of the stock options granted during 2014, as computed in accordance with Accounting Standards Codification 718 “Compensation-Stock Compensation” (“ASC 718”). For a further discussion of the assumptions used in the calculation of the grant-date fair values for the stock options pursuant to ASC 718, please see “Financial statements—Evolent Health Holdings, Inc.—Notes to financial statements—Note 11 Equity incentive plan”, included in this prospectus. For further discussion of grants made in 2014, see the discussion following the “Outstanding equity awards at fiscal year end” table.

Narrative disclosure to summary compensation table

The following describes material features of the compensation disclosed in the Summary Compensation Table. Each of our named executive officers are paid an annual base salary as determined by the compensation committee of our board of directors and are eligible to participate in our annual bonus plan, which is described in detail below. None of our named executive officers were party to an employment agreement during 2014.

Evolent Health, Inc. 2014 Bonus Plan

The Evolent Health, Inc. 2014 Bonus Plan, which we refer to as the 2014 Bonus Plan, is an annual incentive plan that provides our employees, including our named executive officers, with the opportunity to earn a cash bonus based on satisfaction of pre-established quantitative and qualitative performance metrics, as well as achievement of individual goals. The 2014 Bonus Plan is funded based on the company’s achievement of company performance goals. Payments under the 2014 Bonus Plan to our named executive officers are then determined by our board of directors, in its discretion, based, in the case of Messrs. Blackley and Wigginton, on recommendations made by Mr. Williams, considering the executive’s performance as rated on a five-point scale against pre-determined individual performance goals. The individual performance goals for our named executive officers and the company performance goals under the 2014 Bonus Plan are based on: (i) high customer satisfaction levels; (ii) three-year contract value (80% of 2015 forecasted revenue, 50% of 2016 forecasted revenue and 35% of 2017 forecasted revenue); (iii) clinical outcomes (achieve targets of greater than 90% of our clients’ at risk populations); (iv) financial metrics (revenue of $100 million and cash burn less than $29 million); and (v) optimal and high performing organization, measured by engagement, talent depth and retention. We met or exceeded all the corporate goals under the 2014 Bonus Plan.

 

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Each of our named executive officers’ target bonus opportunities, which corresponds to three out of five points, or a rating of “satisfactory performance”, and maximum bonus opportunities, which corresponds to five out of five points, or a rating of “exceptional performance”, under the 2014 Bonus Plan are as follows: Mr. Williams, $185,500 target bonus and $259,700 maximum bonus; Mr. Blackley, $145,750 target bonus and $204,050 maximum bonus; and Mr. Wigginton, $196,000 target bonus and $600,000 maximum bonus. Our board of directors determined that each of our named executive officers exceeded their individual goals, which is equivalent to four out of five points, or a rating of “exceeds expectations”. Our board of directors determined, in its discretion, to award Messrs. Williams, Blackley and Wigginton $259,700, $195,000 and $275,000, respectively, under the 2014 Bonus Plan, based on each executive’s overall strong performance during 2014, which the board determined warranted a higher payment than that equivalent to a rating of “exceeds expectations”. Each of these amounts is included in the “Bonus” column of the Summary Compensation Table. All amounts earned under the 2014 Bonus Plan were paid to participants in February 2015.

Outstanding equity awards at fiscal year end

The following table summarizes the outstanding equity awards held by each of our named executive officers as of December 31, 2014.

 

          Option Awards     Stock awards  
Officer   Grant Date  

Number of

Securities

Underlying

Unexercised
Options (#)
Exercisable

   

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable(1)

   

Equity
Incentive

Plan
Awards:

Number of

Securities

Underlying

Unexercised

Unearned
Options

(#)

   

Option

Exercise

Price
($)

   

Option

Expiration

Date

   

Number of

shares or
units of
stock that
have not
vested  (#)(2)

   

Market value

of shares

or units of
stock that

have not
vested ($)(3)

   

Equity

incentive

plan
awards:

number
of

unearned
shares,
units or

other
rights

that have
not

vested (#)

   

Equity

incentive

plan
awards:

market or

payout
value of

unearned

shares,

units or
other

rights

that

have not
vested ($)

 

Frank Williams

(Chief Executive Officer)

  04/01/2014     46,035        138,105               $15.36        04/01/2024        113,531 (4)    $ 3,117,561                 

Seth Blackley

(President)

  04/01/2014     30,690        92,070               $15.36        04/01/2024        53,813 (5)    $ 1,477,705                 

Steve Wigginton

(Chief Development Officer)

  04/01/2014     27,980        83,940               $15.36        04/01/2024        6,497 (6)    $ 178,408                 

 

 

 

(1)   Stock options granted under the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan to (a) Messrs. Williams and Blackley vest 25% on each of December 1, 2014, 2015, 2016 and 2017 and (b) Mr. Wigginton vest 25% on each of October 1, 2014, 2015, 2016 and 2017.
(2)   All awards of restricted stock vest 25% on the first anniversary of the grant date and 6.25% every three months thereafter, becoming fully vested on the fourth anniversary of the grant date.

 

(3)   There was no public market for shares of our Class A common stock as of December 31, 2014. As a result, the amounts reported in this column are based on the expected fair market value of a share of our Class A common stock as of December 31, 2014 ($27.46), as determined by our Compensation Committee based on a valuation as of December 2014.

 

(4)   Consists of 98,437 shares of restricted stock that were granted on April 23, 2012 and 15,094 shares of restricted stock that were granted on September 10, 2012.

 

(5)   Consists of 43,750 shares of restricted stock that were granted on October 26, 2011 and 10,063 shares of restricted stock that were granted on September 10, 2012.

 

(6)   Consists of 6,497 shares of restricted stock that were granted on September 10, 2012.

 

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Restricted stock awards and stock options under the 2011 Equity Incentive Plan

The restricted stock awards and stock options reported in the Outstanding Equity Awards at Fiscal Year End Table were granted to our named executive officers under the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan, which we refer to as the 2011 Plan, which is described in detail below.

The restricted stock awards carry with them all the rights and privileges of a holder of shares of our Class A common stock, including the right to vote and to receive dividends and distributions with respect to such restricted stock. The terms of the restricted stock award provide that 25% of such award vests on the first anniversary of the grant date and 6.25% vests every three months thereafter, becoming fully vested on the fourth anniversary of the grant date. Pursuant to the applicable award agreement, all outstanding restricted stock awards will automatically vest immediately prior to our initial public offering and will become freely transferable shares of our Class A common stock.

 

In March and April 2014, we granted stock options under the 2011 Plan to certain of our employees and directors, including our named executive officers. Except as described below, the terms and conditions of the stock options granted to our named executive officers are substantially similar to the terms and conditions of the 2011 Plan, which is described in more detail below. The options granted to Messrs. Williams and Blackley generally vest in four equal installments on each of December 1, 2014, 2015, 2016 and 2017, and options granted to Mr. Wigginton generally vest in four equal installments on each of October 1, 2014, 2015, 2016 and 2017. Upon a termination of employment, the unvested portion of the option is forfeited and the unexercised vested portion of the option award must be exercised within six months (or one year in the case of death or disability) of the date of termination, provided that if the holder is terminated for cause, all outstanding options will immediately terminate. In addition to potential acceleration in the event of a Change in Control (as defined below under the 2011 Plan), any unvested options will automatically vest upon a Sale of the Company (as defined below), except that, in the event UPMC, The Advisory Board or TPG, each of which we refer to as a significant securityholder, acquires a majority of our stock or voting power in such sale, only those options that would have vested on the first vesting date following the sale will automatically accelerate vesting. “Sale of the Company” means (a) a transaction in which a person other than the company or one of our affiliates acquires from two or more significant securityholders all of our shares of Class A common stock or all the equity interests in Evolent Health LLC or otherwise acquires a majority of our shares of Class A common stock or a majority of the voting power of Evolent Health LLC; or (b) a sale of all or substantially all of the assets of our company and our subsidiaries.

In addition, in July and October 2014, we granted stock options under the 2011 Plan to certain of our employees (excluding our named executive officers) that generally vest over a four-year period from the grant date and have substantially similar terms to the options granted in April 2014. None of the stock options granted under the 2011 Plan will accelerate vesting in connection with our initial public offering.

Potential payments upon termination or change in control

Other than with respect to the restricted equity awards granted under the 2011 Plan, as described above, we do not have agreements with our named executive officers that provide for payments upon termination, retirement or in connection with a change in control of the company.

 

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Director compensation

None of our directors received compensation for their service on our board of directors or any board committees in 2014. Norman Payson, M.D., one of our non-employee directors, received consulting fees and stock options in 2014 for services he provides to us through an entity that he controls in the amounts set forth in the table below. The compensation of our non-employee directors following the offering, if any, has not yet been determined.

 

Director Fees Earned
or Paid in
Cash ($)
  Stock Awards
($)
 

Option
Awards

($)(1)

  Non-Equity
Incentive Plan
Compensation
($)
 

Nonqualified
Deferred
Compensation
Earnings

($)

  All Other
Compensation
($)(2)
  Total ($)  

Norman Payson, MD

            51,200                100,000      151,200   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   The amounts reported in this column represent the aggregate grant-date fair value of the stock options granted during 2014, as computed in accordance with ASC 718. For a further discussion of the assumptions used in the calculation of the grant-date fair values for the stock options pursuant to ASC 718, please see “Financial statements —Notes to financial statements— Note 10 Equity incentive plan” for the year ended December 31, 2014, included in this prospectus. The stock options were awarded to Dr. Payson for his services as a consultant, as described in detail below. As of December 31, 2014, Dr. Payson held 32,000 stock options, 8,000 of which were vested and exercisable.

 

(2)   The amounts reported in this column represent consulting fees paid to NCP, Inc., an entity controlled by Dr. Payson, under the terms of the consulting agreement between us and NCP, Inc., as discussed in detail below.

Narrative disclosure to the director compensation table

2014 consulting agreement with Norman Payson, M.D.

On March 12, 2014, we entered into a consulting agreement with NCP, Inc., a New Hampshire corporation that is controlled by Dr. Payson pursuant to which NCP, Inc. agreed to provide certain consulting and advisory services to us. The consulting agreement will remain in effect until either NCP, Inc. or we give notice of termination of the agreement for any reason. Pursuant to this consulting agreement, NCP, Inc. receives an annual fee of $200,000, payable in monthly installments, and reimbursement for reasonable out-of-pocket expenses incurred by NCP, Inc. in the performance of its duties under the consulting agreement. The fees payable under the consulting agreement are separate from, and in addition to, any compensation Dr. Payson may become entitled to receive as a member of our board of directors. In the event the consulting agreement is terminated, NCP, Inc. is entitled to receive only accrued and unpaid fees and reimbursement for any expenses incurred, in each case, through the date of termination. The consulting agreement also contains certain restrictive covenants, including confidentiality obligations that survive termination of the agreement and non-solicitation obligations that end 12 months following the termination of the consulting agreement, and assignment of intellectual property provisions.

In addition, in March 2014, we granted 32,000 stock options under the 2011 Plan to Dr. Payson for his services as a consultant. The stock options generally vest over a four-year period in four equal installments on each of December 11, 2014, 2015, 2016 and 2017 and have substantially similar terms to the other options granted in April 2014, as described above.

Evolent Health Holdings, Inc. 2011 Equity Incentive Plan

We assumed the Evolent Health Holdings, Inc. 2011 Equity Incentive Plan, as amended, which we refer to as the 2011 Plan, in connection with the merger of Evolent Health Holdings, Inc., with and into Evolent Health, Inc. The 2011 Plan has been effective since August 31, 2011 and permits us to grant an array of equity-based and cash incentive awards to our directors, employees, including our named executive officers, and other service providers. The following is a summary of the material terms of the 2011 Plan and the awards outstanding under the 2011 Plan. The full text of the 2011 Plan will be included as an exhibit to the registration statement of which this prospectus is a part, and the following discussion is qualified in its entirety by reference to such text.

 

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Summary of plan terms

Purpose.    The purpose of the 2011 Plan is to enhance our ability to attract and retain highly-qualified officers, non-employee members of the board of directors, key employees, consultants and advisors to serve us and to expend maximum effort to improve our business results and earnings, by providing to such persons an opportunity to acquire or increase a direct interest in our operations and future success.

Types of awards.    The 2011 Plan provides for the grant of options intended to qualify as incentive stock options, which we refer to as ISOs, under Section 422 of the Code, nonqualified stock options, which we refer to as NSOs, stock appreciation rights, which we refer to as SARs, restricted stock awards, restricted stock units, which we refer to as RSUs, and other stock-based and cash-based awards.

Administration.    The 2011 Plan is administered by our board of directors or such other committee our board designates to administer the 2011 Plan, which we refer to as the Committee. Subject to the terms of the 2011 Plan and applicable law, the Committee has full power and authority to (i) take actions and make determinations not inconsistent with the terms of the 2011 Plan that the Committee deems necessary or appropriate to the administration of the 2011 Plan, (ii) designate award recipients, (iii) determine the types of awards to grant, (iv) determine the number of shares to be covered by awards, (v) determine the terms and conditions of awards, including the price of any stock option, the duration of any restriction or condition relating to vesting, exercise, transfer or forfeiture of an award or the units subject thereto, (vi) prescribe the form of each award agreement and (vii) amend, modify or supplement the terms of any outstanding award including the authority to modify awards of foreign nationals or individuals employed outside the United States to recognize differences in local law, tax policy, or custom.

Shares available for awards.    Subject to adjustment as described below, we have reserved 2,285,317 shares of our Class A common stock for awards to be granted under the 2011 Plan. As of April 30, 2015, 2,201,910 shares have been issued and are outstanding or are subject to issuance with respect to awards outstanding, in each case, under the Plan. If an award expires or is canceled or forfeited, the shares covered by the award will again be available for issuance under the 2011 Plan. Substitute awards for an award of a business acquired by or combined with the company do not count against the number of shares reserved under the 2011 Plan. Shares tendered or withheld in payment of an exercise price or for withholding taxes also will again be available for issuance under the 2011 Plan.

Changes in capitalization.    In the event of any change in the shares of our Class A common stock, effected without receipt of consideration by the company, whether as result of a merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the company, or in the event of a payment of a dividend to our shareholders that has a material effect on the fair market value of our common stock, in order to prevent dilution or enlargement of the rights of award holders under the 2011 Plan, the Committee will make appropriate and proportionate adjustments of (i) the number and class of shares that thereafter may be made the subject of awards under the plan, (ii) the number and class of shares subject to outstanding awards and (iii) the exercise price of options and SARs and the purchase price per share of any outstanding awards. In the event a majority of outstanding shares of the same class subject to awards outstanding under the 2011 Plan are converted into, exchanged for, or otherwise become (whether or not pursuant to a change in control) shares of another corporation, the Committee may unilaterally amend outstanding awards to provide they are for such new shares. The Committee may make changes in the terms of any award to reflect changes in our capital structure or distributions as it deems appropriate.

Eligibility.    Any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the company or any of our affiliates is eligible to participate in the 2011 Plan.

 

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Stock options.    The Committee is permitted to grant both ISOs and NSOs under the 2011 Plan. The exercise price of a stock option may not be less than the fair market value (as defined in the 2011 Plan) of a share of our Class A common stock on the grant date. If the option is granted to a ten percent stockholder, the exercise price may not be less than 110% of the fair market value on the grant date. The Committee will determine the vesting schedule applicable to each award of options. Unless otherwise set forth in the applicable award agreement, each option will expire on the later of (i) the tenth anniversary of the date the options was granted (or the fifth anniversary in the case of a ten percent stockholders) and (ii) the date on which the participant who was holding the options ceased to be a director, officer, employee or consultant for us or one of our affiliates. The exercise price may be paid with cash (or its equivalent) or, to the extent provided in the applicable award agreement, through delivery of irrevocable instructions to a broker to sell shares of our Class A common stock or through the Company withholding shares of our Class A common stock otherwise deliverable upon exercise of the options.

Stock appreciation rights.    The Committee is permitted to grant SARs under the 2011 Plan. The exercise price of a SAR may not be less than the fair market value (as defined in the 2011 Plan) of a share of our Class A common stock on the grant date. Upon exercise of a SAR, the holder will receive cash or shares of our Class A common stock, as determined by the Committee, equal in value to the excess, if any, of the fair market value of a share of our Class A common stock on the date of exercise of the SAR over the exercise price of the SAR. Unless otherwise set forth in the applicable award agreement, each SAR will expire on the later of (i) the tenth anniversary of the date the SAR was granted and (ii) the date on which the participant who was holding the SAR ceased to be a director, officer, employee or consultant for us or one of our affiliates.

Restricted stock and restricted stock units.    The Committee is permitted to grant restricted stock and RSUs under the 2011 Plan. Restricted stock is an award of shares of our Class A common stock that are